Payroll: Top Tips for Seamless Set Up
Setting up payroll correctly is crucial for any business, but especially if you’re the owner
of a small business. How can you take the pain out of payroll and get it right first time?
To outsource or not to outsource…
It goes without saying that employees need to be paid, and on time. If not, staff morale
will inevitably suffer, and it can threaten the viability of your entire business. To avoid any problems, it’s vital to set up an efficient payroll system. You can either do this yourself or make life easy and outsource it to a third party payroll company, like
an accountant or other providers.
A lot depends on how large your business is, how many employees you have, and how
complex your needs are. It will also depend on what resources you have in-house. If you
have a dedicated finance team, you might be able to handle payroll in-house. But if you
are your company’s finance team, then you only have a limited amount of bandwidth. It
may not therefore be a good use of your time to be focusing on payroll administration
when you could be focusing on bringing in new customers or making more widgets.
If you’re short on time and don’t want to handle your payroll yourself, you can always
outsource it to an accountant or other payroll providers – this will free you up to focus on the things where your involvement is critical to the long-term success of your business.
Payroll can be extremely time-consuming, especially if it’s not your area of technical
expertise. By outsourcing it to an accountant or other accredited professional, you won’t
only get rid of an administrative headache, you’re also more likely to minimise mistakes
and remain compliant.
How to choose a payroll provider
The first step is to think what kind of help you think you’re going to need with your
payroll, and who you’re going to use. Remember, though, ultimately it’s still down to you
to keep all your employee records accurately and efficiently.
Some payroll providers offer different services and extra help if you need it, like keeping
all your employee records organised, as well as preparing payslips and making PAYE and
other payments to HMRC.
Setting up payroll for your business
If you decide to run or set up payroll yourself, you will need payroll software to report to
HMRC. It will help you to:
Record all your employees’ details
Calculate your employees’ pay and deductions
Report all the required payroll information to HMRC
Calculate how much you need to pay to HMRC
Calculate any statutory pay, e.g. sick pay, maternity pay
You will also need to do the following:
1. Register with HMRC as an employer
You need to do this when you start employing staff or sub-contractors. It can take up to
five days to get your employer PAYE reference number.
2. Register for PAYE Online
Most new employers will receive login details when they register online as an employer.
If you registered in a different way, you’ll need to enroll for PAYE Online separately.
3. Give your employees’ information to HMRC
You must tell HMRC whenever you hire a new employee. You’ll also need to check
whether the new employee needs to be paid through PAYE, work out their tax code
(using their P45 if you have it, otherwise using HMRC’s starter checklist), and whether
they have any student loans outstanding.
With all this information, you can then set up your new employee in your payroll
software. Finally, you can register him or her with HMRC using a Full Payment Submission (FPS).
4. Collect and keep records
You need to keep records of everything you pay to your employees and any deductions
you make, as well as things such as employee leave and sickness absences, and any
taxable expenses or benefits.
3. You’ll need to keep these records (on paper or digitally) for three years from the end of the tax year they relate to. If you don’t keep full records, you’re liable to an HMRC
penalty of up to £3,000.
5. Record pay, make deductions, report to HMRC
You’ll need to complete a number of tasks during each tax month. i.e. from the 6th of one month to the 5th of the next.
You must tell HMRC if you’ve not paid any employees in a tax month. Then, every time
you pay your employees, you need to use your payroll software to:
Record their pay
Calculate deductions, e.g. tax and National Insurance
Calculate your employer’s National Insurance contribution for earnings above
£166 a week
Produce payslips for each employee
Report everything to HMRC in a Full Payment Submission (FPS).
6. Pay HMRC the tax and National Insurance you owe
Every month, you’re required to pay HMRC the tax and National Insurance you owe as
reported on your FPS in the previous tax. Your payroll software will calculate how much
tax and National Insurance you owe, including employer’s National Insurance
7. Provide annual reports prepared for the coming tax year
Every year you’ll need to report to HMRC on the previous tax year (ending 5th April). The
annual report must include your employees’ pay, plus any payroll benefits and
deductions in an FPS.
To prepare for the next tax year, you’ll need to update employee payroll records from 6th
April, update your payroll software, give a P60 to each employee, and report employee
expenses and benefits.
Records and other payments to be aware of
Other steps you need to be aware of with your payroll include:
1. Statutory pay: including Statutory Sick Pay (SSP) or statutory pay for parents. These are taxed like normal pay, though you can reclaim statutory pay for parents.
2. Expenses and benefits: such as uniforms or company cars are reported separately at
the end of the tax year. Check the rules to find out what counts as expenses and benefits, and how you should record them in your accounting software.
3. Tips and other payments: treat any non-cash tips to your staff as normal pay. Other
payments you should record as normal pay include:
Payments for employee travel time
Passenger payments, except the first 5p per mile
Medical or maternity suspension payments
4. Deductions: your payroll software will calculate how much tax and National Insurance
to deduct from your employees’ pay. They are worked out using each employee’s tax
code and National Insurance category letter.
5. Student loan repayments: your payroll software can record if your employee needs to
make student loan repayments, according to which plan they’re on.
6. Pensions: pension deductions are usually made after National Insurance but before tax – check with your pension provider. You’ll also need to pay any employer contributions into your employee’s pension. All employers have to provide and pay into a workplace pension scheme for their employees – this is called automatic enrolment.
7. Payslips: you must give your employees a printed or electronic payslip on or before
their payday; it should show gross pay, deductions, net pay and, if applicable, the number
of hours worked.
Small businesses are now required to follow complex legislation in relation to data
protection and (since May 2018) the General Data Protection Regulation (GDPR).
It’s very important to be aware of the latest legislation surrounding the minimum wage,
maternity/paternity pay, sick pay, holiday pay, student loans, pension contributions,
National Insurance, auto-enrolment and so on.
Using up-to-date payroll software can help you stay on top of the legislation.
Four important payroll points to get right:
In order for your payroll to run smoothly, it is important that you’re aware of and follow
HMRC’s rules and regulations, otherwise you risk being fined, not to mention having
unhappy employees if you’re not paying them correctly.
1. Minimum wages
Make sure you’re up to date on the National Living Wage – the hourly rate that all
employees aged over 25 are legally entitled to. It was previously called the National
Minimum Wage, but was renamed in 2016. Now, the National Living Wage applies to people who are between school-leaving age and under the age of 25.
The National Living Wage and National Minimum Wage rates (which are legally binding)
for the 2019/20 tax year are:
25 and over: £8.21
Under 18: £4.35
2. Employee status
The next thing to consider is the status of each employee – are they an employee or an
independent contractor? The difference is important and it could cost you dearly if you
get it wrong.
Independent contractors can be self-employed workers who aren’t paid through PAYE,
and they don’t have the employment rights and responsibilities of employees.
Make sure you keep your administrative house in order. Keep accurate records, both in
your payroll and accounting software. HMRC can check your records at any time.
4. Payment deadlines
Finally, don’t miss payment deadlines. You’ll receive a late filing notice from HMRC if
you’ve paid any employees and either not sent an FPS or sent one late. It can also charge you a penalty, unless you have a valid reason for reporting late.
Setting up Payroll - the Final Word
Payroll is complicated but essential to keep your employees happy and your business
running smoothly. So it’s worth taking the time to get it right first time so you can spend
time on more productive parts of your business.
When setting up payroll for your business, there are several processes to go through, no
matter whether you’re doing it in-house or outsourcing to an accountant or other
Setting up payroll can be intimidating and overwhelming, to make life easier,
why not speak to us about setting up and managing your payroll, get in touch today for a no-obligation consultation.