Business owner at desk on computer

Contents

  1. 1. How do small businesses do payroll?
  2. 2. How to set up payroll
  3. 3. What payroll responsibilities do I have as an employer?

How do small businesses do payroll?

July 22, 2021
If you are setting up a business for the first time or branching out from operating alone, odds are you'll be looking at bringing a few more people on board. When that happens, you'll need to get to grips with payroll –and fast.
Payroll is the means of managing your employees' pay and is essential not only for paying HM Revenue and Customs (HMRC) on time, but for keeping your employees happy. As an employer, you're responsible for working out how much Income Tax and National Insurance your employees owe, which you need to deduct from their pay via PAYE (Pay As You Earn).

As well as this, you also need to factor in any other deductions that need to be made, as well as produce payslips, record information, manage bonuses and benefits and provide a company pension scheme. Get any of this wrong or fail to carry it out come payday and you are liable to have some unhappy employees, as well as face investigation and potential penalties from HMRC.

Luckily, you don't need to work all of this out with a pen and paper each month. In this article, we'll cover what options are available to small business owners needing payroll support and how to set up payroll for the first time.

How do small businesses do payroll?

Whether you have 1 or 50 employees, every business must follow the same rules when it comes to payroll. The obvious difference is that the more employees you have, the longer it can take. However, it doesn't have to take up hours of your time or cost a small fortune.There are three options when it comes to setting up and operating payroll. You can employ the services of an external accountant or bookkeeper, manage it in-house with dedicated HR or finance staff, or run it yourself by using a small business payroll software. Let's look at these options in more detail.

Hire an accountant or payroll provider

Outsourcing your payroll might seem the simplest option, but is far from being the cheapest by a longshot. A payroll provider will charge a set fee for each payroll run, plus an additional cost for every employee.When your staff numbers start rising, this can be a significant expense to fork out every month. If you use an accountant, this will likely be another charge on top of the services they already provide – potentially taking your monthly cost to hundreds of pounds. You'll also have to make sure you keep them up to date with all relevant business information by every payroll date. This includes things like the number of hours your staff has worked (including any overtime), new hires and any personnel deciding to leave the business. Not recording the correct information on your payroll can lead to paying your employee or HMRC the incorrect amount – something you are liable for, not the payroll provider.

Run payroll in-house

Another option is to keep your payroll in-house by having a dedicated employee manage the process – usually someone employed in an HR or finance position. This can be a good choice if you have hundreds of employees but again, it can be costly. As well as paying the salary of the employee who operates payroll, you also need to pay for payroll software so they can manage the process.

Use payroll software and run it yourself

Managing your own payroll might initially sound daunting but with the right tech at your disposal, it can be a breeze. Although cheaper than hiring an accountant, older accounting software is time-consuming, more complex to operate and full of confusing jargon.
When looking at your options you want something that is intuitive, easy to understand and does the bulk of the work for you – like Ember. We'll work out calculations and deductions for you, send you timely reminders, auto-enrol employees into your company pension scheme and file Real Time Information directly to HMRC. All you need to do is set up your employees' details and we can manage the rest.

How to set up payroll

If you plan to run your own payroll system and have selected the software you are going to use, there are a couple of steps to follow to get you set up.

Register as an employer

The first thing to do to set up payroll for your business is to register as an employer with HMRC. You will receive your employer PAYE reference number (ERN), which you will need for completing your end of year PAYE return and for listing on payslips, and your PAYE Accounts Office Reference, which you will need whenever you need to contact HMRC.
To find out more about setting up as an employer, regardless of whether you're a sole trader or limited company director, head over to our guide on how to register as an employer.

Tell HMRC about your employees

You need to let HMRC know any time you hire a new employee. As well as checking their legal right to work in the UK, setting their salary and providing them with a written statement of employment – all as part of your hiring process – you also need to:
    Check if your new employee should be paid through PAYE (this doesn't apply to self-employed workers or employees paid less than £120 a week or £6,240 a year).Obtain employee information so you can set them up with the correct tax code – if they are unable to provide you with their P45, ask them to complete HMRC's starter checklist.Find out if they have an outstanding student loan, so any necessary deductions can be calculated.
Once you have these details, you can set your new employee up in your payroll software and register them with HMRC using a Full Payment Submission (FPS). This provides HMRC with information about your employee's details, tax code, pay and deductions, to ensure they – and you as their employer – are paying the correct amount of tax.

What payroll responsibilities do I have as an employer?

There are a number of tasks you need to carry out each month, both on behalf of your employees and HMRC. You need not worry though, as choosing a good payroll software can automate the majority of this for you.

Pay staff and calculate deductions

It's important that you pay your employees on time and pay them the correct wage. When and how you pay your staff is something that should be stated in the contract they sign.You should also be clear about the type of pay they will receive, such as:
    annual salary or hourly rateif there is a commission to be paid and if so if this is a flat fee or percentageif tips are included (mostly applicable to the hospitality industry)
When deciding on what to pay your employees, you must ensure that you pay at the National Living Wage of £8.91 if they are aged 23 or over. The National Minimum Wage also applies to anyone above school leaving age, with different rates depending on what age bracket they are in.As well as paying wages, you also need to consider other types of pay. This might include:
    Statutory sick payMaternity/Paternity payParental leave
Once you know the weekly or monthly amounts, it's your responsibility as an employer to calculate all necessary deductions from each employee's wages. The most common deductions are:
    Income TaxNational InsurancePension contributions
Ember will automatically calculate your deductions for you, but if you want to better understand how the rates apply for Income Tax and National Insurance, take a look at our guide on tax brackets in the UK.

Other deductions can include:
    Student loanPayroll GivingChild maintenance

Provide payslips to your employees

It is a legal requirement to provide every employee with a payslip on each pay date. This can be a physical copy or a digital version but as a minimum, it must include:
    Gross pay (the amount before any deductions are made)Amount of deductions (Income Tax, National Insurance, pension contributions, student loan)Net pay (the amount after all deductions have been made)Number of hours worked if the employee is not paid via an annual salary

Auto-enrolment Pension

All employers have to offer a workplace pension scheme for their employees, into which you and your employees contribute. Before 2018 (or 2012 for large businesses), the onus was still on employees to join the pension scheme if they wanted. Auto-enrolment means that you must enrol your employees into a pension scheme – although they still have the choice to opt-out.

Keep records

As part of the payroll process, you must keep records of:
    What you pay your employees each week or month and any tax deductions like National Insurance and Income Tax that you makeThe payments you make to HMRCAny days of employee leave or sickness absences
You will need to store this information for three years from the end of the tax year they relate to. HMRC are entitled to check these records at any point and can issue penalties if there is any missing information.

Report to and pay HMRC

In each payroll tax month – from the 6th to the 5th of the next month – you need to report to HMRC all of your employees' pay and deductions, as well as the amount of employer National Insurance contributions you will pay. Your employer NI contributions depend on the NI category of your employee, but for most this will be category A, for which you will pay 13.8% on earning above £737 a month. You can find the full details on HMRC, but Ember will automatically calculate this for you.Once you've calculated all of the pay and deductions, you can submit all of the necessary details using your payroll software to send a Full Payment Submission.Payments to HMRC need to be made by the 22nd of every month, or the 19th if paying by cheque. You might find it handy to set up a reminder of your deadline so you don't miss a payment – something Ember can do for you.The final responsibility you have is when the tax year ends on the 5th of April. You will need to send an annual report to HMRC, provide your employees with a P60 – a statement of their pay and any deductions in the tax year just gone – and update your payroll records on the 6th of April for the new tax year.
Daniel Hogan
Daniel HoganCOO & Co-Founder

You might also like

Freelancer working from home office | A Complete Guide to National Insurance

Rachel Cameron-Potter

·

Startup

The Complete Guide to National Insurance

Female-led startup employees brainstorming around a table | What is a VAT receipt?

Ellie Perkins

·

Startup

What is a VAT receipt?

Freelancer on the phone at wooden table | How to find work as a freelancer

Rachel Cameron-Potter

·

Freelancer

How to find work as a freelancer

Don’t take our word for it.

Try Ember for free.

With our super software and talented team of qualified accountants, taking care of your business admin has never been easier. Try us free for 14 days today.

Ember