Setting up payroll for a small business
Read time: 6 mins Added: 21/11/2023
Taking on employees in your small business is a big step. Under UK law, all employees have the right to be paid on time and in full. As an employer, it’s your responsibility to make sure this happens.
Staying on top of your cashflow becomes even more important when others rely on you for their livelihood.
If you’re looking to hire your first member of staff, this guide explores how to ensure you do things right from day one and what the main considerations are.
1. Your business payroll obligations explained
In addition to ensuring your staff get the right pay on time, as a business owner, you are responsible for reporting these payments to HM Revenue & Customs (HMRC) via the Pay as You Earn (PAYE) system.
It’s vital you do this on time and accurately to HMRC so your employees pay the right amount of Income Tax and National Insurance.
There are two choices for managing business payroll:
- Do everything yourself
- Outsource it to your accountant
There are pros and cons to each approach. For example, you may feel like it’s outwith your skillset and that you’ve already got enough to think about, so the cost of outsourcing is worth it.
Alternatively, if you’re only hiring one new team member, your business payroll may be fairly straightforward and something you want to learn.
The HMRC payroll website explains more about payroll and getting your business ready to hire staff.
Complying with the National Minimum Wage
Another critical obligation as an employer is to ensure your staff are being paid in line with the National Minimum Wage or the Living Wage in Scotland if this is something you want to adopt in your small business.
Two things to bear in mind that can catch new employers out are:
- keeping up-to-date with any rate increases and applying them at the right time
- knowing employees’ dates of birth to be aware of when they’re due an age-related wage increase
it’s not enough to say you’re meeting your National Minimum Wage responsibilities; your business needs to keep records in accordance with HMRC’s requirements.
2. What to include in your payroll records
While business payroll and PAYE may be new to you, the onus is on you to be aware of the information you need to record and keep for each employee.
Maintaining accurate and up-to-date records is vital to ensure your staff are paying the right amount of tax. It also makes things much easier if they have a question about their pay or have been contacted by HMRC.
Keeping business payroll records is an important thing to get right and must include the following information:
- All payments to staff and details of deductions such as PAYE and National Insurance Contributions (NICs)
- Payments made to HMRC on your employees’ behalf
- Copies of all the reports you’ve sent to HMRC, including every full payment submission (FPS) with details of new starts and anyone who’s left the business
- Any information on employees’ tax code changes and tax-free income allowances
- Details of any taxable benefits or expenses
- Documented absence and sick leave
- Payroll Giving Scheme documentation, including agency contacts and employee authorisation forms
It’s worth noting that you need to keep all these records for three years from the end of the relevant tax year. If you don’t, you could face a fine of up to £3,000 and have to repay any shortfall calculated by HMRC.
As with all record keeping, you must follow the data protection rules if your business stores or uses personal information.
What happens if your records aren’t available?
The loss, theft or destruction of your records is a serious matter. You should notify HMRC immediately if this happens. You’ll be expected to recreate them as best as possible and may need to ask HMRC to confirm payment amounts.
3. How to choose the right payroll software
There are many advantages to using business payroll software, including the following:
- It enables quicker and easier filing of information
- Payroll software can do the tax and National Insurance calculations for you
- Going paperless is more sustainable for record keeping and payslips
- Improved security and storage
Your business doesn’t need to use payroll software, but it’s advisable as HMRC moves more processes and systems online through digital real-time information (RTI) submissions.
Before researching business payroll software, you should refer to the list of tested and recognised software from HMRC. If you have fewer than 10 employees, you can use one of the approved free payroll software packages.
Your chosen software must be up-to-date with the latest legislation and provide the functionality you need, for example:
- Absence and holiday pay
- Bonuses, expenses and overtime
- Court-imposed attachment of earnings orders
- Payslip loans
4. Pensions and other payroll considerations
Before hiring any new staff, it pays to explore whether they’re eligible for a workplace pension, and if so, how much this will cost you each month.
All eligible employees must be placed into a scheme paid through automatic enrolment. Learn more about the criteria and how to set up and manage a workplace pension scheme.
As an employer, it’s your responsibility to keep track of your team’s age and earnings whenever you pay them, so they’re enrolled in your pension scheme as soon as they qualify.
To make things easier, your payroll software should be able to calculate staff pension contributions. You'll also need to adjust payroll for some employees' student loan repayments and sickness or maternity pay.
Easing the burden of business payroll
Managing payroll on top of all the other things you need to do as a small business owner can feel overwhelming. However, it’s important to realise there’s lots of help out there for you. Here are four quick steps to help you get started.
- Explore some of the HMRC-approved payroll software systems to find the right one for your business
- Look into the costs and benefits of outsourcing payroll to your accountant
- Talk to other business owners locally or online peers to ask their advice and get any time-saving tips that worked for them