Payroll is a process of calculating wages for employees, using features to comply with various HMRC regulations, and applying relevant taxes accurately. Small businesses that employ staff will have to run payroll at some point. But how?
In this article, Real Business will go through the process of running payroll, including the best payroll software, the taxes to include, and how to ensure you comply with all the relevant regulations and laws involved.
How Do You Do Payroll?
Specific instructions for executing payroll for your employees depend on individual choices, such as the choice of payroll software, but the following are the general steps:
- Collect required employee information – You need very specific information for each of your employees.
- Personal details – Full name, date of birth, address, national insurance number.
- Tax information – A tax code provided by HMRC or from a P45, typically easy to discern.
- Employment details – The start date, job title and working hours.
- Bank details – Bank account number and sort code.
- Salary and payment information – Agreed salary and hourly wage, against overtime rates and bonuses if applicable.
- Pension scheme – Whether they are opting into or out of the auto-enrolment scheme.
- Right-to-work documentation – Proof of eligibility to work in the UK.
- Choose reliable payroll software – Choose a payroll software that knowingly complies with HMRC regulations, and look for quality-of-life features. Sage Payroll, for example, has automatic tax calculations, payslip generation and pension management.
- Establish a payment schedule – Decide whether payments will be made weekly, biweekly or monthly. Keep dates consistent and inform employees ahead of time.
- Calculate earnings and deductions – The best payroll software often makes automatic calculations for various taxes and national insurance contributions. That being said, the various earnings and deductions are typically:
- Gross pay – Employees pay sum, overtime, bonuses, commission and statutory pay (like statutory sick pay).
- Deductions – Income tax, national insurance contribution, pension contribution, student loan repayments, child maintenance payments.
- Distribute Payslips – Ensure that employees receive payslips outlining their earnings, deductions and net pay either in format or on paper. Again, another quality-of-life feature.
- Report to HMRC – Submit a full payment submission (FPS) to HM Revenue & Customs (HMRC) on or before each payday to provide them with information regarding employee payments and deductions.
- Fulfil tax obligations – Remit the deducted taxes as national insurance contributions to HMRC within the specified deadline using an accepted payment method.
- Maintaining records – It’s important to keep payroll records, for each employee and stay updated on any changes in employee information or legislation.
Who Should Do Payroll?
Managing payroll is not a side task. Typically, someone in upper management is responsible for it, and anything else payroll adjacent, for example managing legal requirements such as employer’s liability insurance.
The following are typical designated payroll staff sectioned by business size:
- Small businesses:
- Owner/manager– In small businesses, it is common, for either the owner or a manager to take care of payroll especially if there are only a few employees.
- Administrative staff – Another option is to have a member of the administrative staff manage payroll with proper training and supervision.
- For medium businesses:
- Dedicated payroll staff – As a business grows it becomes more feasible to have one or more employees dedicated to managing payroll and other financial obligations.
- HR department – Often the Human Resources department takes on the responsibility of payroll since it closely relates to employee management.
- For large corporations:
- Payroll department – Typically large companies have a department specifically assigned to handling payroll due to its complexity and workload.
- Finance department – In some cases, the finance department manages payroll particularly if there’s an emphasis, on budgeting and financial planning.
- For any size business:
- Outsourcing – Regardless of business size outsourcing payroll tasks to firms is an option. This approach saves time reduces error risks and ensures compliance with laws and regulations.
- Accountant – Additionally businesses can also choose to have an accountant oversee their payroll processes.
What Is The Best Payroll Software Available?
The best payroll software depends on the user’s requirements, budgets and how big the businesses are. Each example targets specific audiences and has its uses.
Below is a breakdown of the best payroll software available:
- Sage Business Cloud Payroll – Developed by Sage Group in the UK, and founded in 1981, this payroll system is designed for small to medium businesses. They are HMRC-recognised and designed to run specifically for UK-founded businesses, integrating seamlessly with Sage’s accounting and pension products. For collaborative payroll management, it enables multi-user access. Beware the learning curve for first-time users not familiar with payroll software, however.
- Pricing – £7 per month for up to 5 employees.
- Brightpay – Developed by Bright Software Group, this HMRC-approved payroll scheme is designed for UK accountants and small businesses that have advanced reporting needs. Itss interface is intuitive and fantastic for new users, offering comprehensive management systems for employees and bulk payroll processing. The cloud version offers enhanced accessibility and security measures. However, the desktop version limits remote access and the cloud subscription increases overall cost.
- Pricing – Starts at £199 per tax year for up to 25 employees.
- Xero payroll – Xero is a cloud-based accounting platform with over 3 million global subscribers, targeting small businesses via Xero’s accounting ecosystem. This ecosystem is comprised of many accounting software for seamless financial management and is accessible from any device with cloud-based storage capabilities. Employees can use it for self-service, requesting leave requests and playslip access easily. That being said, advanced payroll functionality is lacking, and prices are higher per employee.
- Pricing – Starting at £16 per month.
- QuickBooks payroll – This software is owned by Inuit, and is trusted by millions of small businesses globally. It offers functionality alongside Quickbooks accounting software, with next-day direct deposit for employees. The software is user-friendly, and tailored for small business owners. Designed primarily for dedicated QuickBooks users.
- Pricing – Starts at £14 per month, with additional fees for advanced features.
What Are Some Payroll Best Practices?
The following practices are considered the standard when using payroll software:
- Accurate timekeeping – Accurate timekeeping and record keeping cover your track and support your business. Many automatic features dedicated to tracking hours of work and overtime, as well as recording starters and leavers for pro-rata adjustments, can make this work a lot easier. Hours worked need to be recorded and verified before using the payroll software to pay and calculate taxes, as miscalculating taxes can lead to trouble with the HMRC.
- Auditing – Your payroll system can also be used to identify errors and inconsistencies via auditing, and should most definitely be used periodically. Payroll software auditing mitigates chances of fraud, overpayments and underpayments.
- Go digital – Payroll can be done with paper, but it’s not only old-fashioned but also far less efficient. Not only does a digital payroll system cut back on the use of paper, but it also provides a paper trail and resolves much quicker.
- Disaster planning – Put measures in place to ensure that the payroll system continues even during unexpected disruptions. This prevents payment delays, employee dissatisfaction and operational breakdowns. Many employees rely on set paydays for various reasons, so back up payment methods and employ secure payroll redundancy plans.
- Data security – Understanding and mandating security protocol keeps everyone’s personal data safe from fraudsters, and from punishment by the relevant authorities. It is your responsibility to keep sensitive employee data safe under GDPR by preventing data breaches and identifying theft through various mmen Secure your handling of payroll information and retain the trust of your employees.
- Know your role – Your role is not only executing the various processes payroll requires, but also knowing details about:
- National minimum wage – What is the precise figure?
- Tax codes – What is your employee’s tax code, and if you don’t know it, how do you calculate it?
- Tax month – What dates matter in the tax month, and what timeframes are to be respected?
- Holiday pay – How much is holiday pay, does holiday pay apply on half days, etc?
Conclusion
Managing payroll requires attention to detail, adaptability and a solid understanding of both your business operations and the legal framework. By customising your approach, leveraging technology and prioritising security measures, you can establish a payroll system that not only fulfils requirements but also contributes to the growth and success of your company.
FAQ – Can I change the payday?
Absolutely! If you wish to change the payment frequency simply inform HMRC. Payroll software can assist in recalculating deductions based on the payday.
FAQ – What if there are changes in employee information?
Any changes related to employee details such, as addresses, job titles or when someone joins or leaves the company should be reported to HMRC through the FPS form.
FAQ – How can I ensure that payments are made accurately and on time?
Maintaining a schedule and utilising payroll software can automate calculations and effectively manage payment deadlines.
FAQ – What are some payroll terms to know?
Payroll is its beast, with terms specific to the systems and processes it uses. The following should be a quick rundown of some terms that you would otherwise require an explanation for:
- Employer PAYE reference number – This is a unique identifying number assigned to an employee, used for all correspondence with HMRC about payrolls and employee taxes.
- Workplace pension scheme – This is a retirement savings plan that employers are legally required to offer under auto-enrolment rules.
