If you’re a business owner juggling different responsibilities, including managing employees or preparing to hire your first member of staff, payroll can quickly become another task competing for your attention.
It involves more than simply paying your employees each month. You also need to handle deductions, report the required information to HMRC and keep your payroll records up to date.
For a small business owner, managing all of this alongside your day-to-day responsibilities can feel like a lot.
So, where do you start, and what does payroll management for small businesses actually involve? This guide explains the main responsibilities involved and when outsourcing payroll could make sense for your business.
Key Takeaways
- Payroll management for small businesses involves setting up the right process for paying employees and handling your employer responsibilities.
- Payroll involves more than paying employees. You also need to manage deductions, payslips, HMRC reporting, payments and payroll records.
- Common payroll mistakes include incorrect pay, deductions, employee information, HMRC reporting and payslips.
- You can manage payroll yourself or outsource it to an accountant or payroll provider, depending on your time, payroll requirements and preferences.
- If you choose to outsource, consider what the provider will handle, their experience, data protection arrangements, support and overall cost.
How Do You Set Up Payroll for a Small Business?
While payroll management for small businesses can involve several ongoing responsibilities, the setup itself starts with putting the right process in place.
These processes include:
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Checking Whether You Need to Operate PAYE
Before setting up payroll, you need to check whether you need to operate PAYE. PAYE is the system employers use to collect Income Tax and National Insurance from employees’ pay.
You normally need to register for PAYE if an employee is paid £96 or more a week, receives certain expenses or benefits, has another job or receives a pension from you.
If none of these circumstances apply, you may not need to register for PAYE, but you still need to keep payroll records.
1. Registering as an Employer
If you need to operate PAYE, you must register as an employer with HMRC before your first payday.
Once registered, HMRC will give you an employer PAYE reference, which you will use when dealing with your payroll and HMRC.
2. Gathering Your Employees’ Information
You’ll need to collect the information required to set up each employee on your payroll, including their personal details and information needed to calculate their pay and deductions.
You also need to report the required information about new employees to HMRC.
3. Setting Up Workplace Pension Arrangements
You also need to check your workplace pension responsibilities when you take on employees. Depending on your employees and circumstances, you may need to enrol eligible employees into a workplace pension scheme and make the required contributions.
4. Putting Your Payroll Process in Place
Finally, decide how and when your employees will be paid and establish how payroll will be handled each pay period.
Having a consistent process will make it easier to manage payroll and deal with changes as they arise.
How Do You Manage Payroll for a Small Business?
Once you have set up your payroll, you need to manage it each time you pay your employees. Even if you choose to outsource your payroll management, you still have responsibilities as an employer.
You’ll need to:
- Keep Employee and Pay Information Up to Date: Employee information can change over time. You may need to update your payroll when you hire someone, an employee leaves or their pay or working arrangements change. Changes such as salary, overtime, bonuses or working hours may also need to be reflected when processing their pay.
- Calculate Pay and Make the Required Deductions: Each pay period, you need to calculate what your employees are due and account for the deductions that apply. These can include Income Tax, National Insurance, workplace pension contributions and other deductions that apply to an employee.
- Provide Payslips: Employees must receive a payslip on or before payday. The payslip should show the required information about their pay and deductions.
- Report the Required Information to HMRC: You also need to report the required payroll information to HMRC as part of your payroll process and make the relevant payments when they are due.
- Keep Payroll Records Up to Date: Your payroll records should be kept accurately and updated when employee or pay details change. This gives you the information you need to manage payroll and meet your record-keeping responsibilities.
What Changes Do You Need to Update in Payroll?
When changes happen in your business involving your employees, you may need to update your payroll records and reporting.
For example, this could include:
- Hiring a new employee
- An employee leaving
- A change to an employee’s pay or working arrangements
- A change in an employee’s circumstances
- A change to workplace pension arrangements
- Some changes also require information to be reported to HMRC.
What Are the Common Payroll Mistakes Small Businesses Make?
When you are responsible for payroll management for small businesses, it is easy to focus on paying your employees on time.
However, you also need to calculate deductions correctly, report payments to HMRC and keep accurate payroll records. When these responsibilities are overlooked often, you risk:
- Forgetting to Update an Employee’s Pay: When an employee’s salary changes, or they receive overtime, a bonus or another payment, the change needs to be reflected in their next payslip. If you forget to update the payroll before it is processed, the employee could receive the wrong amount.
- Entering the Wrong Hours: For employees who are paid according to the hours they work, the number of hours entered into the payroll system directly affects their pay. Entering too many or too few hours can therefore result in an overpayment or underpayment.
- Using an Incorrect Tax Code: An employee’s tax code determines how much Income Tax is deducted from their pay. If you use an old or incorrect tax code when processing payroll, the employee may have too much or too little tax deducted.
- Failing to Process a Leaver Correctly: When an employee leaves your business, their final pay may include salary, holiday pay or other amounts that need to be accounted for. Forgetting to process the employee as a leaver or getting their final payment wrong can leave both your payroll records and the employee’s pay incorrect.
- Reporting the Wrong Payment Date: The date you pay your employees needs to be reported accurately to HMRC. If you enter the wrong payment date when submitting your payroll information, the payment could be reported in the wrong tax period, which can affect your PAYE records.
- Paying HMRC the Wrong Amount: After processing payroll, you need to pay the amount due to HMRC. If your payroll calculations are incorrect, the amount you owe may also be wrong. This can leave you with an underpayment that needs to be settled or an overpayment that needs to be reconciled.
- Leaving Payroll Errors Uncorrected: Payroll mistakes can be easy to overlook, particularly if they are discovered after payday. However, simply noticing an error does not correct it. If an employee has been paid incorrectly or the wrong information has been reported to HMRC, the appropriate correction needs to be made so that your payroll and PAYE records are accurate.
Should a Small Business Outsource Payroll?
Payroll management for small businesses can be handled in-house or outsourced to an accountant or payroll provider.
The right approach depends on more than the number of employees you have.
Managing Payroll In-House
Handling payroll yourself may be manageable when your employees have consistent hours, fixed salaries and few changes from one pay period to the next.
However, the time involved is recurring. Payroll needs to be processed every time you pay your employees, and changes such as overtime, commission, different working hours, new starters and leavers can add to the workload.
You also need to make sure the payroll is processed accurately and on time, with the required information reported to HMRC and the relevant payments made by their deadlines.
The question is therefore not simply whether you can manage payroll in-house. It is whether the time and responsibility involved make sense for your business.
Outsourcing Your Payroll
Outsourcing gives you another option: a professional can handle the regular payroll process on your behalf.
This can be useful when payroll involves frequent changes or when the time required to manage it is becoming difficult to fit around your other responsibilities.
However, before outsourcing, it is worth checking exactly what the provider’s service covers.
For example, does it include payroll calculations, payslips, HMRC reporting, corrections and support when something changes outside the usual payroll run?
You should also consider how the provider handles sensitive employee information, what happens when an error needs correcting and whether additional payroll runs or other services cost extra.
Outsourcing does not remove your responsibilities as an employer, but it can reduce the regular administrative work involved in meeting them.
If you are considering outsourcing your payroll, you can work with the trained accountants at Surrey Accountancy Limited.
How to Choose a Payroll Provider for Your Small Business
Choosing a payroll provider is about more than finding someone who can process your employees’ pay. You are giving another person or business access to sensitive employee information and relying on them to handle payroll tasks accurately and within the agreed timescales.
So, before choosing a provider, consider:
1. Understand What the Service Includes
Ask exactly what the provider will handle. This could include processing pay and deductions, producing payslips, payroll reporting and maintaining payroll records.
Also consider how much of the process you want to hand over. Having a clear idea of your requirements will make it easier to compare providers and find a service that suits your business
2. Check Their Experience and Support
Ask whether they have experience working with businesses similar to yours and how you can contact them when you need help. It is also worth understanding their process for dealing with changes and corrections.
3. Ask About Data Protection
Because payroll involves employee information and statutory reporting, compliance and data protection should also form part of your assessment.
Ask how the provider checks payroll calculations, manages reporting deadlines and deals with errors or corrections. In addition, find out how employee information is stored, protected and shared.
4. Compare the Total Cost
Look beyond the advertised price and check what is included. Ask whether there are additional charges for things such as extra payroll runs, corrections, setup or year-end work.
Taking the time to understand the service before you choose a provider can help you select one that fits your business.
You Should Also Read
Small Business Payroll Services from Surrey Accountancy
Managing payroll can take time, particularly when you have to deal with it every time your employees are paid.
The workload can become even greater when you have overtime, bonuses, different working hours or other changes to account for. That recurring work can take time away from other responsibilities that need your attention.
If payroll is becoming another task your team has to fit into an already busy schedule, outsourcing it can give you one less recurring responsibility to manage.
At Surrey Accountancy Limited, we can manage your payroll on your behalf, including processing employees’ pay and deductions, preparing payslips and dealing with the required payroll reporting.
If you need support with payroll management for small businesses, get in touch with Surrey Accountancy Limited to discuss how we can help.
Frequently Asked Questions
1. What Payroll Services Are Available for Small Businesses in the UK?
Payroll services can include processing employee pay and deductions, producing payslips, handling payroll reporting to HMRC and maintaining payroll records.
Depending on the provider, the service may also include workplace pension administration and other payroll support.
2. What is the Best Payroll Software for Small Businesses in the UK?
The right choice depends on the number of employees, required features, budget and whether the business already uses accounting software.
HMRC provides a list of free and paid payroll software that it recognises for reporting PAYE online, but HMRC does not recommend one provider over another.
3. How Do Small Businesses Manage Payroll?
Small businesses generally manage payroll by either handling it in-house with payroll software or outsourcing it to a payroll provider.
4. How Much Do Payroll Services Cost in the UK?
The cost of payroll services varies depending on the number of employees, how often employees are paid, the complexity of the payroll and whether the service includes additional support.
Some of which include pension administration, payslips, HMRC submissions and employee record management.
For payroll software, costs can range from free to paid monthly subscriptions. HMRC Basic PAYE Tools is free for businesses with fewer than 10 employees.
Commercial software can charge a monthly subscription and/or a fee based on the number of employees.
