Paying your employees the right amount at the right time is essential if you want to motivate and retain them. We look at how operating a good payroll system can help you achieve this, from keeping accurate records to dealing with legal issues and various payment methods.
1. Your payroll responsibilities
If you’re employing staff, you’ll need to efficiently arrange their weekly or monthly pay and ensure you send accurate reports to HM Revenue & Customs (HMRC). You’ll usually need to operate a PAYE system, which is what HMRC uses to collect Income Tax and National Insurance from employment. Check the HMRC payroll website for more information on whether your business may need to set up a PAYE system.
It’s easiest to use payroll software as many paper forms have been replaced with digital real time information (RTI) submissions to HMRC. Payroll software programmes make the process simpler, faster and more automated by guiding you through the steps and forms that need to be completed. Your software should also perform all the calculations to be able to work out how much tax and National Insurance (NI) you owe, including your employer’s NI contributions.
You can also choose to give your employees paper or paperless payslips. Just make sure that your choice of software has been tested and recognised by HMRC. For some employees, you’ll also need to make payroll adjustments for things like pension contributions, student loan repayments, sickness and maternity pay.
You can operate payroll by doing it yourself with the appropriate software or by outsourcing it to a payroll provider – including an accountant or specialist payroll company. If you are considering outsourcing decide how much support you want and are happy to pay for. For example, some providers will keep employee records and make payments direct to HMRC.
There are plenty of payroll software providers to choose from. Find one that suits you and your business best. Check that the software you choose can handle all the things you need, such as absence, court-imposed attachment of earnings orders, bonuses, expenses, holiday pay, overtime and more.
If you have fewer than 10 employees you can use one of the approved free payroll software packages.
Make sure any software you use stays up to date with the latest legislation.
As an employer you are legally responsible for all payroll tasks, even if you pay someone else to do these for you. To keep full and accurate records you will need to:
- Tell HMRC each time a new employee starts or leaves work, using form P45 (or P46 if your employee doesn't have a P45).
- Classify employees correctly, so you don’t mix up independent contractors and employees.
- Work out and deduct PAYE income tax and National Insurance contributions (plus any other relevant deductions) using payroll software and send a Full Payment Submission (FPS) to HMRC. You usually need to do this monthly, on or before your employee’s pay day.
- Keep a detailed record of the total payments you make to HMRC for each pay period on a P32 (Employer's Payment Record).
- Submit returns to HMRC at the payroll year end.
- Give each employee a record of their pay and deductions at the end of the tax year using a P60 by the end of May.
- Keep all payroll documentation for at least three years after the tax year it relates to.
Ideally, your End of Year Record (EOYR) should be automated if you’re using an RTI system, replacing the old P35 (Employer Annual Return) and P14 (End of Year Summary) forms. This should make all end of the year returns more straightforward.
When you hire a new employee, you’ll need to tell HMRC and then set them up on your payroll system. For step by step guidance visit HMRC's website. You can also find some helpful HMRC videos on topics such as PAYE.
You’ll also need to understand your pension obligations to put eligible staff into a workplace pension and pay into it via automatic enrolment. You must include staff who meet the government’s criteria.
So every time you pay your staff you will need to monitor their age and earnings to see if they need to be put into the pension scheme, and if so how much. Ideally your payroll system should take care of working out the contributions and generating any necessary data for your pension provider.
You will need to make sure you comply with the regulations around the National Living Wage to make sure you always pay minimum wage staff enough and that any rises are built into your system, for example when the rate increases or when employees reach a birthday that moves them into a new category for that age band.
Any data that you keep will need to be fully compliant with the General Data Protection Regulation (GDPR) rules – particularly if you are sharing information with a third-party supplier.
Remember, if you don’t complete your businesses payroll responsibilities you could end up having to pay a fine.
Managing payroll doesn’t have to be a burden and there are options you can choose to ensure a smooth-running process:
- Spend some time researching an appropriate digital payroll system for your business that’s HMRC approved.
- Consider outsourcing payroll to a third party that gives you the level of customer support your business needs.
- Play to your team’s strengths and delegate payroll responsibilities to an appropriate employee.
Talk to your accountant and peers to see if they have any time-saving tips that you can replicate.
Important legal information
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