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How Do Small Businesses Manage Payroll

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  • 11-07-2022
How Do Small Businesses Manage Payroll

Find out how small business manage payroll in the UK. We look at what   payroll is needed for and payroll options for small business.

What is payroll?

The original conception of payroll was a list of a company's employees and the amounts they were due to be paid each month. However, as times change and the demands of businesses change with them, payroll processing has evolved to include more aspects of an employee's working relationship than a simple account of the wages they are owed.

In most modern businesses, payroll has become an administrative process in which certain payroll professionals have specialised. From keeping on top of salaries to updating employee data and information, such as bank details, payroll is now an essential part of running a large or small company.

Alongside this, there are now more ways for small business owners to organise and manage their payroll, including:

  • In-house payroll solutions, with a dedicated team, hired directly by a business.
  • Outsourcing payroll processes to specialist payroll service providers.
  • Use dedicated payroll software that streamlines your admin and automates payroll processes.

Hiring new staff is a natural part of any business's development. As a company grows, it will naturally require more employees to meet increased business demands. Therefore, as these growing companies hire more people, the importance and advantages of accurate and efficient running payroll become clearer.

Finding fully managed payroll solutions that suit your needs and implementing them can greatly benefit any growing business. The importance of good payroll to the success of any business cannot be overstated, as, again, it encompasses more than just a record of how much money you owe to your employees.

This article will take you through the many facets of payroll, explaining how it is crucial for any business. Payroll is vital for the smooth operation of any work and helps your business operate lawfully. 


How does payroll work?

To ensure your payroll is as accurate and efficient as possible, there are a few things your in-house or fully managed service needs to do each month for your company's payroll.

Most of these relate to the tax contribution your business and your employees pay. In the UK, our tax months take place from the 6th of one month to the 5th of the following. 

Each month, you must:

  • Record how much you pay your employees, including their gross salary, statutory sick pay and any holiday pay owed.
  • Work out the necessary deductions to their pay, such as student loan payments, income tax and national insurance contributions. This will usually be done automatically if you use payroll software and other free options like apps.
  • Work out your or your business's national insurance contributions, which you must pay on any earnings over £184 per week.
  • Generate payslips for each of your employees. Again, this is easy to do if you outsource payroll to specialist payroll service providers or use free payroll software.
  • Notify HMRC about all the deductions made from your employees' salaries, also known as a Full Payment Submission (FPS), about how much and how often they pay tax.

What is payroll needed for?

As you have already read, there are many areas of your business that payroll is essential for. Here we will go into more detail about these necessities and what your payroll service is needed for in your business.

Of course, different businesses will have different payroll requirements depending on how large or small they are. These are simply a general guide to how businesses, in general, require the best payroll services.

One of the most useful things payroll can help your business with is keeping track of your payment records. A part of this is calculating how much you have paid to a certain employee through their career at your company. Working out figures such as these is a crucial part of budgeting in your business and can help you make detailed financial plans for future hires.

Another important part of keeping accurate records regards your employees' income tax, national insurance and pension contributions. Ensuring you know when and how often these are taken out of their wages is part of being a responsible employer. Your workers will need this information whenever they choose to take out a loan or mortgage or need proof of employment and income. 

An important part of this is ensuring you keep accurate records of all your employees' pension contributions deducted from their wages. Naturally, they will be able to check how much they have paid accurately into their pensions through whichever provider your company selects.

However, to ensure they know exactly how much they have contributed, you must include this figure in their payslips.

The most important thing about being a business owner, and more specifically an employer, is paying your employees accurately and on time. Besides being a requirement of employment law, you owe your employees compensation for their labour and the continued success of your business, at least with statutory pay.

Payroll providers can ensure this if you aren't managing payroll yourself.  You must also pay your employees appropriately, given that everything will go through your books. Regardless of whether you have an in-house payroll team or outsource your payroll to a third party, each of your payments to your employees is checkable.

Therefore, we recommend you complete your payroll accurately, so you can calculate your employees' pay accurately to avoid any disasters.

Remaining HMRC (Her Majesty's Revenue and Customs) compliant is another vital reason to keep accurate payroll records. HMRC needs to know when your company hires a new employee and that their taxes are paid on time and in full, depending on which tax code they have.

Knowing this is especially important, given that payroll software will automatically deduct the set amount of tax contributions from your employee's wages. Therefore, accurate payroll records are vital for your employees' records and HMRC tax regulations.

Besides paying your employees accurately, payroll also helps you make accurate deductions from their wages for their necessary contributions to tax, national insurance and pension schemes.

If you use payroll software to organise your employees' payslips, you can automatically set these deductions to come out of their wages when you make them. 

Payroll categories

There are specific categories in your payroll that require accurate information to create accurate reports.

If you fail to provide the right information in these categories, you can wind up in a heap of trouble; with confusing payroll records or even incorrect wages for your employees.

This section will take you through these various categories and what you must include in each of them to create accurate payroll records.

How Do Small Business Manage Payroll? UK

Employee information

While this may sound like an obvious thing to get right, you'd be surprised how many businesses input the wrong employee information into their payroll. Ensuring this information is accurate and up-to-date is vital to running an efficient payroll system.

For each of the employees in your company, you must include:

 Their full name, including any middle names.

 Their home address.

 Their National Insurance number for deductions to NI contributions.

 Their annual salary. 

It is best practice to check and update this information annually, whether you complete your payroll in-house or through a separate payroll service. Business owners should also inform their employees about their need to update their personal information. They should notify your payroll service whenever anything changes, such as their address, salaries or name.

Salary, wages and payslips

Whether your employees are paid a monthly salary or an hourly wage affects how your payroll will look. Therefore, knowing the difference between the two payment methods is important, especially if you run payroll yourself rather than payroll outsourcing.

In either case, your employees' payslips will include their Gross Pay and Net Pay, with the former being the entire payment amount, while the latter is this figure minus taxes and deductions. A salary pay packet is given to your employees each month, with the yearly amount they will earn being determined by the employer and employee before they start working.

Once they have a yearly sum, this is divided into twelve equal payments for their monthly earnings. On the other hand, a wage is an hourly figure rather than an annual one. In this case, how much an employee is paid depends on the hourly rate agreed on and how many hours they have worked during a specific time. 

What does payroll mean for small businesses?

In most cases, small business payroll is fairly straightforward. You will be giving your employees the right amount of pay at the right time on a consistent basis, as per their contracts.

At the same time, you will be accurately deducting tax, national insurance and retirement contributions from said pay.

It sounds fairly easy, but if you aren't used to working with numbers, it can quickly become difficult to keep track of the figures.

This is why accuracy and efficient record keeping is so important in payroll. There are also numerous rules and government regulations surrounding payroll you need to adhere to.

Therefore, rather than focusing on your time-consuming payroll, you can focus on how to grow your company. 

Most small businesses are recommended to use payroll software or small business payroll services to help ease the burden of payroll tasks. 


What does payroll compliance involve?

Again, there are plenty of rules and regulations to comply with when it comes to completing your payroll. Of course, the most obvious of these is making sure your payments to your employees and deductions from their wages are entirely accurate.

Your employees need to see this in their payslips when you're finished. You also need to ensure that all your taxes are filed and paid in full on time each month. Pension contributions and other deductions from wages also need to be paid to the correct places.

To ensure everything is in order and can easily be checked in case of a mistake, you need to keep your payroll records for at least three years. 

What are payroll deductions?

Payroll deductions include a wide range of things that require you to take money out of your employees' pay. These deductions can include things such as contributions to your workplace pension scheme, which you must have as a legal requirement.

They also include things like income tax, any applicable taxes on benefits and national insurance. You may also need to make deductions for child maintenance payments where necessary. Your employees may also have other deductions that they need to notify you about besides the ones mentioned above.

These can include deductions for private healthcare insurance, private pension schemes or other regular payments, such as donations to charities. These need to be taken out of their pay as a deduction before your employees receive their net pay. There is also a specific order in which you need to make these deductions. 

Detailed Reporting to HMRC

As an employer, you are responsible for deducting taxes from your employees' pay before paying and filing them with the tax office.

This must be done according to HMRC's schedule, regularly filing tax reports with them throughout the tax year.

This is very important, as by regularly informing HMRC of the taxes you have paid, you can prove that you and your employees aren't breaching any laws.

Each time you pay your employees, you need to send a Full Payment Submission (FPS) to HMRC in the form of a payroll report.

This can easily be created with payroll software if you are doing it yourself. These reports detail all your payments to your employees and the deductions you have taken from them.

You can also include any expenses or taxable benefits your employees qualify for in these reports or declare them at the end of the financial year. 

Small Business Payroll Options

Again, small businesses usually have fairly straightforward payroll requirements. But as your company grows and you bring in new employees, larger businesses can quickly find themselves with complicated payroll needs.

Companies with multiple employees will usually have complicated payroll requirements, especially if they have a mix of salaried and hourly-wage employees. Businesses that also rely on outside contractors, employees earning commission, expenses, overtime, allowances, sick pay, leave entitlements and holidays, you can see how things can quickly get on top of you.

Luckily there are several methods of handling payroll services for small businesses, including:

 Spreadsheets are the easiest way to keep track of your payroll if you only have a small business with up to five employees. However, HMRC usually won't accept spreadsheets as a method of filing reports. They are also subject to manual errors if you enter inaccurate information.

 Payroll software for small businesses and apps are another way for small businesses to keep track of their payroll and make automatic deductions. They can also fill in tax forms for you, but you will have to make any payments yourself.

 Fully managed payroll services are another method of getting your payroll done through outsourcing. Some payroll experts provide comprehensive services, while other payroll specialists focus on a limited area. Comparing payroll service prices is the best way to get the most for your money as a small business owner.

 You could also hire accountants, date entry professionals or bookkeepers to carry out your payroll in-house if you feel the need to or combine these last two methods for a part-managed payroll service.

Are you looking for a payroll accountant in Wakefield and west Yorkshire? Follow the link below to contact our tax advisors.