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Payroll Basics

Payroll is a key area of the business, and it's important to understand the process behind it and how to carry it out correctly. If you're not comfortable running payroll, many accountants offer this service and can run it for you. You can find a list of these on our sister site, Find An Accountant by going to Search by services' and selecting Payroll'.

Payroll

Do I need to run payroll?

This can depend on a number of things:

  • are you a sole trader or partnership? If yes, you don't need to run payroll for yourself but you will need to for employees (if you have them). This is because legally, there's no separation between you and the business.
  • do you have employees? Generally, anyone with a contract of employment with the business would be classed as an employee. But there are also some extensions to this - directors for example are also employees. Remember - a limited company is a separate legal entity to their directors.

Ok, I need a payroll. Where do I start?

First things first - you need to tell HMRC that you are going to pay staff and you are an employer. This can be done anytime up to 2 months before the first payday, but can take up to 2 weeks. There are also some key parts to payroll you need to consider:

  • Payslips - You will need to produce payslips for each employee every time they are paid. This also includes P45s and P60s when the time comes
  • RTI - You need to tell HMRC how much you're paying each employee, and when through their Real Time Information service.
  • Records - You need to keep records of what you pay, tax code notices, payments to HMRC and more for a minimum of 3 years from the end of the tax year they relate to. There's more information on this here.

Sounds scary, right? There are plenty of packages out there that can do this for you and help make things a bit easier. HMRC have very kindly produced a list of free and paid software providers on their web site.

Some packages will also help you manage what you owe to HMRC for PAYE or National Insurance, and remind you about payments to help you avoid overdue penalties.

What should I be paying staff?

It's a big question, and an important one too. There are many things to consider when it comes to paying staff, including:

  • Minimum or Living Wage
  • Employer's National Insurance (which is paid by the employer)
  • Employee's National Insurance (which is deducted from the employee's wages)
  • Pension contributions (auto enrolment)
  • Industry average pay rate for the role

You can check out more about National Insurance rates on the GOV UK web site

You should take these things into consideration when deciding on the rate of pay for an employee. When deciding on your own pay rate as a director, most usually go for the rate around the personal allowance for the tax year - your accountant can normally help with this part.

You can also decide how often they should be paid. Common times are weekly, 4 weekly or monthly.

Reporting

Things like this wouldn't be complete without reports. RTI is the main submission of reports, but includes monthly and annual submissions. Your payroll software provider can normally help with these and advise you on when you need to send them.

Further Reading

We've covered the basics of payroll. It can become complex in some situations, but this should hopefully help you have a head start.

The GOV UK web site has lots of information on payroll which can be found here. All our information is correct at the time of writing, but it's always best to check with HMRC or your accountant to be sure.

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