If you’re a small or medium-sized business looking to hire your first employee or expand your team, you’ll need to get to grips with payroll and admin.
Hiring employees is an exciting step for growing businesses, but payroll can be time-consuming and confusing. That’s because there’s more to payroll than simply paying your staff. You’ll need to account for each employee’s deductions, operate PAYE, as well as ensuring you’re compliant with pension contributions and other legal obligations.
But don’t worry because we are here to help you get started with managing payroll so you can get back to managing your team. Enjoy our guide to payroll for small and medium sized businesses.
What Is Payroll?
Payroll in its basic form, is the list of employees and workers a company must pay and the amount they will receive. It’s also the total amount of salaries and wages a company pays to its employees, as well as any deductions that are made.
The payroll function includes:
- Calculating pay for everyone on the payroll.
- Deducting taxes, National Insurance, and any other legal obligations as required.
- Distributing pay via bank transfer, cheque, or cash on the day it should be paid to staff.
- Managing record keeping for each employee, including pay and deductions year-to-date.
- Making payroll tax payments and submitting reports to HMRC on time.
What Payroll Processes Need to Be Followed When You Hire an Employee?
Whether you’re recruiting your first employee or growing your team, there is a checklist of things you need to follow for every person you employ. To stay compliant with payroll you’ll need to do the following:
- Make sure you are registered as an employer with HMRC.
- Apply for and get a PAYE online login.
- Set up a Pay As You Earn (PAYE) payroll scheme. If you use a payroll provider, they can also do this for you.
- Have some form of payroll software set up to help manage the process.
- Get the required information from your new employee(s) to work out their tax code(s). A P45 or HMRC’s starter checklist are the most useful.
- Get the new employee(s) National Insurance number.
- Register your new employee with HMRC using a Full Payment Submission.
These may seem like quite a task, but this process can be just the tip of the iceberg. You may also have other responsibilities as an employer, such as setting up employer’s liability insurance and creating the correct documents for the new employee, such as employment contracts.
What is PAYE?
You need to operate PAYE within your payroll process to allow HMRC to collect income tax and National Insurance from your employees through deductions. There may also be other deductions that need to be made, such as
- Student loan repayments.
- Pension contributions.
- Child maintenance payments.
When Do PAYE Payments Have to Be Made?
This depends on what you choose as a payment period.
- If you choose to pay monthly, you must ensure that full payment of your PAYE bill has been made to HMRC by the 22nd day of the next tax month.
- If you choose to pay quarterly, you must pay you PAYE bill by the 22nd day of the month that follows the end of that particular quarter.
What is the Process of Completing Payroll for a Small and Medium-Sized Business?
The process of payroll is complex and includes a variety of different tasks. On or before payday a small or medium-sized business owner will need to do the following:
- Record the employee’s pay based on the number of hours they have worked and their pay rate.
- Calculate any deductions like income tax and National Insurance.
- Work out how much employer’s National Insurance you’ll need to pay.
- Produce and distribute payslips to staff members.
- Report pay and deductions in a Full Payment Submission to HMRC.
All employers must report their PAYE information to HMRC in real-time. This is known as Real Time Information (RTI). RTI means that you must report to HMRC every time you pay an employee, at the time you pay them.
So, Payroll is a Monthly Process?
Yes and no. Whilst you’ll have a weekly or monthly routine for payroll, there are also annual duties you’ll need to carry out. From sending your final payroll report to updating tax codes and issuing P60s, there are a variety of yearly tasks too. Here are a few of the annual tasks you will have to complete as a small or medium-sized business owner:
Send Your Final Payroll Report
At the end of the tax year, you’ll need to send your final Full Payment Submission on or before the last payday of the tax year. The deadline for this is the 20th of April.
This Full Payment Submission tells the HMRC about all payments made to your employees and any deductions that have been made, for example, National Insurance contributions and income tax.
Your payroll should include all current employees you have paid in a tax year, as well as any other employee who has worked for you but has now left the company. You can find detailed guidance on what to do about new employees and leaving employees from the HMRC.
Update Your Payroll Records and Tax Codes
You’ll need to use the correct tax code for the new tax year and update your payroll software with these too. HMRC will contact you between January and March with any new tax codes to use for employees. Failure to do this can lead to incorrect tax payments and unhappy staff.
Update Tax Rates and Thresholds
Every tax year, new rates and thresholds for income tax, National Insurance and student loan repayments are updated. You’ll need to make sure your payroll software has been updated to reflect this so that payments are accurate.
Update Payroll with National Minimum Wage and National Living Wage Increases
The National Minimum Wage and National Living Wage are updated frequently. As such, your payroll software will need to be updated to ensure staff are being paid correctly and you aren’t breaking the law.
As of the 1st of April 2021, the National Living Wage was extended to those aged 23 and over, where previously it has been 25 and over. This means that the new rates from this date are:
- For those aged 23 or over: £8.91
- For those aged between 21 and 22: £8.36
- For those aged between 18 and 20: £6.56
- For those under 18: £4.62
- Apprentices rate: £4.30
Send All Your Employees a P60
A P60 outlines an employee’s total pay during the tax year and any deductions that have been made. This is important for staff members records and may be needed if they are looking to get a mortgage or loan or otherwise prove how much they earn. As an employer you will need to do this by 31st of May every year.
Report Expenses and Benefits
You need to report expenses and benefits to HMRC by 6th of July using a P11D form. There are a range of benefits and expenses that you might give to employees, and you might need to pay tax and National Insurance on them.
Claim Your Employment Allowance
Most small businesses will probably claim Employment Allowance, a scheme aimed at helping them to reduce their National Insurance burden. If you are a business who can claim this, you will need to do it every tax year. Your HMRC online account will show you how much Employment Allowance you’ve used.
What Employer Contributions Do You Need to Pay Towards Employee’s PAYE?
As an employer, you will need to contribute Class 1 National Insurance contributions for your employees. Employers’ Class 1 National Insurance contributions, rates, and thresholds for the 2022/23 tax year can be found on the government website.
If you are a small business, you may be able to claim Employment Allowance. This lets eligible employers reduce their National Insurance liability by up to £5,000 (for the 2022/23 tax year – the threshold can change so check the governments’ website for updates).
What About Workplace Pensions?
You have a responsibility to ensure a compliant workplace pension is in place for all eligible employees, no matter how small your team. With auto-enrolment, pension reviews and annual pension-based duties, there’s a lot to think about – and a lot of paperwork to deal with. Failure to do these tasks, however and you risk fines from The Pensions Regulator, especially if they find that your scheme isn’t compliant with the law.
All of this will have to be taken into consideration and planned for in your payroll system.
What Payroll Records Do I Need to Keep?
The list of records you have to keep regarding the payroll of your employees is enough to keep HR teams busy all year. Here are a few of the things that need to be recorded:
- Employee pay. This includes everything paid to the employee, including bonusses, benefits, and expenses.
- Deductions from an employee’s pay. This includes things like:
- Tax contributions
- National Insurance contributions
- Student loan repayments
- Pension contributions
- Child maintenance payments
- Reports and payments made to HMRC
- Employee leave and sickness absences
- Tax code notices
- Taxable expenses or benefits
- Proof that the correct minimum wage has been paid for all employees
These records are important in the event of a PAYE compliance check, as HMRC may request to see your records up to three years after the tax year they relate to.
What Payroll Tasks Need to Be Completed When an Employee Leaves the Business?
There are a variety of payroll tasks that will need to be completed if an employee leaves your business. These include:
- Tell HMRC that the employee has left your business.
- Put the employee’s leaving date on their payroll record.
- Make sure pay and deductions of any final wage are correct. These will need to be listed as normal when you send you next Full Payment Submission.
- Give the employee a P45.
Outside of payroll, you’ll also need to:
- Decide whether it’s best for your employee to work their notice period or offer them payment in lieu.
- Arrange cover for the employee if necessary or start the process of hiring a new staff member.
- Confirm their notice period with them and be specific about their last day of employment.
- Handle any leftover contractual holiday that has been accrued. You may decide to pay the employee for the holiday or force them to take it.
What Is a PAYE Compliance Check?
HMRC may carry out an inspection to make sure you’re paying the right amount of tax. If you’re selected for investigation, HMRC will typically visit your business premises to review your payroll records to check that any payments you have made to employees and the HMRC are correct. Any errors can lead to fines or court action.
How Do I Avoid Payroll Mistakes?
Quality assurance is vital in any workplace process and is essential to avoid payroll issues. Mistakes will happen. You can’t avoid them. Your job is to ensure systems are in place to reduce errors where possible and correct them quickly if they occur. Here are a few suggestions to avoid payroll problems:
- Invest in the Right Tools. The best way to keep payroll mistakes from disrupting your organization is to invest in a robust payroll software. If you really struggle with the process (and can afford to do so), you could look to outsource it to a specialist company.
- Know Your Stuff. Many payroll errors are the result of payroll administration not having enough information, or not having the correct information.
- Run Reports Prior to Payroll. If you have access to payroll software, running a few key reports before processing payroll can help you catch and prevent mistakes.
- Keep a Checklist. You can never go wrong with a checklist. Payroll administrators have a lot to keep track of, even if they have software to support their processes.
Payroll for small and medium sized business is far from the easiest part of a manager’s job. But a well-run payroll process makes for happy employees, a happy HMRC, and a happy business.
We hope you have enjoyed our guide. For more useful workplace information, check out the rest of our website.