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Contents

  1. 1. What is the difference between salary and payroll?
  2. 2. What is the difference between a salary and a wage?
  3. 3. Summary

What is the difference between salary and payroll?

September 22, 2021
Hiring new employees is an exciting time for any growing company. With more people on board, not only can you can expand the range of services and products you provide, but you can start shaping your company culture and the direction your business takes in the future. However, as you take on more staff, you need to make sure that your payroll is kept up to date.An important aspect of the hiring process is settling remuneration – that is, how much you intend to pay the people who work for you. This quantity can vary depending on a variety of factors, such as your employee's job role and responsibilities, their seniority and how long they've been at the company.Keeping track of employees' salaries and updating HMRC of any changes is critical when any contractual changes are made. Salary raises usually mean an increase in the total amount of tax the employee needs to pay too, making keeping on top of your company's payroll system a high priority.In this article, we'll talk about what the difference between salary and payroll is, and walk you through the process of setting up and maintaining your company's payroll.

What is the difference between salary and payroll?

A salary is a regular payment made by a company to members of staff for the worked carried out over a set period of time. You, as the employer, will decide on both the hours the employee will work and the total amount they will earn before the employee starts at your company. Payroll, on the other hand, is a record that keeps track of employees' income and tax deductions.Whether you pay your employees their salaries on a weekly, biweekly or monthly basis, their payslips will detail the amount they have earned each month, as well as outlining any tax deductions that have been made. Your company's payroll will also include this information, but will list the information for every other employee in the company too.You will need to send the payroll information to HMRC on a regular basis for tax purposes. This article will tell you how to do this, as well as which taxes should be deducted from salaries and how you can keep track of them all.

What is a salary?

As noted above, salary is a regular payment to the employees of a company made in exchange for their time and work. No more than a month should pass between each payment, although as the business owner you decide how often to issue your employees' payslips.Salaried workers, including both full-time and part-time employees, are contracted to earn an annual salary, a fixed amount each year for a predetermined number of hours worked that is outlined in their employment contract. This may entail flexible working hours, offering employees a choice on how they fit their designated hours into each day and week. For example, you may allow your employees to work longer hours one day so that they can finish earlier on another.Alongside the rate of pay, employment contracts will also cover how much holiday salaried employees can take each year. This is set at a minimum of 5.6 weeks, which translates to at least 28 days for a full-time employee, but you can decide to offer your employees a larger holiday allowance if you choose. Our article on holiday pay covers exactly how to pay your employees when they're away on vacation.Employees on salaries have to pay regular tax on their earnings, including PAYE (Pay As You Earn) deductions such as Income Tax and National Insurance contributions. Each employee will have a tax code that is based on how much they earn, which determines how much tax should be deducted from their salary each month. You will need to give your employees a payslip every payday. This should detail their total income, any statutory leave they have taken and the taxes deducted. You can build your own company's payslip using our free downloadable payslip template.The table below states how much Income Tax an employee needs to pay each year (from the period 6 April to the following 5 April). How much an employee earns will determine the percentage that they need to pay.
Tax BandTaxable IncomeTax Rate
Personal AllowanceUp to £12,5700%
Basic rate£12,571 to £50,27020%
Higher rate£50,271 to £150,00040%
Additional rateOver £150,00045%
Employees also have to pay a National Insurance contribution, which is dependent on their employment status and how much they earn. The amount that your employees pay on National Insurance contributions in the 2021/2022 tax year is shown in the table below. This information will need to be included in your company payroll.
SalaryClass 1 rate
Less than £9,5680%
£9,568 to £50,27012%
£50,270 or more2%
Source: Which?The rates are different for those that are self-employed.

What is the difference between a salary and a wage?

It's up to you to decide whether you pay your employees through a set salary or wages. Salaries are typically a fixed amount of money, with the total amount earned each year stated in their employment contract. Alternatively, you could decide to pay your employees a wage. Hourly employees tend to have variable working hours, meaning that managers can adjust their weekly hours depending on what is needed; for example, shop workers may be scheduled more hours in the lead up to Christmas. However, the maximum number of hours in an employee's work week will be outlined in their employment contract, and any hours worked over will be classified as overtime.

What is payroll?

Payroll contains a list of employees in a company and how much they individually earn. It will state how many hours they worked and their set hourly wage (if applicable). Other information needs to be included on the payroll, such as how much each employee pays in taxes on a monthly basis. This should be recorded from the 6th of one month to the 5th day of the following month.You can use the information on the payroll to assess the salaries of your employees and decide upon pay rises and bonuses. You have legal obligations to offer holiday and Statutory Sick Pay, which should also be included on the payroll.

How do I set up payroll?

Before you start employing staff, you will need to register as an employer with HMRC. Make sure you do this before your company's first payday, although you can't register more than two months before you start paying your employees or yourself. After registering as an employer, you will receive an employer PAYE reference number. Companies registered after 6 April will receive their employer PAYE reference number by 31 August. To pay your employees without this reference number, you will have to run payroll, keep hold of the full payment submission and then complete and send a late full payment submission to HMRC. You can find out more on how small businesses do payroll here.The easiest way to set up and use payroll is through payroll software. Here at Ember, our super-smart software makes running payroll easy to do and keep track of. You can add new employees as the business grows and keep track of their personal details, tax contributions and gross salary. At the end of each month, we can automatically send your company's Real Time Information (RTI) directly to HMRC. Employees aged between 22 years old and state pension age will also be automatically enrolled in your company's pension scheme via our payroll software. Those aged under 22 years old will need to be manually added to the pension scheme.

What information is on payroll?

The information on your company's payroll will include personal details of all of your employees such as their full name, National Insurance number and home address. Payroll must show a breakdown of your employees' gross salary, PAYE and pension contributions. You can also use this information to calculate how much National Insurance you'll need to contribute to their earnings. All of your employees' salary and tax deduction information must be reported to HMRC on or before your company's first payday. You will need to update HMRC on any changes to the payroll or to notify them of employees that are joining or leaving the company. Companies that need to pay £1,500 or less per month can sometimes pay quarterly instead of monthly. Contact payment helpline if you think you are eligible and want to start paying in this way.

How do I report payroll to HMRC?

Our payroll feature automatically sends end-of-year reports to HMRC, as well as auto-generating P45s and P60s. The information that you send to HMRC must include all employees that receive a salary, even if they are earning less than £120 per week. Everything should be contained and sent to HMRC in a Full Payment Submission (FPS). 

Full Payment Submission 

A Full Payment Submission (FPS) is how your company needs to report employee earnings and tax deductions to HMRC. In addition to an FPS with employee information, you will also need to make an FPS for every director working at your company. Alternatively, you can group both director and employee information into the same FPS. HMRC require you to send the FPS every month before payday, and every FPS should include the usual date for each pay period. You should also include this date that you usually pay employees on, even if you pay them on a different date one month due to a bank holiday or similar. The submission form must also include the relevant tax year. When generating an FPS through payroll software, you will need to use the PAYE reference and Accounts Office reference.

Summary

In short, salary is the amount of money an employee is contracted to earn in a year, while payroll and payroll infrastructure is used to keep track of how much each employee earns and what they pay in tax. As a business owner, it's your responsibility to keep HMRC updated about how many employees you have, how much you pay them and the personal details you have on file. Any changes to an employee's salary (whether on a monthly or annual basis) need to be sent to HMRC so necessary adjustments to tax and National Insurance contributions can be made in a timely manner.
Fred Princewill
Fred PrincewillJunior Accountant

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