What is payroll?
Put simply, payroll is everyone who works for you and how much you pay them. As soon as you have employees, you need to keep certain records, put certain systems in place (PAYE) and make certain payments (like income tax and National Insurance).
That might sound like a pain, but having the right systems and keeping the right records will save you loads of time and hassle in the long run. And as your business grows, you won’t get bogged down in admin.
You can get a payroll provider to do everything for you, or use payroll software. Either way, here’s what’s involved.
Step 1: Registering with HMRC
As soon as you have employees, you need to register as an employer with HMRC – even if you’re the one and only employee of your own private limited company. This part’s easy. You just register online here.
After five days or so, HMRC will send you your ‘employer PAYE reference number’. You’ll need this before you can start paying anyone. (But you can’t register more than two months before you start paying people.)
Step 2: Setting up payroll and PAYE
PAYE stands for Pay As You Earn. All it means is that every payday, you deduct any income tax and National Insurance (plus student loan, pension and child maintenance payments, and so on) from your employees’ pay, and then send it to HMRC.
Every single employer in the UK has to do this. (And in case you’re thinking of chancing it, just keep in mind if you don’t deduct what you’re supposed to, HMRC will come after you for the money – not your employees).
You also need to keep records of:
- how much you’ve paid each person
- how much tax and NI you’ve deducted for each person
- anything else you’ve deducted for each person (e.g. student loan repayments, pensions deductions and child maintenance payments)
- tax code notices
- taxable expenses or benefits
- Payroll Giving Scheme documents (that’s where employees can donate to charity from their pay before you take off their taxes).
And you need to send a report to HMRC (called a Full Payment Submission) every month. Your payroll provider or software will do this for you – usually on, or just before, payday.
You need to keep these records for three years, or you could end up with a £3,000 fine.
You can get software that will automatically work everything out for you and report directly to HMRC: wages, deductions, sick pay, maternity pay, student loans and so on. It’s designed to do all the heavy lifting, with minimal input from you. And if you have less than ten people, the software might be free.
If you do decide to use software, just remember to keep an eye out for the ‘PAYE recognition’ logo. This means it’s been tested to make sure it’ll work with HMRC’s online systems. There’s also a list of approved packages on HMRC’s website.
And before you settle on one, don’t forget to check out any reviews, demos or walk-throughs before you commit.
Step 3: Making regular payments
You’ll need to claim any reductions (for things like sick pay or maternity pay, for example) by the 19th of each month. And you’ll need to pay HMRC by the 22nd (or 19th, if you’re paying by post).
Just remember that you’ll need to allow three working days for your payment to clear, unless it’s a same-day payment (like CHAPS).
If you’re only small and your monthly bill is likely to be less than £1,500, you can ask to pay once every three months instead.
But whatever you do, don’t be late. Otherwise, you’ll end up having to pay penalties, plus 3% interest every day.
Step 4: Taking on new employees
Any time you take on someone new, you’ll need to let HMRC know before you can pay them. You’ll find all the information you need to do that on their P45.
In-house or out?
That really comes down to how many people you’ve got, how complicated your setup is, and how comfortable you are with the software. The best packages are intuitive and make everything as simple and painless as possible.
You might decide it’s not worth the time or hassle, and you’d rather outsource it. Some payroll agents charge per pay slip and ask for a minimum monthly amount. They’ll work out tax, net pay and pension contributions, deal with PAYE, report monthly and annually, and back up your data.
But whether you keep it in-house or outsource, payroll’s your responsibility.