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Payroll systems

Read time: 6mins      Date: 25/05/23

According to UK law, all employees have the right to be paid in full and on time. In this guide, we’ll show how operating an efficient payroll system can help you achieve this. We'll also discuss payment methods, helpful software and payroll record-keeping. 

5 things you’ll learn from this article

  1. Your responsibilities regarding payroll
  2. How to choose the right payroll software
  3. How to keep good payroll records
  4. Your responsibilities regarding the National Living Wage
  5. Your responsibilities regarding staff pensions

Your payroll responsibilities

Once you start employing staff, you must ensure they get paid. As well as arranging weekly or monthly payments, you must accurately report them to HM Revenue & Customs (HMRC). This is normally done through the Pay As You Earn (PAYE) system that HMRC uses to collect Income Tax and National Insurance from paid staff. 

You can run payroll yourself with the right software, or outsource it – some companies get their accountant to do it or use a specialist payroll provider. If you’re considering outsourcing, decide how much support you want and are happy to pay for. Some providers will keep employee records, apply payroll numbers and make payments directly to HMRC. 

Check the HMRC payroll website for more information on whether your business needs to set up a PAYE system.

Payroll software

Many businesses use dedicated software to run their payroll. This is more convenient and uses less paper, so it also improves your business’s sustainability credentials. In addition, many paper forms have been replaced with digital real-time information (RTI) submissions to HMRC. 

Payroll software isn’t mandatory, but it does make the whole process simpler and more automated by guiding you through the steps and forms you need to complete. It will also work out how much tax and National Insurance (NI) you owe, including your employer’s NI contributions. 

Make sure that your choice of software has been tested and recognised by HMRC.  You'll also need to adjust payroll for some employees' pension contributions, student loan repayments and sickness or maternity pay.

Payslips

You can give your employees paper or paperless payslips. 

There are plenty of payroll software providers to choose from. Check that the software you choose is up-to-date with the latest legislation and can handle everything you need, for example:

  • Absence
  • Bonuses
  • Court-imposed attachment of earnings orders
  • Expenses
  • Holiday pay
  • Overtime
  • Payslip loans

If you have fewer than 10 employees, you can use one of the approved free payroll software packages.

Payroll record keeping

CAs an employer, you must keep accurate payroll records. They will show HMRC that you’re paying the correct amount of tax and help them in the event of any subsequent enquiry.  

Your payroll records must show details of the following:

  • Payments made to your employees.
  • Deductions taken from employee pay (such as PAYE and National Insurance contributions (NICs).
  • Reports to HMRC, including every full payment submission (FPS) with details of new or departing employees.
  • Payments to HMRC.
  • Tax code notices including information about changes to individual’s codes and whether their tax-free income has gone up or down.
  • Leave and sickness absence details.
  • Taxable expenses or benefits.
  • Payroll Giving Scheme documentation, including agency contacts and employee authorisation forms.

You must keep all these records for three years from the end of the relevant tax year. Failure to do so may result in a fine of up to £3,000 plus repayment of any estimated shortfall.

If your records are lost, stolen or destroyed

You must inform HMRC as soon as possible if you do not have or cannot replace your records. You must then do everything possible to recreate them. HMRC may be able to help if you’re unsure how much you paid your employees.

Other payroll considerations

The National Living Wage

You must comply with all regulations around the National Living Wage and pay the right amount to minimum wage staff. Make sure that your system is prepared for rate increases or employee birthdays that move them into a new category for that age band. 

Be aware that there are different rules for keeping records to prove you have paid the correct minimum wage.

Pensions

You must put all eligible staff into a workplace pension scheme and pay into it through automatic enrolment. You can check this using the government’s criteria.

Every time you pay your staff you will need to monitor their age and earnings. You can then see if they need to be put into the pension scheme, and how much they need to pay. Ideally, your payroll system should calculate their contributions and provide any other information your pension provider needs. 

Data protection

As with all record keeping, you must follow the rules on data protection if your business stores or uses personal information.

Summary

Managing payroll doesn’t have to be a burden. There are options available that can ensure a smooth-running process:

  • Spend some time researching an appropriate digital payroll system for your business that’s HMRC-approved.
  • Consider outsourcing payroll to a third party that gives your business the support you need.
  • Play to your team’s strengths and delegate payroll responsibilities to a suitable employee.
  • Talk to your accountant and peers to see if they have any time-saving tips that you could copy. 

Further information