How to set up payroll

Once your business reaches a certain size, you may need to spend some of your hard-earned profits on hiring employees. If you reach this milestone, then it’s essential to pay your staff correctly and on time for their hard work. In other words, you need to set up a good payroll system.

But setting up payroll for the first time isn’t exactly a walk in the park, so we wrote this guide to help you through the process. Here’s what you need to know.

What is payroll?

Before we get to setting up your payroll, let’s first go over what that actually means.

Simply put, your payroll is the list of all your employees and how much they earn, although it has come to mean the actual process of managing your employees’ pay (“doing the payroll”).

The payroll process includes:

  • calculating each employee’s wages and issuing them
  • managing bonuses and benefits
  • calculating pay for time not worked (e.g. sickness, holidays, maternity leave)
  • paying employees’ tax and National Insurance contributions (NICs)
  • maintaining all financial records related to payroll.

The list may seem daunting – it can be, even for small organisations – so remember you can always speak to a payroll specialist if you need a hand.

Setting up your first payroll and registering for PAYE

To set up your payroll, you first need to register as an employer with HMRC, which will then send you your PAYE reference and PAYE accounts office reference. You’ll need both of these numbers to send your payroll data to HMRC.

Even if you’re the sole employee in your business (as the only director of a limited company, for example), registering as an employer and running payroll is mandatory.

Once you’ve done that, you need to decide how you’re going to administer your payroll. Are you going to outsource it to a professional? Or are you going to do it yourself? If you choose the second option, you’ll need to use approved payroll software.

Payroll software comes in all shapes and sizes, there’s no one-size-fits-all solution to choosing the right platform for your business. HMRC provides its own basic software, for example, which is free for organisations with fewer than ten employees.

Alternatively, you could pay for cloud payroll software to take advantage of time-saving automations that make your job easier.

Pensions, benefits, expenses and other deductions

As an employer, you’re required to offer a workplace pension to all eligible employees, and you may also provide additional benefits such as flexible holidays, childcare vouchers, gym memberships, and more. Many of these benefits are taxable, however, so you’l need to process then through your payroll or report them to HMRC using the P11D form.

In some cases, you can provide benefits through salary sacrifice, which means the employee agrees to receive a lower salary in exchange for the benefit.

Meanwhile, if any employee pays for any work-related expenses out of their own pocket, you’ll need to reimburse their purchase and run it through payroll.

Finally, you must remember to deduct tax and NICs from each employee’s pay before you pay them via PAYE (your software should work this out for you).

How long should you keep payroll records?

In the UK, you’re legally obligated to keep records for a minimum of three years, but many employers keep them for up to six years. Such information includes salaries, salary deductions, employee leave and tax codes.

Need help with your payroll?

To set up your payroll, you need to register with HMRC. The process is fairly straightforward, but things can get more complicated when you need to pay your staff for the first time.

It is absolutely possible for you to take on the task yourself, but be aware of the risks. It’s easy to make mistakes when the process is new to you and you’re busy with your other duties as an employer. If you don’t have time to administer payroll, outsourcing to payroll professionals may be the solution you’re looking for.

If you need a helping hand, or you’re just looking for some advice, don’t hesitate to get in touch with us.

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