Setting up Payroll for Your UK company

Introduction

If your business is growing, you will need more people to keep that momentum going. A larger workforce means more paperwork, especially when it comes to setting up payroll. From ensuring your payroll system is compliant with HMRC requirements through to auto-enrolment pension payments and PAYE, your payroll system has to be efficient, streamlined, and effective.

If you're new to this process, here is our guide on how to set up payroll for your business. We'll take you through the legal requirements, how to pay your staff, and some essential tips that'll make organising payment quick, easy, and straightforward. We'll even take you through your options if you want to outsource your payroll requirements and use a specialist payroll provider rather than keeping it 'in-house'.

What is Payroll?

Payroll is shorthand for the administration and payment process you go through to pay your workforce. It includes the calculations you need to do to make sure you’re paying your people the correct amount of salary. When you’re setting up payroll, you need to factor in:

How to calculate gross and net pay
SSP (Statutory Sick Pay) and National Insurance
Pension contributions
Calculating PAYE
Making the correct tax, pension and NI deductions from the gross pay
Providing documentation such as payslips
PAYE
HMRC – what they need from you as a business owner
It’s all in the maths
Payslips – what information should they have?
Auto-enrolment pensions
How to pay your staff, including producing payslips and BACS payments
Submitting all the relevant information to HMRC

PAYE

PAYE or Pay As You Earn is the simplest way to run a payroll. Designed by HMRC, it enables the correct amount of income tax and National Insurance to be collected from each payment, rather than a single lump sum at the end of the tax year. If your employees are paid more than £120/week (as of 2021), you will need to incorporate a PAYE system into your payroll. If they are paid less than that amount, you don't need to use PAYE - but you will still need to keep detailed payroll records.

Essential tips you need to know

Registering as an employer

If you start employing staff, you'll need to register as an employer with HMRC before you set up your payroll. Once you've registered, you'll get a PAYE reference number within around a week or so.

Digital PAYE

As the shift towards digital records picks up the pace, you’ll find that using the online PAYE portal is a much easier option than ‘old school’ hard copy paperwork. When you register as an employer online, you’ll be given the option of PAYE Online. This portal allows you to keep up to date with all of your PAYE payments, check what you owe or keep up with your monthly payments. The online option is manageable and far more practical, especially for businesses with a larger number of employees on the books.

Keeping HMRC up to date

You’ll need to tell HMRC when an employee joins the company. They’ll need to know whether or not the employee needs to be paid via PAYE, their tax code, and if they have any student loans still outstanding. You’ll then be able to register your employee using a Full Payment Submission.

National Insurance

If your employees earn over £157/week, you’ll also need to calculate your employer’s Class 1 National Insurance contributions. The amount you have to pay will depend on the amount your employee earns. Tables detailing the current rates are available here.

Pensions

The government is trying to encourage all workers to contribute to a pension scheme, and part of that includes employer contributions to ‘top up’ pensions. Auto-enrolment pensions need to be factored in when you’re setting up payroll. A good system will make it much easier to make these contributions quickly and easily, and the details of payments are included in the employees’ payslips. Employees can opt out of pensions if they want to, but in general, most workers are seeing the potential benefits of enrolling in a pension scheme and are happy to put aside a little bit of their salary each month for the future.

Paying your staff

Once you've established a process and know what HMRC requires from you, it's time to think about setting up payroll. An effective payroll system ensures that staff are paid on time and correctly. They can also precisely see their deductions from their gross pay, including pension payments, income tax, NI, and other deductions or benefits.

How much do you pay?

Theoretically, you can pay your staff whatever you want to, as long as it’s in line with current minimum wage laws. This is the minimum you can pay your workers and will depend on their age. Generally, employers pay an amount between the National Minimum Wage and the National Living Wage, which is slightly higher.

If you're setting up payroll, your team will need to know the fixed amount you'll be paying (gross), how often you will be paying your workers, the rate per hour, and any additional information on commission-based pay. You'll need to work out an hourly rate and give this information to your payroll team. You will also need to implement a system whereby your payroll person or department is notified of commission payments as and when they are due.

image of a card machine dispensing receipts

Payslips

It’s not just Payroll who need to know the ins and outs of your employees’ wages. Your staff do too. This isn’t optional – it’s enshrined in the Employment Rights Act 1999, Section 8. To comply with this legislation, your payslips must contain the following information:

Gross Pay
The number of hours worked
Deductions (income tax, National Insurance, Student Loan repayments, Auto-enrolment or other pension payments)
Bonuses, holiday pay and SSP if applicable
The net pay after all deductions or additional bonuses have been calculated
The method of payment

Payslips should also have the tax code that’s being applied to the employee’s wages, their NI number, and the date.

Hard copy or electronic?

Payslips can either be printed out and given to your workers or sent to them electronically. As we move towards a paperless society, more firms are incorporating electronic payslips into their payroll system. If you're setting up payroll as a primarily electronic system, it makes more sense to use electronic payslips, as they'll be easier to collate, cross-reference and access if needed. Setting up an online portal where payment details can be accessed digitally saves time and effort. But it is essential that if you choose this method, your security systems are of the highest standard to prevent hackers from accessing sensitive personal information. You’ll also need to ensure that any such portal conforms to current Data Protection and GDPR legislation both here and in Europe, especially if you have overseas workers.

You also need to bear in mind that not everyone can access electronic payslips or would prefer a ‘hard copy’ rather than a digital one.

Method of payment

When you're setting up payroll, one of the primary considerations you'll need to factor in is how you pay your team. The most common method in the UK is via BACs or bank transfer payments. Other electronic systems are available, such as CHAPS and Faster Payments Service. CHAPS or Clearing House Automated Payment System is a same-day electronic system with no upper limit, but some banks levy a charge to use CHAPS. Faster Payments Service (FPS) cuts transfer times to a few hours and - thanks to the lower charges - is popular as an alternative payment system. Both CHAPS and FPS can be integrated when you're setting up your payroll system.

Other payments

Statutory Pay

If an employee is off sick, they may be entitled to SSP or Statutory Sick Pay. You may also have to factor in maternity, paternity, adoption and shared parental pay. When you're researching how to set up payroll, these mandatory payments must be included, so you'll need to choose a payroll system that allows you to record them for tax purposes.

Expenses

From time to time, your employees will claim back for expenses, which are reimbursed through their salary. These can be anything from company car use to clothing allowances or equipment purchases. While you'll need to reimburse your employees within a relatively short time, you will need to ensure that all expenses payments are added to your end-of-year figures.

Commission and bonuses
All additional payments need to be accounted for, including:
Tips and gratuity payments
Holiday pay
Travel or commuting time payments
Bonuses
Commissions

In-house versus outsourcing your payroll

With all of that to consider, setting up payroll can look like a daunting prospect. While large companies often have a whole department dedicated to payroll matters, smaller companies and businesses may not have the resources to employ one or more people to deal with the day-to-day running of their payroll systems. For many, the obvious option is to outsource your payroll to a dedicated company specialising in providing a complete payroll service for businesses.

Keeping your payroll in-house means having more direct control over your system. It also allows you to keep a close eye on the ins and outs of the process so that you can catch errors earlier and deal with queries quickly. If you invest time in setting up payroll electronically, then once it's established, it's relatively easy to manage. For very small businesses (those with fewer than ten staff), an internal process may work better.

However, if your business is growing and you're taking on more and more staff, eventually your payroll will get to a stage where you either need to create your own in-house specialist team to deal with it or outsource it to a payroll specialist service. For smaller businesses, outsourcing also has benefits, especially if financial management and payroll are not your specialist area. Remember that mistakes can be very costly, especially when reporting back to HMRC. So having an accredited professional payroll expert take care of things will mean that you'll spend less time on payroll, avoid costly errors, and stay compliant.

Why work with Finesse Resources?

If you’re just learning about how to set up payroll, it can seem like a real headache, especially if you’re also trying to manage and grow a small business. Whether you simply want a service to keep you compliant and on track with your HMRC obligations or want to hand over the entire system to the experts, Finesse Resources are here to help.

Every month, our business partners trust us to make over a quarter of a million payments. Because we specialise in Payroll and nothing else, we have an in-depth understanding of the finer points of compliance, how to streamline payroll, faster payment systems, and everything in between. We make sure our clients adhere to the letter of the law and fulfil all their legal and financial obligations on time, minimising the chance of penalty payments eating into their bottom line profits.

Drawing on nearly two decades of experience and with a team of highly qualified and accredited professionals, we deliver everything from pension payrolls and small business payroll through to sector-specific services to keep your people paid on time, every time.

Our mission is to make life as hassle-free as possible for our clients. We want you to be able to put your resources, your time and your focus into growing your business while we look after your payroll. From P45s to SMS notification of wage payments, secure online portals and the full range of payroll documents, Finesse Resources has the time, energy, and expertise to deal with it for you.

To find out more about working with Finesse Resources and to see how we can help you with setting up payroll in your business, contact us today.