
On-cycle and off-cycle payroll refer to the timing and frequency of paying your employees.
The terms On-cycle and off-cycle payroll are used to describe two different approaches to processing payroll for business owners in the UK.
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Why is the monthly payroll cycle so popular?
The monthly payroll cycle is popular because it aligns with taxation and national insurance, reduces administrative burden, is consistent for employees, is simple, has cost savings, is compliant, and has reporting advantages alongside compatibility with most accounting systems.
While monthly payrolls are common, some industries with varying workforce needs may opt for different frequencies to suit their employees’ cash flow requirements.
What is On-cycle payroll?
On-cycle payroll is the traditional method of paying employees on a regular and scheduled basis. This typically means paying employees on a specific date, such as monthly, bi-weekly, or weekly, depending on the company’s established payroll schedule. For example, many UK businesses pay their employees on the last working day of each month or on specific days of the week.
What are the benefits of On-cycle payroll?
Benefits of on-cycle payroll include:
Consistency: On-cycle payroll provides consistency and predictability for both employees and employers. Employees can rely on a regular payday, making it easier to manage their finances, while employers can plan and budget for payroll expenses more effectively.
Administrative efficiency: Processing payroll on a fixed schedule reduces the administrative burden on HR and payroll teams. It allows for streamlined processes and automation, reducing the likelihood of errors in calculating wages and deductions.
Compliance: Adhering to a regular payroll schedule helps ensure compliance with UK employment laws and regulations, including tax and National Insurance contributions. It reduces the risk of non-compliance penalties.
Employee satisfaction: Employees generally prefer the stability and predictability of on-cycle payroll. It can contribute to higher job satisfaction and morale, as employees can plan their finances with confidence.
Reduced costs: Streamlined and automated payroll processes associated with on-cycle payroll can result in cost savings for businesses. Fewer manual interventions and errors mean fewer resources are needed to rectify payroll issues.
Reporting and analytics: Monthly payroll cycles align well with monthly financial reporting and budgeting. This makes it easier for businesses to analyse payroll costs, track trends, and make informed financial decisions.
Tax efficiency: On-cycle payroll aligns with the UK’s tax system, which often calculates income tax and National Insurance contributions on a monthly basis. This simplifies tax reporting and ensures accurate deductions.
Pension contributions: Many workplace pension schemes in the UK are based on monthly contributions. On-cycle payroll helps ensure timely and accurate contributions to employees’ pension accounts, promoting retirement savings.
Employee benefits: Some employee benefits and deductions, such as those related to insurance premiums or loan repayments, may be more conveniently administered on a monthly basis, which on-cycle payroll facilitates.
Regulatory compliance: On-cycle payroll ensures that employees receive their statutory entitlements, such as paid holidays, sick pay, and maternity/paternity pay, in accordance with UK labour laws.
What is Off-cycle payroll?
Off-cycle payroll, on the other hand, involves making payments outside of the regular payroll schedule.
Off-cycle payroll examples
Some common situations where off-cycle payroll might be used include paying bonuses, overtime, commissions, or issuing special payments for employees who have resigned or were terminated.
Complexity
Off-cycle payroll can be more complex to administer because it often involves calculating additional payments or deductions that are not part of the standard payroll process.
Off-cycle payroll and compliance
Employers must still ensure compliance with tax and employment laws when processing off-cycle payments.
What are the benefits of Off-cycle payroll?
Flexibility: Off-cycle payroll provides flexibility in terms of payment frequency. This can be particularly beneficial for businesses with variable pay structures, seasonal workers, or irregular work patterns. It allows employers to pay employees when they’ve worked, rather than waiting for a fixed monthly schedule.
Timeliness: In some situations, off-cycle payroll can ensure that employees receive their wages more promptly. For example, if an employee is terminated or resigns mid-month, an off-cycle payment can be processed quickly, reducing financial stress for the employee.
Bonus and incentive payments: Off-cycle payroll is often used for bonus payments, commissions, or other incentive-based compensation. This allows employers to reward employees based on performance or achievements outside the regular payroll cycle.
Correcting errors: If errors are discovered in a regular payroll cycle, an off-cycle payment can be used to rectify the issue promptly. This can help maintain employee trust and compliance with employment laws.
Expense reimbursements: When employees need to be reimbursed for business-related expenses, such as travel or supplies, off-cycle payments can be used to reimburse them quickly, ensuring that employees are not out of pocket for an extended period.
Terminations and final payments: Off-cycle payroll is often used when an employee leaves the company. It allows for the calculation and timely payment of any outstanding wages, accrued leave, or severance pay.
Compliance with statutory requirements: In some cases, UK employment laws may require specific payments to be made within a certain timeframe (e.g., statutory redundancy pay). Off-cycle payroll can help ensure compliance with these requirements.
Employee flexibility: Some employees may prefer more frequent payments, especially if they have irregular expenses or financial commitments. Off-cycle payroll can accommodate such preferences.
Are there other types of payroll cycles?
There are several other types of payroll cycles or pay frequencies that businesses can use, in addition to the common on-cycle and off-cycle payrolls. These include:
Weekly payroll
In a weekly payroll cycle, employees are paid every week, typically 52 times a year. This frequency can be suitable for businesses with a high number of hourly or part-time employees.
Bi-weekly payroll
Bi-weekly payrolls occur every two weeks, resulting in 26 pay periods per year. This frequency is convenient for businesses that want to align with a standard workweek but prefer to pay employees less frequently than weekly.
Semi-monthly payroll
Semi-monthly payrolls happen twice a month, usually on specific dates, such as the 15th and the last day of the month. There are typically 24 pay periods in a year with this frequency.
Quarterly payroll
Some businesses, especially those with highly variable income or payment structures, choose to pay employees quarterly, resulting in just four pay periods a year.
Annual payroll
Very infrequently, businesses may opt for an annual payroll, where employees receive their entire year’s pay in one lump sum. This is typically used for certain contract workers or seasonal employees.
Adhoc or special payrolls
In addition to on-cycle and off-cycle payrolls, businesses may process adhoc or special payrolls to address unique situations. This could involve bonuses, severance payments, or other one-time payments outside the regular pay cycle.
What are some factors to consider when choosing a pay period?
Choosing the right pay period is an important decision for any business. Several factors should be considered when making this choice:
Employee preferences
Consider the preferences and financial needs of your employees. Some employees may prefer more frequent paychecks, while others may be comfortable with less frequent payments.
Payroll administration
Think about the administrative burden of processing payroll. More frequent pay periods, like weekly or bi-weekly, require more time and resources for processing and compliance.
Business cash flow
Assess your business’s cash flow and financial stability. A more frequent pay cycle may strain your cash flow, especially if you have a large workforce.
Legal and regulatory compliance
Ensure that your pay period choice complies with national and local labour laws, including minimum wage and overtime regulations. Some jurisdictions have specific requirements for pay frequency.
Payroll costs
Evaluate the costs associated with processing payroll, including software, personnel, and external payroll service fees. More frequent pay cycles may increase these costs.
Employee contract and union agreements
Review any existing employment contracts or union agreements that may dictate the pay period for certain employees.
Employee type
Consider the nature of your workforce. Hourly or part-time employees may benefit from more frequent paychecks, while salaried employees may be more comfortable with monthly or semi-monthly cycles.
Record-keeping and reporting
Ensure that your choice of pay period aligns with your record-keeping and reporting systems, including tax submissions and regulatory requirements.
Industry norms
Research common pay periods in your industry. It can be advantageous to align with industry standards to attract and retain talent.
Employee communication
Effective communication with employees is essential. Clearly inform your employees about the pay period and the frequency of paychecks to avoid misunderstandings or discontent.
Employee recruitment and retention
The choice of pay period can influence your ability to attract and retain employees. Some may be more attracted to your business if your pay frequency aligns with their financial needs.
Cash flow forecasting
The pay period you choose affects your ability to forecast cash flow accurately. Consider how pay frequency may impact your financial projections.
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You can choose to use either on-cycle or off-cycle payroll methods, depending on your business needs and the specific circumstances surrounding employee payments. However, it’s important to ensure that all payments, whether on-cycle or off-cycle, comply with UK employment and tax regulations to avoid legal issues.
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