From the moment a small business takes on its first employee, it becomes the responsibility of the employer to ensure their new starter is paid accurately and on time with tax and National Insurance deductions paid to HMRC. UK businesses must abide by rules set out by HMRC under their Pay-As-You-Earn (PAYE) scheme.
Small business payroll management also includes regular reporting to HMRC, registering employees for pensions and managing deductions and contributions to their plans.
HMRC publish a number of excellent small business payroll management resources for people who are getting started with this area of administration as well as more experienced managers.
An employee’s tax code determines how much an employer deducts from someone’s gross pay. The amount someone is paid after deductions have been made is called net pay.
All money collected from deductions is sent to HMRC by employer ‘at source’ – meaning directly from employees’ wages before it reaches their bank account. National Insurance and student loan repayments may also be deducted in this way. Other types of deductions are listed below.
We recently wrote an introduction to UK PAYE and payroll management in which we covered the basics of this area of administration based on HMRC’s rules and regulations. In this you’ll find coverage of the following areas:
- Working with tax codes – these are used as the basis for calculating payments and deductions based on an employee’s individual circumstances and tax bracket
- Compulsory payroll deductions – as required by HMRC based on an employee’s tax code
- PAYE and payroll reporting forms – such as payslips, P60s and P45s. These are the reports required by HMRC which summarise payroll activity and history
- Real Time Information (RTI) reporting – the scheme by which businesses report payroll related information to HMRC following each payroll run
- Pensions and payroll management – businesses must enroll all eligible employees on pensions and report information to HMRC in addition to your employees themselves
Small business payroll management software
Payroll software systems have been used by organisations of every size, in some cases for decades to automate PAYE calculations and reporting. These reduce the complexity of this important area of financial management and accounting and the time it took previously when making calculations manually. Updated every year to reflect any changes to PAYE rules and regulations, payroll software systems were also equipped with the means of online reporting and RTI monthly filing of information to HMRC.
If you were involved in payroll management before 2013 you’ll be well aware of how this has changed over the last decade with businesses moving on from manual and spreadsheet based calculations. The ability to calculate all necessary deductions and report these to HMRC accurately and on time is of paramount importance if a business is to avoid fines for inaccurate and late filing.
HMRC publish a list of small business payroll management systems and it is well worth comparing systems as they vary in terms of cost and ease of use. Most software companies will provide you with a free trial so you can test-drive functionality.
Payroll management and cloud computing
Many modern systems are hosted in the cloud and in highly secure datacentres provided by organisations such as Amazon Web Service. Look for software providers who can prove that their hosting arrangements are ISO27001 accredited. This is an international industry benchmark which demonstrates that the datacentre in which your employee data is held has been independent verified for being a safe environment.
If you are new to the cloud and thinking about using non-cloud-based software, it’s worth asking yourself if your own systems and servers provide the same levels of data security as a professional hosting provider with an ISO27001 accredited datacentre.
Using small business payroll management services
If you do not want or unable to manage payroll directly, this area of business administration is offered as a service by many accountants and dedicated bureau specialists. This can be useful for recently established small businesses where their founders are focusing on establishing their new company and generating sales. There is no doubt than managing payroll can be time-consuming and it’s important that is done accurately. Late payments and incorrect deductions can damage staff morale and also lead to fines if a company is deemed by HMRC to have been negligent in any way.
There are pros and cons for outsourcing payroll management but in collating the information an accountant or payroll bureau needs to make payments and deductions, administrators are actually doing much of the hard work.
Once employee information has been entered into the payroll software used by a bureau– and assuming there have been no recent changes to an employee’s circumstances – completing a payroll run is little more than pressing a button. Yes, there are then reports that need to be completed, checked and sent to HMRC but payroll software shoulders the heavy lifting and the reporting processes are almost entirely automated.
Although there are sound arguments for outsourcing small business payroll management – particularly when a company is new - further down the line it is something which it may be more cost effective to bring in-house.
Although payroll management is only one of a number of different areas of admin related to employment it’s important that it is highly prioritised as soon as a company takes on its first employee. Agreeing credit terms with third party suppliers of products and services and negotiating adjustments as the need arises is something which can be relatively straightforward to achieve. Ensuring your people – the lifeblood of your company – are paid on time isn’t open to negotiation and the ramifications of late payments are serious.
But the range of tools and resources that are available to small businesses to help them manage payroll effectively is wider than ever before, as is the number of software systems and payroll bureaux. As a result, employers have everything they need to cut through payroll management related admin and this they can spend more time on helping their people grow and building their business.