Managing payroll is one of the most important responsibilities for any business owner. Whether you’re a small company or a growing corporation, getting payroll right ensures that your employees are paid correctly and on time, while keeping your business compliant with legal requirements.
While most companies enlist the help of an external payroll service such as an accountant or a payroll manager, some employers prefer to manage their payroll independently. In this article, we’ll walk you through the process of managing payroll for your own company and the key things to be aware of, so that you can ensure employee satisfaction and compliance with employment laws.
What is Payroll?
Payroll refers to the process of managing employee pay, from calculating and issuing wages to keeping financial records and reporting them to HM Revenue & Customs. While traditionally used to describe a company’s list of employees and their earnings, today “payroll” encompasses the entire management of employee compensation.
Many businesses choose to outsource their payroll services to an accountant or bureau. However, smaller companies with fewer employees sometimes opt to handle payroll in-house as a more cost-effective option.
First Steps
Before you can start paying your employees, you need to complete a number of steps, including registering as an employer and choosing a payroll software.
According to HMRC, you must do the following before you can start running your own payroll:
1. Register as an employer with HMRC.
2. Choose a payroll software to record employee details, calculate pay and deductions and report to HMRC.
3. Collect and keep records.
4. Tell HMRC about your employees.
5. Record wages, make deductions and report to HMRC on or before the first payday.
6. Pay HMRC any tax and National Insurance you owe.
You will also need to file certain annual reports and tasks to prepare for the coming tax year, which starts on the 6th of April.
What does Payroll Involve?
Now that you’re set up to manage your company’s payroll, the next step is to calculate your employees’ wages and handle any necessary deductions. As an employer using PAYE, here’s what you’ll need to manage each pay period:
· Employee Wages: Decide when and how much you pay your employees based on their hours worked, salary, bonuses and any overtime. It is essential to ensure that all employees are paid National Living Wage or Minimum Wage, depending on their age.
· Benefits: If you offer your employees additional benefits such as use of company cars, living accommodation or private medical insurance, they must be
reported to HMRC. This can be through payroll each month or at the end of the tax year through a P11D form.
· Deductions: Your payroll software will automatically calculate the necessary deductions, including income tax, National Insurance (NI) and pension contributions. You may also need to account for student loan repayments or other deductions specific to individual employees.
Once these details are calculated, you’ll need to report them to HMRC in a Full Payment Submission (FPS) and issue a payslip for each employee, either on or before their payday.
Types of Employees
How you manage your payroll also depends on the type of employees you hire.
It can be tricky to navigate payroll if your employees are part-time or work variable hours. In this case, you should keep track of hours worked and compensation methods (i.e. whether they operate on an hourly or fixed salary). Part-time employees may also have different entitlements to paid leave or other benefits, which need to be tracked in payroll.
Independent contractors or freelancers normally determine their own working schedule and are paid a set fee for their work. They are also usually self-employed, meaning they are responsible for filing their own tax return and making their own contributions. However, it is your responsibility to ensure they are paid in line with their contract and that everything is kept on record.
Important Deadlines and Regulations
When managing your company’s payroll, it is essential to be aware of key deadlines and regulations to stay compliant and avoid penalties.
It is your legal responsibility to keep records of employee details, payments, deductions, leave, sickness etc. These records must be kept for at least three years, though many companies choose to keep them for up to six years. If you fail to keep records, you could face a penalty charge of up to £3,000.
As an employer, you are legally required to provide each employee with a payslip on or before their payday. This must include details of gross pay (pay before deductions), deductions, net pay (pay after deductions) and the number of hours worked if applicable. Payslips can either be printed or sent digitally.
Any tax and NI contributions must be paid to HMRC by the 22nd of each month if paying electronically. Your PAYE bill can be paid through your HMRC account, via online or telephone banking or by cheque. Late payments could result in penalties and interest charges.
If your business stores employee personal data, you must comply with data protection laws, including GDPR. Ensure that all employee information is stored securely and handled appropriately to avoid breaches.
These are just a few of the requirements when running payroll. If you’re managing payroll independently, it’s your responsibility to stay informed on all relevant regulations to ensure compliance.
Things to Consider:
Taking on your company’s payroll is no small task and can be time-consuming for any employer. Before taking it on, make sure you have the capacity to handle payroll consistently and accurately, as mistakes can lead to legal issues or penalties. It’s also important to have a backup in place – train other team members to manage payroll in the event that you’re unavailable or unexpectedly absent.
While handling payroll independently can be more cost-effective for small businesses, larger companies may find it more practical to outsource their payroll. Outsourcing payroll services to an external body ensures that it’s managed correctly, relieving your business of administrative burden.
We always recommend seeking professional advice before taking on payroll responsibilities. Understanding the full scope of what’s involved will help you plan effectively and manage expectations.
Accounting Services with Cooper Associates
At Cooper Associates, we offer tailored payroll support to small businesses, medium-sized enterprises or larger corporations. From payroll processing to advising on tax and employment legislation, our expert accountants provide financial advice that aligns with your business needs.
Whether you want guidance on managing payroll yourself or are interested in finding out more about our professional payroll services, we’re here to help.
