PAYROLL INSIGHT
Rounding reminder for payroll calculations Terri Bethel, CIPP lead technical material author, explains why rounding is important and reviews the rules for some of the most common payroll calculations
W hen it comes to rounding in payroll calculations, there are only three ways to go: up, down or to the nearest. So why does it seem so complicated and confusing in practice? Perhaps because nothing – whether in life or in payroll – is that simple. We must also consider at what point in a calculation to round and how much rounding to do (more rounding equals less accuracy). But the main reason why rounding payroll calculations seem so troublesome is because the rules vary for each one (and occasionally there are options). Why rounding is important Does any of this matter when the results of different methods may vary by less than a penny? Understanding and applying correct rounding rules is important because the calculation results need to be accurate to the penny – and using the wrong method (or the right method incorrectly) can lead to the wrong results. Accurate results are a statutory requirement for many payroll calculations because the employer is
making deductions and certain payments on behalf of the state. HM Revenue & Customs (HMRC) sets out the rounding rules for areas such as income tax deductions, National Insurance contributions (NICs), student loan deductions, and statutory pay. The rounding method for each of these calculations is not a matter of personal choice – it is a statutory requirement policed by HMRC. Errors identified during a compliance visit could lead to a full-scale audit by HMRC. We rely on our payroll software to process sometimes huge amounts of data. So why would we need to know what the rounding rules are? There are several reasons. ● Verifying payroll software – We must verify that the payroll software is actually processing the data correctly and accurately, particularly after installing software updates or revising parameters (such as rates and thresholds at the start of a tax year). You could run a series of calculations to test different scenarios involving statutory pay, Scottish taxpayers, multiple attachment orders, and so on,
comparing the system’s results with your own calculations. You might also test a few random payslips from each payroll cycle. ● Ad hoc manual calculations – Situations will arise where you need an accurate calculation outside the payrun and not all software systems will be able to do them for you. These could include calculating an adjusted payslip when preparing an extra payment for an employee, advising prospective parents/ adopters about their statutory leave payments, and ‘what if?’ salary modelling. You might want to demonstrate to an employee how their payslip figures were produced. While sometimes a quick, rough calculation will be enough, usually the result needs to be accurate otherwise uncertainty remains. ● Management information – The workforce is usually the biggest area of expenditure in an organisation, so it is essential that the information on which its budgets and plans are based is accurate. A difference of a few pence for each employee, for each payrun, quickly builds up into sizeable discrepancies that could affect projections and, ultimately, the organisation’s cashflow. Paybill data contributes to several current ‘hot topics’ such as gender pay gap reporting and apprenticeship levy payments.
...the calculation results need to be accurate to the penny...
| Professional in Payroll, Pensions and Reward | November 2017 | Issue 35 16
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