Payroll isn’t rock ‘n’ roll, but knowing how to set up PAYE and other payroll elements is a crucial part of meeting your legal obligations. So, let’s look at how payroll systems work and what setting up PAYE entails for small businesses like yours.
What does payroll mean?
A company’s payroll refers to the process in place to manage employees’ earnings, Income Tax, National Insurance contributions and other deductions. If you’re a business owner who employs one or more staff, you’ll generally need to set up a payroll system. Your accountant or payroll provider may be able to do this on your behalf, and report your payroll submission to HMRC as part of your legal responsibilities.
Why is setting up a payroll important?
Setting up a payroll system is crucial because you could get charged penalties and interest by HMRC if you do this incorrectly, or otherwise do not comply with your obligations. But there are some other benefits of doing payroll properly as a small business:
- Keep your staff happy – a reliable payroll system means your employees may have greater confidence in the way you run your business, which could help with staff retention and boosting performance.
- Save time – while running a payroll may seem like hard work, doing it incorrectly may take up even more time. Increased paperwork, number crunching and adhering to HMRC’s further processes and enquiries may clog up your diary more than a simple payroll exercise.
- Peace of mind – knowing that you’ve set up a payroll professionally, with accurate reporting to HMRC, means you may not have to worry so much about the prospect of investigations and penalties.
What is PAYE?
PAYE (Pay As You Earn) is HMRC’s way of collecting Income Tax and National Insurance from employees and employers. A functioning payroll system is designed to ensure that your employees are paying the correct amount of Income Tax, with the right amounts deducted on everything from tax to student loan repayments, as reflected on their payslip. An employee only needs to register for PAYE if they earn more than £120 a week.
How to set up a payroll
Before you set up a payroll, you must register your business with HMRC before the first pay day of any employee. You can register up to two months before you start paying someone, but bear in mind that it can take up to five working days before you receive your PAYE reference number – this is how HMRC identifies your firm when you operate a payroll. You can read more about setting up PAYE, as well as your PAYE history and responsibilities, by accessing PAYE Online via GOV.UK.
Hiring payroll and off-payroll employees
You’ll also need to ensure you’re financially ready to take on staff before you run a payroll. If you’re hiring permanent, part-time or fixed-term staff, they’ll be legally entitled to rights such as paid holidays, Statutory Sick Pay and parental leave. You’ll also have to set up a workplace pension scheme , paying at least 3% of each employee’s pre-tax earnings, usually between £6,032 and £46,350 depending on the scheme – read more on GOV.UK. You’ll need to give employees a payslip that reflects these deductions, and when you hire a new employee, you’ll need to inform HMRC.
If you’re hiring freelancers, consultants or contractors, you may need to assess whether they are employed by you for tax purposes and need to be included in your PAYE reporting.
How to run your payroll
You can run your payroll yourself using HMRC-recognised payroll software, or hire an accountant or payroll provider to manage it. One potential advantage of doing your own payroll as a small business is that you may be able to spot errors more quickly. You’ll have a degree of control over your finances with an in-house accounts team by your side. However, some businesses prefer to outsource their payroll, which could save valuable time and let you focus on running your day-to-day operations.
Reporting your payroll to HMRC
You have a number of ongoing responsibilities to HMRC while overseeing your company’s payroll. In every tax month (which start on the 6th ), you will generally have to:
- record your employees’ pay and issue employees with a payslip. This includes additional payments such as bonuses and commission as well as salary
- calculate deductions, including Income Tax and National Insurance, but also student loan contributions, pension contributions and any other deductions, such as child maintenance payments
- send a Full Payment Submission to HMRC where you report each employee’s pay and deductions.
You can read more about your payroll responsibilities on GOV.UK.
Tax reliefs referred to are those applying under current legislation, which may change. The availability and value of any tax reliefs will depend on your individual circumstances.
This has been prepared by Tyl by Natwest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
Tyl by Natwest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.
Tyl by Natwest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.