Payroll Guide For Small Business

The correct payroll system is essential to pay your staff accurately, on time and within the law.

The majority of the estimated 4.5m private sector businesses in the UKdon't employ any staff (because they're one-person firms). For the 1.2m enterprises that do, paying staff is essential. Laws dictate how tax and national insurance must be deducted, payslips issued, records kept and returns sent to the taxman. All of these requirements are grouped together under the heading of payroll.

A simple payroll may have just one employee paid the same monthly salary; a complex payroll may have many staff, paid different amounts each week, with frequent joiners and leavers.

Payroll Outsourcing

One way a small business can organise its payroll is to outsource it – typically to their accountant or bookkeeper. Larger businesses may use a specialist payroll firm. If outsourcing is chosen, good communication is essential: if you don't tell your accountant that someone has left, they may still get paid.

It can be comforting to know that your payroll is in the hands of a specialist, although this must be balanced against the financial cost and the risk of communication errors, particularly for complex payrolls.

payroll guide

Managing your payroll in-house

If you choose to manage the payroll in-house, you will need to decide who is going to run it and what tools they will use. In very small companies, it is often the job for one of the directors, but larger firms delegate it to an individual, a team or even a department.

Whoever is running the system needs knowledge of the workings of the PAYE tax system, and the returns that must be sent to HMRC. Currently, the tax authorities must be informed when you start as an employee, when an employee joins or leaves, and at the end of each tax year.

In 2013 this is due to change, and HMRC will expect a return every time you pay your staff. These returns can be sent directly from your payroll system, but it is useful to understand what it is doing. As well as sending information to HMRC, you must send them payments of tax and national insurance; you can do this monthly or quarterly, depending on the size of your business.

Payroll systems

It is still possible to calculate tax and national insurance by hand and issue handwritten payslips without using a computer. Most returns must be sent to HMRC electronically, so only the most stubborn of employers still refuses to use a computerised payroll system.

A good system will do the necessary calculations, produce payslips, send returns to HMRC and print P45, P60 and other forms for employees. The types of calculations include tax, national insurance, student loans, sick pay, maternity pay and others, according to your needs.

Some payroll options cover only a subset of these functions, and you need to supplement them by manual processes. For example, HMRC provides free software to do the calculations, but it does not produce payslips.

Fully functional payroll systems for small businesses come in two main categories:

• Payroll packages that you install on your PC

• Online systems that you access using a browser

A basic package will tie your payroll to a single computer, which you must keep secure and backed up. An online system stores the data remotely, and you can access it from different locations, by entering your username and password.

Whichever option you choose, you should also consider how the figures will be transferred to your accounting system. It is easy to enter the figures manually, but this can be streamlined by choosing a payroll system that is compatible with your accounting system. Some systems are compatible with many accounting systems, so you don't necessarily need to buy them from the same company.

Keeping up

Rules changes frequently, so you will need to ensure your system is up to date. Most software packages have to be upgraded annually, whereas an online system should be kept updated automatically at no extra cost.

The importance of good support is hard to overstate. In the situation where a technical problem is preventing your employees being paid, a lot of stress and embarrassment can be avoided if you can pick up the phone and get a quick answer. Depending on your choice of payroll system, support may be included in the basic price or may be an optional extra.

How you decide to manage your payroll is an important choice, as mistakes can be costly. It is essential to find a solution that suits your business, whether it is outsourcing, a package or an online system.