Payroll for small business uk

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Navigating payroll for your small business in the UK doesn’t have to be a headache.

It’s essentially the process of managing employee salaries, National Insurance contributions NICs, income tax, and pension contributions, all while ensuring compliance with HMRC HM Revenue & Customs regulations.

For UK small businesses, understanding payroll is fundamental not just for keeping your employees happy and paid correctly, but also for avoiding hefty fines and legal issues from HMRC.

It’s a core operational function that impacts your financial health and your reputation as an employer.

Done right, it ensures your business runs smoothly, allows you to focus on growth, and maintains a positive relationship with both your team and the taxman.

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Let’s cut through the jargon and get straight to what you need to know to nail your payroll process without breaking a sweat.

Table of Contents

Understanding the Essentials of UK Payroll for Small Businesses

When you run a small business in the UK, payroll isn’t just about paying your team.

It’s a critical legal and financial responsibility that requires precision and adherence to strict HMRC guidelines.

Missteps here can lead to penalties and a whole lot of stress.

At its core, UK payroll involves calculating gross pay, deducting PAYE Pay As You Earn income tax, National Insurance contributions NICs for both employee and employer, and managing workplace pension contributions.

Beyond the numbers, it also means providing payslips, submitting real-time information RTI to HMRC, and keeping meticulous records. Payroll workful

Key Components of UK Payroll

Every payroll run involves several moving parts that need to be accurately managed.

Skipping or miscalculating any of these can throw your entire process off track.

  • Gross Pay Calculation: This is the total earnings an employee receives before any deductions. It includes their basic salary or hourly wage, plus any bonuses, commissions, or overtime. For example, if you have an employee on a £25,000 annual salary, their monthly gross pay is £2,083.33.
  • PAYE Pay As You Earn Income Tax: This is the system HMRC uses to collect income tax from employees’ wages directly. The amount deducted depends on an employee’s tax code and their earnings. For the 2023/24 tax year, the personal allowance the amount you can earn before paying income tax is £12,570. Anything above this is taxed at various rates: 20% for basic rate, 40% for higher rate, and 45% for additional rate.
  • National Insurance Contributions NICs: Both employees and employers pay NICs. Employee NICs Class 1 Primary are deducted from their gross pay, while employer NICs Class 1 Secondary are an additional cost to the business, paid on earnings above a certain threshold. For 2023/24, the primary threshold for employees is £242 per week, and the secondary threshold for employers is £175 per week. Employee NICs are generally 12% on earnings between £242 and £967 per week, and 2% above £967. Employer NICs are 13.8% on earnings above £175 per week.
  • Workplace Pension Contributions: Under auto-enrolment rules, most UK employers must automatically enrol eligible staff into a pension scheme and contribute to it. The current minimum total contribution is 8% of qualifying earnings, with the employer contributing at least 3% and the employee contributing the remaining 5% which includes tax relief. Around 90% of eligible employees in the UK are now auto-enrolled in a workplace pension scheme, a significant jump from just 50% prior to auto-enrolment’s introduction in 2012.

HMRC Compliance Requirements

HMRC isn’t just a tax collector.

They are the governing body ensuring payroll integrity.

Staying compliant means understanding and adhering to their rules. Payroll processing companies for small business

  • Real Time Information RTI Submissions: Since 2013, employers must report payroll information to HMRC “in real time,” i.e., on or before each payday. This typically involves submitting a Full Payment Submission FPS for each payroll run. Failure to submit on time can result in automatic penalties.
  • Payslips: Employers are legally required to provide payslips to employees on or before payday. These must clearly show gross pay, all deductions tax, NI, pension, and net pay.
  • Record Keeping: You must keep detailed payroll records for at least three years from the end of the tax year they relate to. This includes information on payments made, deductions, employee details, and RTI submissions. HMRC can request these records for inspection.
  • P60s and P45s: At the end of each tax year 5th April, you must provide a P60 to all employees working for you on that date. This summarises their total pay and deductions for the year. When an employee leaves, you must provide them with a P45, detailing their pay and tax up to their leaving date.

Choosing the Right Payroll Method for Your Small Business

Deciding how to manage your payroll is a pivotal decision for any small business owner.

It boils down to a trade-off between cost, control, complexity, and the time you’re willing to invest.

There are generally three main approaches, each with its own merits and drawbacks.

DIY Payroll Software

Managing payroll in-house using dedicated software offers control and can be cost-effective for businesses comfortable with the process.

This approach is ideal for those who want to retain full oversight and have a good grasp of payroll regulations. Best payroll program for small business

  • Pros:
    • Cost-Effective: Software subscriptions are generally cheaper than outsourcing to an accountant or payroll bureau, with many reputable options available from £5-£30 per month depending on features and employee count. For example, QuickBooks Payroll starts from around £12 per month for up to 5 employees, while Xero Payroll is included in their standard plan from £30 per month.
    • Full Control: You have direct access to all payroll data and processes, allowing for immediate adjustments and reporting.
    • Integration: Many payroll software solutions integrate seamlessly with accounting software, streamlining your financial management.
  • Cons:
    • Time-Consuming: Processing payroll, submitting RTI, and keeping up with regulatory changes demands a significant time investment, especially as your business grows. Small business owners report spending an average of 5-8 hours per month on payroll-related tasks if done manually or with basic software.
    • Risk of Errors: Without expert knowledge, there’s a higher risk of making mistakes, leading to HMRC penalties. A study by the British Chambers of Commerce found that payroll errors are a common source of stress for small businesses.
    • Staying Updated: Tax codes, NIC thresholds, and pension rules change annually. It’s your responsibility to ensure the software and your processes reflect these updates.
  • Popular Software Options:
    • BrightPay: Often praised for its user-friendly interface and comprehensive features, especially for auto-enrolment. It’s desktop-based but also offers cloud add-ons.
    • QuickBooks Payroll: Integrates directly with QuickBooks accounting software, making it a popular choice for existing QuickBooks users. Offers full PAYE, NIC, and pension calculation.
    • Xero Payroll: Fully integrated with Xero accounting, providing a seamless experience for those already using Xero for their bookkeeping. Known for its intuitive design.
    • Sage Payroll: A long-standing provider, Sage offers various payroll solutions ranging from basic to advanced, suitable for different business sizes.

Outsourcing to a Payroll Bureau or Accountant

Handing over payroll responsibilities to a specialist firm removes the burden from your shoulders, ensuring accuracy and compliance.

This option is popular for businesses that prefer to focus on their core operations. 

*   Expertise and Compliance: Payroll bureaus are specialists who stay up-to-date with all HMRC regulations, ensuring your payroll is always compliant and accurate. This significantly reduces the risk of penalties.
*   Time-Saving: Frees up valuable time for you and your team to focus on business growth, sales, and customer service. Small business owners who outsource payroll can save up to 10-15 hours per month.
*   Reduced Stress: Eliminates the worry of complex calculations, deadlines, and potential errors.
*   Confidentiality: Employee salary details are handled by an external, impartial party, maintaining confidentiality within your internal team.
*   Cost: Generally more expensive than DIY software. Prices can range from £10 to £50 per employee per month, depending on the number of employees and the complexity of services required e.g., pension administration, P11D reporting. For a business with 5 employees, this could be £50-£250 per month.
*   Less Control: You have less direct control over the day-to-day payroll process. Any urgent changes or specific reports might require communication with the bureau.
*   Dependency: You become reliant on the bureau for accurate and timely processing. Choosing a reliable, reputable provider is crucial.
  • When to Consider Outsourcing:
    • If you have a growing number of employees.
    • If payroll is becoming a significant time drain.
    • If you lack in-house expertise or feel overwhelmed by compliance.
    • If you want to minimise the risk of HMRC penalties.

HMRC Basic PAYE Tools

For very small businesses with straightforward payroll needs, HMRC offers a free, basic software solution. 

*   Free: This is the most significant advantage – it costs nothing to use.
*   HMRC Approved: It's developed by HMRC, so you know it will be compliant with their regulations.
*   Simple: Designed for businesses with few employees and no complex payroll requirements e.g., no salary sacrifice schemes, no multiple directorships.
*   Limited Features: It's basic. It won't handle auto-enrolment pension calculations, P11D reporting, or complex payroll scenarios. It also doesn't integrate with accounting software.
*   Manual Input: Requires manual data entry for each pay period, which can be time-consuming even for a small number of employees.
*   No Support: You're largely on your own for troubleshooting. there’s no dedicated customer support line for the tool itself, beyond general HMRC help.
  • Who it’s for: Typically suitable for businesses with 1-5 employees, who pay regularly, and whose employees have straightforward tax codes. It’s a good starting point for micro-businesses looking to understand the basics before investing in more comprehensive solutions. As of early 2023, around 300,000 employers in the UK still use HMRC Basic PAYE Tools, primarily micro-businesses.

The right choice depends on your business’s size, complexity, budget, and your comfort level with financial administration.

Many businesses start with HMRC Basic PAYE Tools or a basic software and then transition to outsourcing or more advanced software as they grow. Workful plans

Onboarding New Employees for Payroll

Bringing on new team members is exciting, but it also triggers a crucial set of payroll tasks.

Proper onboarding ensures your new employee is paid correctly from day one and that you meet your HMRC obligations. This process isn’t just administrative.

It’s about making a positive first impression and setting up a smooth working relationship.

Essential Information to Collect

Before you even think about running their first payroll, you need to gather specific information from your new hire.

Missing any of these details can delay payments or lead to incorrect tax and NI deductions. Hr and payroll software uk

  • Full Name and Address: Crucial for personal identification and official correspondence.
  • Date of Birth: Required for National Insurance purposes and determining eligibility for certain benefits or pension auto-enrolment.
  • National Insurance NI Number: This unique number is used by HMRC to track an individual’s tax and National Insurance contributions. If a new employee doesn’t have an NI number, they need to apply for one, and you can still pay them initially with a temporary tax code.
  • Bank Account Details: Essential for direct deposit of salary. You’ll need the account number and sort code.
  • Starter Checklist Information or P45: This is arguably the most critical piece of information for payroll.
    • P45: If the employee has worked in the UK in the current tax year which runs from 6th April to 5th April, they should provide a P45 from their previous employer. This document contains vital information about their pay and tax paid in the current tax year, allowing you to apply the correct tax code and avoid emergency tax deductions. About 65% of new employees provide a P45 upon starting a new role.
    • Starter Checklist: If they don’t have a P45 e.g., this is their first job, they’re returning to work after a break, or they’ve been self-employed, they must complete an HMRC Starter Checklist. This form asks questions about their previous employment and other income sources, which helps HMRC assign an initial tax code.

Setting Up the Employee in Your Payroll System

Once you have the necessary details, the next step is to enter them into your chosen payroll system, whether it’s software or a manual process.

  • Employee Record Creation: Create a new employee record. Input their personal details, bank information, and, most importantly, their tax code derived from their P45 or Starter Checklist. If no P45 or Starter Checklist is provided, you might have to use an emergency tax code e.g., 0T W1/M1 until HMRC provides a definitive tax code, which typically results in higher initial deductions.
  • Contractual Terms: Ensure their agreed-upon salary, hourly rate, and payment frequency e.g., weekly, monthly are accurately recorded.
  • Pension Auto-Enrolment:
    • Assess Eligibility: You need to assess if the new employee is an ‘eligible jobholder’ for auto-enrolment. This depends on their age 16-74, earnings above £10,000 annually for 2023/24, and location working in the UK.
    • Enrolment: If eligible, you must automatically enrol them into your workplace pension scheme and notify them in writing within 6 weeks of their start date.
    • Contributions: Start deducting employee contributions and adding employer contributions from their first pay period. The Pensions Regulator actively monitors compliance, with fines for non-compliance starting from £400 and escalating daily penalties for ongoing breaches. In 2022/23, The Pensions Regulator issued over 10,000 compliance notices to employers, a significant portion related to auto-enrolment duties.

Notifying HMRC

This is where Real Time Information RTI comes into play.

  • Full Payment Submission FPS: For a new employee, their details are included in your first Full Payment Submission FPS to HMRC on or before their first payday. The FPS tells HMRC who you’re paying, how much, and what deductions have been made.
  • New Starter Declaration: The Starter Checklist or P45 information determines the new starter declaration on the FPS, which signals to HMRC how the employee should be taxed.

A seamless onboarding process not only keeps you compliant but also shows your new employees that you are organised and professional, setting a positive tone for their employment with your business.

Running Your Payroll: Step-by-Step Guide

Executing your payroll accurately and on time is the bedrock of good employer-employee relations and HMRC compliance.

Whether you’re doing it yourself with software or manually, following a clear step-by-step process is crucial. Workful payroll fees

Step 1: Gather Employee Timesheets and Data

The first step in any payroll run is collecting all the necessary input data for the pay period. This forms the basis of your calculations.

  • Hours Worked: If your employees are paid hourly, collect accurate timesheets or clock-in/out data. This might be through a time-tracking app, manual timesheets, or a punch clock system.
  • Sick Pay, Holiday Pay, and Absences: Record any statutory sick pay SSP days, statutory maternity/paternity/adoption pay SMP/SPP/SAP, or annual leave taken. SSP is £109.40 per week for 2023/24 for eligible employees.
  • Bonuses and Commissions: If applicable, tally any bonuses, commissions, or other additional payments to be included in this pay run.
  • Expenses: Process any expense claims that are to be reimbursed via payroll though often these are handled separately.
  • New Starters/Leavers: Ensure you have processed all necessary new starter information P45/Starter Checklist and details for any employees who have left P45 issued.

Step 2: Calculate Gross Pay

Once you have all the input data, calculate the gross pay for each employee for the current pay period.

  • Salaried Employees: Divide their annual salary by the number of pay periods e.g., for monthly pay, divide by 12. Add any applicable bonuses or overtime.
  • Hourly Employees: Multiply their hours worked by their hourly rate. Add any overtime calculated at higher rates e.g., 1.5x, 2x.
  • Minimum Wage Check: Always ensure that all employees’ pay meets or exceeds the National Living Wage NLW or National Minimum Wage NMW. For 2023/24, NLW for those aged 23 and over is £10.42 per hour. A report by HMRC indicated that over 150,000 workers were underpaid the National Minimum Wage in 2022, leading to significant penalties for employers.

Step 3: Deduct PAYE Tax, National Insurance, and Pension Contributions

This is the core of payroll calculations, where deductions are made based on employee earnings and tax codes.

  • PAYE Income Tax:
    • Apply the employee’s tax code e.g., 1257L for the standard personal allowance to their gross pay.
    • Subtract any allowances and apply the relevant tax rates 20%, 40%, 45%.
    • Payroll software automates this, but if doing it manually, you’d refer to HMRC’s tax tables.
  • Employee National Insurance:
    • Calculate Class 1 Primary contributions based on the employee’s earnings above the Primary Threshold £242 per week for 2023/24.
    • The typical rate is 12% on earnings between the Primary Threshold and Upper Earnings Limit £967 per week for 2023/24, and 2% above that.
  • Employee Pension Contributions:
    • Deduct the employee’s contribution to their workplace pension scheme. This is typically a percentage of qualifying earnings currently 5% for the employee for auto-enrolment.
    • Ensure tax relief is applied correctly – sometimes this is ‘net pay arrangement’ where tax relief is immediately given, or ‘relief at source’ where the pension provider claims it.
  • Other Deductions: Include any other authorised deductions, such as student loan repayments Plan 1, Plan 2, Plan 4, Postgraduate Loan, Attachment of Earnings Orders AEOs, or union subscriptions. Around 15% of employees in the UK have a student loan deduction.

Step 4: Calculate Employer National Insurance and Pension Contributions

These are costs to your business, not deductions from the employee’s pay, but they are part of the overall payroll cost.

  • Employer National Insurance: Calculate Class 1 Secondary contributions on employee earnings above the Secondary Threshold £175 per week for 2023/24. The rate is currently 13.8%. Remember, small businesses with an annual NICs bill below £100,000 might be eligible for the Employment Allowance, which can reduce their Class 1 NICs bill by up to £5,000 per year. Around 650,000 businesses claimed the Employment Allowance in 2022/23.
  • Employer Pension Contributions: Calculate your business’s contribution to the workplace pension scheme currently 3% of qualifying earnings for auto-enrolment.

Step 5: Generate Payslips

Before or on payday, you must issue a payslip to each employee. Best online payroll

  • Legal Requirement: Payslips are a legal requirement and must show:
    • Gross pay
    • All deductions tax, NI, pension, student loans, etc.
    • Net pay
    • Number of hours worked if hourly paid
  • Clear and Detailed: Ensure the payslip is clear, easy to understand, and itemises all elements of pay and deductions. Most payroll software generates these automatically.

Step 6: Make Payments to Employees

This is the moment your hard work pays off for your team.

  • Bank Transfer: Transfer the calculated net pay to each employee’s bank account. This is almost exclusively done via BACS Bankers’ Automated Clearing Services for efficiency and security.
  • On Time: Ensure payments arrive in employees’ accounts on their designated payday. Late payments can cause significant issues and dissatisfaction.

Step 7: Submit Real Time Information RTI to HMRC

This is a critical compliance step that must happen on or before your payday.

  • Full Payment Submission FPS: Submit an FPS to HMRC. This includes details of all payments, deductions, and new starters/leavers for the pay period. Your payroll software will typically handle this submission directly.
  • Employer Payment Summary EPS: You might also need to submit an EPS if you are reclaiming statutory payments SSP, SMP, etc., claiming the Employment Allowance, or if you have no employees to pay in a particular period. This is submitted less frequently than an FPS, usually monthly.

Step 8: Pay HMRC and Pension Providers

Finally, you need to pay over the collected tax, NI, and pension contributions.

  • HMRC Payment: Pay the total amount of PAYE tax and National Insurance employee and employer contributions to HMRC. The deadline is usually the 19th of the following month or 22nd if paying electronically. For example, for a payroll run in April, the payment is due by May 19th/22nd.
  • Pension Provider Payment: Pay the total pension contributions employee and employer to your workplace pension scheme provider. The deadline for this is typically the 22nd of the month following the payroll period.

By systematically following these steps, you can ensure your payroll is processed accurately, efficiently, and in full compliance with UK regulations.

Managing Statutory Payments and Leave

These are government-mandated payments that employees are entitled to under specific circumstances, and administering them correctly is a non-negotiable part of payroll compliance. Payroll software that integrates with quickbooks desktop

Statutory Sick Pay SSP

SSP is paid by employers to eligible employees who are off work due to illness.

  • Eligibility:
    • Must be an employee and have done some work for you.
    • Must have been sick for at least 4 consecutive days including non-working days. These are called “waiting days” for the first 3 days, for which SSP is not usually paid.
    • Must earn at least the Lower Earnings Limit LEL for National Insurance purposes £123 per week for 2023/24.
    • Must give you notice of their illness.
  • Payment Rate: For 2023/24, SSP is £109.40 per week. It’s paid for a maximum of 28 weeks.
  • Calculating SSP: You calculate SSP based on the number of qualifying days an employee is off sick. Your payroll software should help with this. You cannot reclaim SSP from HMRC unless your business was part of the COVID-19 SSP rebate scheme, which has now ended.
  • Fit Notes: For absences over 7 days, employees must provide a ‘fit note’ previously known as a sick note from their doctor.

Statutory Maternity Pay SMP, Paternity Pay SPP, and Adoption Pay SAP

These payments are designed to support employees during periods of family leave.

  • Statutory Maternity Pay SMP:
    • Eligibility: Employee must have worked for you for at least 26 weeks by the 15th week before the expected week of childbirth and earn above the LEL.
    • Payment Rates:
      • First 6 weeks: 90% of average weekly earnings AWE.
      • Remaining 33 weeks: £172.48 per week for 2023/24 or 90% of AWE, whichever is lower.
    • Duration: Up to 39 weeks.
    • Reclaiming from HMRC: Most small businesses whose total Class 1 NICs were £45,000 or less in the previous tax year can reclaim 92% of the SMP paid. If you qualify for Small Employers’ Relief, you can reclaim 103%. You reclaim this via your Employer Payment Summary EPS submission.
  • Statutory Paternity Pay SPP:
    • Eligibility: Similar to SMP, employees must meet certain length of service and earnings criteria.
    • Payment Rates: £172.48 per week for 2023/24 or 90% of AWE, whichever is lower.
    • Duration: Either 1 or 2 consecutive weeks.
    • Reclaiming: Similar reclaim rules to SMP apply.
  • Statutory Adoption Pay SAP: Similar to SMP, SAP is paid for up to 39 weeks to an employee who is adopting a child, with similar eligibility and reclaim rules.

Shared Parental Leave SPL and Pay ShPP

SPL allows parents to share maternity or adoption leave and pay more flexibly.

  • Flexibility: Eligible parents can share up to 50 weeks of leave and 37 weeks of pay between them. This allows parents to take leave in blocks, or both be off at the same time.
  • Payment Rate: Statutory Shared Parental Pay ShPP is £172.48 per week for 2023/24 or 90% of AWE, whichever is lower.
  • Complexity: SPL and ShPP can be complex to administer due to various notification periods, eligibility criteria, and the ability for parents to “opt-in” and “opt-out” of blocks of leave.
  • Reclaiming: Similar reclaim rules as SMP and SPP apply.

Holiday Pay

All UK workers, regardless of employment status employee or worker, are entitled to paid annual leave.

  • Minimum Entitlement: The statutory minimum is 5.6 weeks of paid annual leave per year. This includes public holidays. For an employee working 5 days a week, this equates to 28 days.
  • Calculation: Holiday pay should generally be calculated based on an employee’s average weekly earnings over the previous 52 working weeks or fewer if they haven’t worked that long. This includes regular overtime, commission, and other payments.
  • Accrual: Holiday entitlement accrues from the first day of employment. For irregular hours workers, holiday pay can be calculated as 12.07% of hours worked, or a ‘rolled-up holiday pay’ can be used, though this is less common for full-time employees and has specific legal requirements.
  • Transparency: Ensure your employment contracts and staff handbooks clearly outline your holiday policy, including how leave is accrued, requested, and paid.

Administering these statutory payments correctly is vital, not just for legal compliance but for supporting your employees during significant life events. Payroll companies nyc

Payroll software often has built-in calculators and processes for these, significantly simplifying what can be a complex area.

Workplace Pensions and Auto-Enrolment Compliance

Workplace pensions and auto-enrolment represent one of the most significant changes to UK payroll in recent decades.

The Pensions Regulator TPR mandates that employers automatically enrol eligible staff into a pension scheme and make contributions.

Non-compliance can lead to severe penalties, making it crucial for small businesses to get this right.

The Auto-Enrolment Basics

  • Eligibility: You must auto-enrol ‘eligible jobholders’ into a pension scheme. An eligible jobholder is an employee who:
    • Is aged between 22 and State Pension age.
    • Earns over £10,000 per year for 2023/24, the ‘earnings trigger’.
    • Works or ordinarily works in the UK.
  • Opting Out: Employees have the right to opt-out of the scheme after being auto-enrolled. If they opt out within one month, you must refund any contributions they’ve made. If they opt out later, contributions already made are usually retained by the pension provider. You cannot encourage or induce an employee to opt-out.
  • Re-enrolment: Every three years, you must re-enrol any eligible employees who have opted out or stopped contributions into your pension scheme. This is part of your ongoing duties.

Minimum Contribution Rates

The current minimum contribution rates for auto-enrolment are calculated on ‘qualifying earnings’, which is a band of earnings between a lower and upper limit £6,240 and £50,270 for 2023/24. Payroll programs free

  • Total Contribution: 8% of qualifying earnings.
  • Employer Contribution: At least 3% of qualifying earnings.
  • Employee Contribution: At least 5% of qualifying earnings this includes tax relief.
    • Example: If an employee earns £20,000 a year, and their qualifying earnings are £13,760 £20,000 – £6,240, the total annual contribution would be 8% of £13,760 = £1,100.80. The employer would pay 3% £412.80 and the employee 5% £688.

Choosing a Pension Provider

Selecting a suitable pension provider is a key step.

  • NEST National Employment Savings Trust: Set up by the government, NEST is a popular choice for small businesses due to its simplicity, low charges, and ease of use. It’s designed to be accessible to all employers. Approximately 8.8 million people are saving with NEST as of early 2023.
  • Other Providers: Many private pension providers e.g., Aviva, People’s Pension, Legal & General also offer auto-enrolment solutions. You’ll need to compare their fees, investment options, and administrative support.
  • Key Considerations: Look for providers that offer:
    • Low Charges: To maximise employee savings.
    • Easy Administration: Integration with payroll software is a huge plus.
    • Good Communication: Clear information for your employees.

Ongoing Duties and Compliance

Auto-enrolment isn’t a one-off task. it involves continuous duties.

  • Monitoring Ages and Earnings: You must continually monitor employee ages and earnings to assess who is eligible for auto-enrolment.
  • Processing Opt-Outs/Opt-Ins: Efficiently process any requests from employees to opt-out or opt-in.
  • Paying Contributions: Ensure pension contributions are paid to the pension provider on time. The deadline is usually the 22nd of the month following the deduction from pay. Late payments can be reported to TPR and incur penalties.
  • Declaration of Compliance: Within 5 months of your duties start date, you must complete a Declaration of Compliance with The Pensions Regulator. This confirms you have met your auto-enrolment duties.
  • Record Keeping: Keep detailed records of your pension arrangements and communications with employees for at least six years.
  • Communicating with Employees: You must inform your employees about auto-enrolment, their rights, and your pension scheme. The Pensions Regulator provides templates for these communications.

Consequences of Non-Compliance: The Pensions Regulator is rigorous in enforcing auto-enrolment duties.

  • Fixed Penalties: A £400 fixed penalty notice for non-compliance.
  • Escalating Penalties: Daily penalties can then be applied, ranging from £50 per day for 1-4 employees to £10,000 per day for 500+ employees.
  • Investigations and Enforcement: TPR conducts spot checks and investigates non-compliance, with public enforcement notices issued to naming and shaming non-compliant employers. In the last financial year, TPR issued nearly 10,000 Fixed Penalty Notices and 7,000 Escalating Penalty Notices.

Staying on top of your auto-enrolment duties is as vital as your PAYE obligations.

Many payroll software solutions and payroll bureaus offer robust support for managing auto-enrolment, significantly reducing the administrative burden and risk of non-compliance. Cost of workful payroll

End-of-Year Payroll Procedures

As the tax year draws to a close ending on 5th April, small businesses need to undertake specific end-of-year payroll tasks to finalise their records with HMRC and provide employees with their annual statements.

Getting this right ensures a smooth transition into the new tax year and avoids any last-minute scramble.

Running Your Final Payroll for the Tax Year

  • Final Pay Period: Process your last payroll run for the tax year as normal, ensuring all payments, deductions, and statutory payments up to 5th April are included. This includes any accrued but untaken holiday pay being paid out if an employee is leaving.
  • Year-to-Date Totals: Verify that all year-to-date figures for pay, tax, and National Insurance are accurate in your payroll software. Any corrections for previous periods in the tax year should have been made via an Earlier Year Update EYU or by adjusting a subsequent FPS.

Submitting Your Final Full Payment Submission FPS

  • “Year End” Indicator: In your final FPS for the tax year usually your March payroll run, or the last one that falls before 5th April, you must mark the “Year End” indicator. This tells HMRC that this is your final submission for the tax year for that PAYE scheme.
  • Deadline: This final FPS must be submitted on or before your payday.

Issuing P60s to Employees

  • What is a P60? A P60 is an annual statement summarising an employee’s total pay, tax deducted, and National Insurance contributions for the entire tax year 6th April to 5th April. It’s a vital document for employees for tax self-assessment, applying for tax credits, or proving income.
  • Who Gets One? You must provide a P60 to every employee who was working for you on 5th April.
  • Deadline: You must issue P60s to your employees by 31st May following the end of the tax year.
  • Format: P60s can be issued digitally e.g., via a secure employee portal in your payroll software or as a paper copy.
  • Importance: Ensure accuracy. Errors on P60s can lead to employees having incorrect tax calculations or difficulties with their personal tax affairs. HMRC can issue penalties for not providing P60s on time or for providing incorrect ones.

Completing End-of-Year Declarations EPS

  • Employer Payment Summary EPS: Although the final FPS marks your scheme as complete for the year, you may still need to submit an EPS if:
    • You are reclaiming statutory payments e.g., SMP, SPP for the final period.
    • You are declaring the Employment Allowance for the tax year.
    • You have no payments to make for a particular period.
  • Deadline: The final EPS should be submitted by 19th April.

Updating Your Payroll System for the New Tax Year

  • New Tax Year Settings: After 5th April, your payroll software needs to be updated for the new tax year starting 6th April. This typically involves:
    • New Tax Codes: Although most tax codes automatically roll forward e.g., 1257L becomes 1257L for the new tax year, HMRC may issue P9X notices with specific instructions for certain tax codes.
    • New Thresholds: Updating National Insurance thresholds Primary Threshold, Secondary Threshold, Upper Earnings Limit, PAYE tax bands if they change, and pension auto-enrolment earnings thresholds.
    • New Statutory Rates: Updating rates for SSP, SMP, SPP, SAP, and ShPP, as well as the National Minimum Wage/National Living Wage.
  • Software Updates: Most reputable payroll software providers release updates automatically to incorporate these changes, simplifying the process for you. If using HMRC Basic PAYE Tools, you will need to download the updated version.

Archiving Records

  • Retention Period: You are legally required to keep payroll records for at least three years from the end of the tax year they relate to. This includes:
    • Payslips
    • P45s, P60s
    • RTI submissions FPS, EPS
    • Records of tax and NI paid
    • Correspondence with HMRC
    • Pension records
  • Secure Storage: Ensure these records are stored securely, whether digitally or physically, to protect sensitive employee data and to be readily available if HMRC requests them.

Successfully completing these end-of-year procedures is a testament to sound financial management and ensures your business remains fully compliant with HMRC regulations as you transition into the new tax year.

Common Payroll Challenges and Solutions for Small Businesses

Even with the best intentions, payroll can present hurdles for small business owners.

From navigating complex legislation to avoiding costly errors, understanding these common challenges and their solutions can save you time, money, and stress. Payroll outsourcing companies canada

1. Keeping Up with Ever-Changing Legislation

Payroll rules in the UK are dynamic, with annual changes to tax codes, NI thresholds, minimum wage rates, and pension regulations.

Staying informed can feel like a full-time job in itself.

  • Challenge: The constant evolution of tax laws, National Insurance rates, statutory payments, and auto-enrolment rules. Missing an update can lead to non-compliance and penalties. For example, the National Living Wage has increased every year since its introduction in 2016, and will reach £11.44 an hour for those aged 21 and over from April 2024.
  • Solution:
    • Reliable Payroll Software: The best defence is robust payroll software that automatically updates with the latest HMRC rules and rates. This significantly reduces the manual burden of tracking legislative changes.
    • Subscribe to HMRC Updates: Sign up for email alerts from HMRC and The Pensions Regulator TPR to receive direct notifications about changes that affect employers.
    • Professional Advice: Consult with your accountant or a payroll bureau. They are obligated to stay current with all legislative changes and can advise you on how they impact your business.
    • Industry News: Follow reputable payroll and accounting news sources or professional bodies that summarise key changes.

2. Ensuring Accuracy and Preventing Errors

Small errors can snowball, leading to incorrect payments, unhappy employees, and HMRC fines.

Common mistakes include wrong tax codes, miscalculated overtime, or incorrect NI deductions.

  • Challenge: Manual data entry and calculations are prone to human error. Even slight inaccuracies can lead to underpayment or overpayment of employees, or incorrect submissions to HMRC. A recent survey found that 2 in 5 small businesses experience payroll errors at least once a year.
    • Automated Payroll Software: This is the most effective solution. Good software minimises manual calculations and has built-in validation checks, significantly reducing the chance of errors.
    • Double-Check Input Data: Before running payroll, review all timesheets, expense claims, and new starter information carefully. “Garbage in, garbage out” applies here.
    • Reconciliation: After each payroll run, reconcile your payroll figures with your bank statements and accounting records. This helps spot discrepancies early.
    • Payslip Review: Encourage employees to review their payslips for any discrepancies. Early detection by employees can help resolve issues quickly.
    • Seek Assistance: If you’re unsure about a specific calculation or scenario, don’t guess. Consult your software’s support documentation, HMRC guidance, or a payroll professional.

3. Managing Auto-Enrolment Pension Duties

While beneficial for employees, auto-enrolment adds a layer of complexity to payroll, requiring continuous monitoring and communication. Remote payroll services

  • Challenge: Assessing employee eligibility, managing opt-outs and re-enrolment, calculating correct contributions, and ensuring timely payments to the pension provider. The Pensions Regulator has a clear enforcement regime for non-compliance, issuing tens of thousands of penalty notices annually.
    • Integrated Payroll and Pension Software: Many modern payroll software solutions have built-in auto-enrolment features that automate eligibility assessment, contribution calculations, and even communicate with pension providers.
    • Dedicated Pension Scheme: Choose a pension provider like NEST that is designed for auto-enrolment and offers straightforward administration.
    • Understand Your Duties: Familiarise yourself with The Pensions Regulator’s guidance and set reminders for re-enrolment dates.
    • Outsource Pension Administration: If managing it in-house proves too complex, some payroll bureaus or accountants offer specific services for auto-enrolment administration.

4. Handling HMRC Penalties

HMRC is strict about payroll compliance, with penalties for late or incorrect RTI submissions and late payments.

  • Challenge: Receiving unexpected penalties from HMRC for missed deadlines e.g., late FPS submissions or inaccuracies. Penalties for late FPS can be £100 per month for schemes with 1-9 employees.
    • Strict Deadlines: Implement a strict payroll calendar and set reminders for all HMRC and pension deadlines. Most payroll software will also send alerts.
    • Automated Submissions: Use payroll software that automates RTI submissions directly to HMRC.
    • Check for Errors Before Submission: Before submitting an FPS, run validation checks within your software to identify potential errors.
    • Communicate with HMRC: If you anticipate a problem or have made an error, contact HMRC as soon as possible. Demonstrating a willingness to resolve issues can sometimes mitigate penalties.
    • Appeals: If you receive a penalty you believe is unwarranted, you have the right to appeal to HMRC, providing a reasonable excuse.

5. Data Security and Confidentiality

Payroll involves highly sensitive personal and financial data.

Protecting this information is a legal and ethical imperative.

  • Challenge: Ensuring the confidentiality and security of employee salaries, bank details, and personal information, especially with increasing cyber threats and GDPR requirements.
    • Secure Software: Use reputable payroll software that is cloud-based and employs robust encryption and security protocols.
    • Access Control: Limit access to payroll data to only those employees who absolutely need it. Use strong passwords and multi-factor authentication.
    • Data Backup: Regularly back up your payroll data. If using cloud software, this is usually handled automatically.
    • GDPR Compliance: Understand your obligations under GDPR regarding the collection, processing, and storage of personal data. Ensure payslips are delivered securely e.g., password-protected PDFs or secure portals.
    • Outsourcing: When outsourcing payroll, ensure your chosen bureau has strong data security practices and is GDPR compliant.

Addressing these common challenges proactively will enable your small business to run payroll smoothly, maintain compliance, and foster a positive relationship with your valuable employees.

Integrating Payroll with Accounting Software

For small businesses, efficient financial management is about more than just accurate bookkeeping. it’s about seamless integration. Best employee payroll software

Connecting your payroll system with your accounting software can transform how you manage your finances, offering significant benefits in terms of accuracy, time-saving, and financial oversight.

Why Integration Matters

  • Streamlined Data Flow: Instead of manually entering payroll figures into your accounting system, integration allows data to flow automatically. This means your gross pay, PAYE, NICs, pension contributions, and net pay figures are recorded instantly and accurately in your ledger.
  • Reduced Errors: Manual data entry is a prime source of errors. By automating the transfer of payroll data, you minimise the risk of typos, transposition errors, or forgotten entries.
  • Time Savings: Imagine the hours saved not having to manually post payroll journals every month. Integration frees up valuable time, allowing you to focus on growing your business or other critical tasks. Small businesses can save an average of 3-5 hours per month by integrating payroll and accounting systems.
  • Real-Time Financial Overview: With payroll costs automatically reflected in your accounting system, you get a much clearer and up-to-date picture of your business’s financial performance. This is crucial for cash flow management and budgeting.
  • Easier Reporting: Generating financial reports like profit and loss statements or balance sheets becomes simpler and more accurate when all data, including payroll expenses, is correctly categorised and accounted for.

How Payroll Integrates with Accounting

The level and method of integration can vary depending on the software solutions you use.

  • Native Integration All-in-One Solutions: Some accounting software providers offer their own integrated payroll modules. Examples include:
    • Xero Payroll: Fully embedded within the Xero accounting platform. When you run payroll, the necessary journals e.g., wages expense, PAYE payable, NIC payable, pension payable are automatically created and posted to your general ledger.
    • QuickBooks Payroll: Similarly, QuickBooks Desktop and Online offer integrated payroll features that seamlessly link to your accounting records.
    • Sage Payroll: Sage offers various accounting and payroll packages that can be integrated.
    • Benefits: This is usually the most seamless form of integration, designed to work perfectly together, often requiring minimal setup.
  • Direct API Integration: Many standalone payroll software solutions offer direct integrations with popular accounting packages through Application Programming Interfaces APIs.
    • Example: BrightPay can integrate with Xero, QuickBooks, Sage, and others. After running payroll in BrightPay, you can export the data with a few clicks, and it will import directly into your accounting software, often mapping to the correct accounts.
    • Benefits: Offers flexibility to choose best-of-breed software for both payroll and accounting, while still maintaining a high level of automation.
  • CSV Export/Import: This is the most basic form of integration.
    • Process: You run payroll, export the summary data e.g., gross pay, net pay, deductions into a CSV Comma Separated Values file, and then manually import that file into your accounting software. You may need to create a template or map the columns.
    • Benefits: Compatible with virtually any software combination.
    • Drawbacks: More manual, still carries a risk of mapping errors, and requires more steps than direct or native integration.

Setting Up the Integration

The exact steps will depend on your specific software, but generally involve:

  1. Choose Compatible Software: Select payroll and accounting software that are known to integrate well. Popular combinations like Xero & Xero Payroll, QuickBooks & QuickBooks Payroll, or BrightPay with Xero/QuickBooks are good starting points.
  2. Map Accounts: This is a crucial step. You need to tell the integration which nominal ledger accounts in your accounting system correspond to different payroll elements. For example:
    • Gross Wages/Salaries to ‘Wages Expense’
    • PAYE Deductions to ‘PAYE Control Account’ or ‘HMRC Payable’
    • Employee NICs to ‘NI Control Account’
    • Employer NICs to ‘Employer NI Expense’
    • Pension Contributions to ‘Pension Payable’ and ‘Pension Expense’
    • Net Pay to ‘Bank Account’ or ‘Wages Payable’
  3. Test the Integration: Before running a live payroll, perform a test run to ensure data transfers correctly and maps to the right accounts.
  4. Regular Reconciliation: Even with integration, always reconcile your bank payments for payroll net pay, HMRC payment, pension payment against your accounting records to ensure everything balances.

By wisely integrating your payroll with your accounting software, you’re not just automating tasks.

You’re building a more robust, accurate, and transparent financial backbone for your small business. Desktop payroll software for small business

It’s a strategic move that pays dividends in both efficiency and peace of mind.

Advanced Payroll Considerations for Growing Businesses

As your small business scales, your payroll needs often become more sophisticated.

What started as a straightforward task can evolve into a complex operation involving various employee types, benefits, and statutory obligations.

Proactively understanding these advanced considerations can help you navigate growth smoothly and avoid compliance pitfalls.

1. Employee Benefits and Salary Sacrifice Schemes

Beyond basic salary, many growing businesses offer benefits that impact payroll and tax.

  • Employee Benefits Benefits in Kind – BiKs: These are non-cash benefits provided to employees, such as company cars, private medical insurance, or gym memberships.
    • Tax Implications: Most BiKs are taxable and must be reported to HMRC on a P11D form or P11Db for employer NICs annually by 6th July following the end of the tax year. The value of the benefit is added to an employee’s taxable income, and employer NICs are often due on the value of the benefit. HMRC collects around £4 billion annually from taxes on benefits in kind.
    • Payroll Impact: While not typically processed through the PAYE system on a regular basis, the Class 1A NICs on most BiKs are paid directly to HMRC via your PAYE scheme, usually by 19th July.
  • Salary Sacrifice Schemes: These are arrangements where an employee gives up part of their contractual cash salary in exchange for a non-cash benefit, typically with tax and/or NI advantages.
    • Common Examples:
      • Pension Contributions: The most common. Employees sacrifice salary, and the employer pays this directly into their pension. This saves both employee and employer NICs, as well as employee income tax. As of 2023, around 30% of UK employers offer salary sacrifice for pensions.
      • Cycle to Work Schemes: Employees can save up to 42% on the cost of a new bike and cycling equipment, paid for through salary sacrifice.
      • Childcare Vouchers closed to new entrants: While no longer open to new applicants, existing schemes continue.
      • Electric Car Schemes: A growing area where employees can lease an electric car through salary sacrifice, benefiting from favourable BiK tax rates compared to petrol/diesel cars.
    • Considerations:
      • HMRC Compliance: Schemes must be carefully structured to meet HMRC’s requirements for ‘effective salary sacrifice’ to ensure tax and NI benefits. A written agreement is essential.
      • Impact on Statutory Pay: Salary sacrifice can reduce an employee’s earnings for National Insurance purposes, which might affect their entitlement to statutory payments like SSP, SMP, or SPP. Ensure employees understand this.
      • Minimum Wage: The sacrificed amount cannot take an employee’s cash pay below the National Living Wage/National Minimum Wage.

2. Directors’ Payroll

Paying company directors has specific nuances compared to regular employees.

  • Director’s National Insurance: Unlike employees whose NI is calculated per pay period, a director’s NI is calculated on their cumulative earnings for the entire tax year. This means they might pay little or no NI early in the tax year and then a larger amount later once they cross the annual threshold.
  • Small Salary, Dividends Strategy: Many owner-managed businesses pay directors a small salary often at the National Insurance Secondary Threshold or Personal Allowance to save on NI, and then take additional profits as dividends. Dividends are taxed differently and are not subject to NI.
  • P11D Obligations: Directors often receive various benefits e.g., private medical, company car that must be reported on a P11D.
  • Loan Accounts: Be mindful of directors’ loan accounts and ensure any salary payments are distinct from loan repayments.

3. Apprenticeship Levy

If your annual pay bill total employee earnings subject to NI exceeds £3 million, you must pay the Apprenticeship Levy.

  • Rate: 0.5% of your annual pay bill.
  • Allowance: Employers receive a £15,000 annual allowance to offset against their levy payment.
  • How it Works: The levy is collected monthly through PAYE. Funds are then available in an online ‘Apprenticeship Service Account’ to fund apprenticeship training for your staff.
  • Impact on Smaller Businesses: While most small businesses won’t hit the £3 million pay bill threshold, it’s something to be aware of as you grow. If your pay bill is below this, you can still access government funding for apprenticeships typically 95% of training costs are covered. In 2022/23, around 2% of UK employers paid the Apprenticeship Levy, but these employers account for over 50% of total UK employment.

4. International Employees and Global Mobility

If your business expands to employ staff living abroad or brings in staff from overseas, payroll becomes significantly more complex.

  • Working Abroad: If a UK-based employee works for you overseas, their tax and NI obligations might change depending on the country, the length of their stay, and double taxation agreements. You might need to operate a shadow payroll or engage local payroll providers.
  • Working in the UK Non-UK Residents: If you employ someone moving to the UK, their tax residency status and visa might impact their tax code and NI. You may need to apply for a temporary National Insurance number.
  • Expat Payroll: This is a highly specialised area that often requires expert advice from international tax and payroll consultants due to varying tax treaties, social security agreements, and immigration rules.
  • GDPR Considerations: Transferring employee data across borders also brings specific GDPR requirements.

These advanced considerations highlight why professional advice becomes increasingly valuable as your business grows.

While payroll software can handle many of the complexities, specific scenarios like international payroll or highly bespoke benefit schemes often warrant consultation with a specialist accountant or a dedicated global mobility firm to ensure full compliance.

Key Deadlines and Penalties to Avoid

Navigating UK payroll isn’t just about getting the calculations right.

It’s also about hitting strict deadlines set by HMRC and The Pensions Regulator.

Missing these can result in automatic penalties, which can quickly add up and impact your small business’s cash flow.

Staying organised and understanding these critical dates is paramount.

HMRC Deadlines

HMRC operates on a monthly and annual cycle, with various submissions and payment dates.

  • On or Before Payday:
    • Full Payment Submission FPS: This is the most crucial deadline. You must submit your FPS to HMRC on or before you pay your employees. This is the Real Time Information RTI requirement.
      • Penalty for Late FPS: For employers with 1-9 employees, the penalty for a late FPS is £100 per month. This penalty can accumulate if you continue to be late. There are also penalties for inaccurate submissions.
  • Monthly Deadlines:
    • Employer Payment Summary EPS Submission if applicable: If you need to reclaim statutory payments SSP, SMP etc., claim Employment Allowance, or tell HMRC you haven’t paid any employees that month, you must submit an EPS by the 19th of the following month. For example, for payroll run in April, submit EPS by 19th May.
      • Penalty for Late EPS: While there isn’t a direct penalty for late EPS, failing to submit it means HMRC won’t apply your reclaim or allowance, leading to an inflated bill and potential late payment penalties if you pay less than HMRC expects.
    • PAYE and NICs Payment: Your total PAYE and National Insurance bill for a given month is due by the 19th of the following month if paying by post, or by the 22nd of the following month if paying electronically which is highly recommended for efficiency.
      • Penalty for Late Payment: HMRC imposes automatic penalties for late payments. These start at 1% of the amount owed if 1-6 months late, increasing to 2% 7-12 months and 3% over 12 months. Interest is also charged on overdue amounts. For example, a small business with a £5,000 PAYE bill might incur a £50 penalty if 1 month late.
  • Annual Deadlines:
    • P60s to Employees: By 31st May following the end of the tax year which is 5th April.
      • Penalty for Late P60: There isn’t a fixed penalty for every late P60, but HMRC can issue a penalty of up to £300 for each failure to provide a P60 to an employee, and then up to £60 per day for continuing failure.
    • P11D/P11Db Submissions: By 6th July following the end of the tax year. This is for reporting benefits in kind and expenses.
      • Penalty for Late P11D/P11Db: For each P11Db form that is late, HMRC can charge a penalty of £100 per month or part month. Penalties for individual P11Ds are usually lower but can also be issued.
    • Payment of Class 1A NICs on Benefits: By 19th July or 22nd July if paying electronically following the end of the tax year.

The Pensions Regulator TPR Deadlines

Auto-enrolment introduces its own set of critical deadlines.

  • Declaration of Compliance: Within 5 months of your ‘duties start date’. This is a one-off declaration confirming you’ve met your auto-enrolment duties.
    • Penalty for Late Declaration: TPR can issue a fixed penalty of £400 for failing to submit this on time.
  • Pension Contributions Payment: Payments to your pension provider are due by the 22nd of the month following the payroll period in which the contributions were deducted.
    • Penalty for Late Contributions: TPR monitors late payments. If contributions are consistently late, they can issue escalating penalties, starting from £50 per day for small employers. They also have powers to issue compliance notices and fines.
  • Re-enrolment Every Three Years: You must re-enrol eligible staff every three years, on your ‘re-enrolment date’. The declaration of compliance for re-enrolment must be submitted within 5 months of your re-enrolment date.

How to Avoid Penalties

  • Set Up a Payroll Calendar: Create a clear calendar with all key dates for payroll processing, submissions, and payments, and stick to it rigorously.
  • Use Payroll Software: This is your strongest tool. Reputable software automates submissions, calculates payments, and often provides reminders for deadlines. Many even submit directly to HMRC automatically.
  • Allocate Sufficient Time: Don’t leave payroll to the last minute. Factor in enough time to collect data, process, review, and submit.
  • Understand ‘On or Before Payday’: This is often where small businesses trip up. If you pay on the 28th of the month, your FPS must be sent on or before the 28th, not at the end of the month.
  • Stay Informed: Keep an eye on HMRC and TPR communications for any changes to deadlines or processes.
  • Communicate with HMRC/TPR: If you foresee a problem or make a mistake, contact the relevant authority as soon as possible. They are often more lenient if you are proactive.
  • Consider Outsourcing: If managing these deadlines internally proves too challenging or time-consuming, outsourcing your payroll to a professional bureau is a highly effective way to ensure compliance and avoid penalties. Statistics show that businesses that outsource payroll are significantly less likely to incur HMRC penalties.

By maintaining a disciplined approach and leveraging the right tools, you can confidently meet your payroll obligations and avoid the headache of penalties, keeping your small business in good standing with the authorities.

Frequently Asked Questions

What is payroll for a small business in the UK?

Payroll for a small business in the UK is the process of managing employee salaries, deducting Income Tax PAYE and National Insurance Contributions NICs, administering workplace pensions, and submitting real-time information RTI to HMRC, all while ensuring compliance with UK employment and tax laws.

Do I need a payroll for one employee in the UK?

Yes, if you pay an employee in the UK more than the National Insurance Lower Earnings Limit £123 per week for 2023/24, you must register as an employer with HMRC and operate a PAYE payroll scheme.

How much does payroll cost for a small business UK?

The cost varies: HMRC Basic PAYE Tools are free, DIY payroll software can range from £5-£30 per month, and outsourcing to a payroll bureau or accountant typically costs £10-£50 per employee per month, depending on services.

What is RTI in UK payroll?

RTI stands for Real Time Information.

It’s a system introduced by HMRC in 2013 that requires employers to report payroll information Full Payment Submissions – FPS to HMRC on or before each payday, rather than annually.

What is a P60 and when do I issue it?

A P60 is an annual summary of an employee’s total pay, tax deducted, and National Insurance contributions for the tax year 6th April to 5th April. You must issue a P60 to every employee working for you on 5th April by 31st May.

What is auto-enrolment and how does it affect small businesses?

Auto-enrolment is a UK government initiative requiring employers to automatically enrol eligible staff into a workplace pension scheme and contribute to it.

It affects nearly all UK employers and involves ongoing duties such as assessing eligibility, making contributions, and re-enrolling staff every three years.

What is the National Living Wage/National Minimum Wage?

The National Living Wage NLW is the minimum hourly rate for workers aged 23 and over, while the National Minimum Wage NMW applies to those under 23. Employers must ensure all eligible employees are paid at least these rates.

For 2023/24, NLW is £10.42 per hour for those 23 and over.

Can I do my own payroll manually in the UK?

Yes, you can do payroll manually, especially if you have very few employees and straightforward payroll.

However, it’s highly complex due to constantly changing tax rules, National Insurance calculations, and RTI submissions.

Using payroll software or outsourcing is generally recommended to avoid errors and penalties.

What information do I need from a new employee for payroll?

For a new employee, you need their full name, address, date of birth, National Insurance number, bank details, and either their P45 from a previous job or a completed HMRC Starter Checklist.

What are statutory sick pay SSP rules in the UK?

SSP is paid by employers to eligible employees off work due to illness for at least 4 consecutive days.

For 2023/24, the rate is £109.40 per week, paid for up to 28 weeks. Employers cannot generally reclaim SSP from HMRC.

How do I pay HMRC for PAYE and NICs?

You pay HMRC electronically e.g., Faster Payments, BACS, or Direct Debit or by post.

Electronic payments are due by the 22nd of the month following the payroll period, while postal payments are due by the 19th.

What happens if I miss an HMRC payroll deadline?

Missing HMRC payroll deadlines can lead to automatic penalties.

For example, late Full Payment Submissions FPS can incur £100 per month penalties for small employers, and late payments of PAYE/NICs incur interest and escalating percentage-based penalties.

What is the Employment Allowance?

The Employment Allowance allows eligible employers to reduce their annual National Insurance contributions Class 1 secondary NICs by up to £5,000. It’s designed to support small businesses.

Most businesses whose employers’ NICs bill is under £100,000 a year are eligible.

Do I need to provide payslips to my employees?

Yes, it is a legal requirement to provide employees with a payslip on or before each payday.

The payslip must show gross pay, all deductions, and net pay.

What is a P45 and when is it issued?

A P45 is a document issued by an employer to an employee when they leave their job.

It shows their pay and tax paid in the current tax year up to their leaving date.

New employees should provide their P45 from their previous job.

Can I reclaim statutory maternity pay SMP from HMRC?

Yes, most small businesses can reclaim 92% of the SMP they pay.

If your total Class 1 NICs were £45,000 or less in the previous tax year, you may be eligible for Small Employers’ Relief, allowing you to reclaim 103% of SMP.

You reclaim this via your Employer Payment Summary EPS.

How do I integrate payroll with my accounting software?

Integration can be native built-in to your accounting software, direct API integration where standalone payroll software connects to accounting software, or via CSV export/import.

Native and direct API integrations automate the transfer of payroll journal entries, saving time and reducing errors.

What are the record-keeping requirements for payroll in the UK?

You must keep all payroll records payslips, P45s, P60s, RTI submissions, payment records, etc. for at least three years from the end of the tax year they relate to.

Pension records typically need to be kept for six years.

What are ‘benefits in kind’ and how do they relate to payroll?

Benefits in Kind BiKs are non-cash benefits provided to employees e.g., company cars, private medical insurance. They are often taxable and must be reported annually to HMRC on a P11D form, and employers typically pay Class 1A National Insurance on most BiKs.

When should a small business consider outsourcing payroll?

A small business should consider outsourcing payroll when it becomes too time-consuming, the complexity of rules like auto-enrolment or statutory payments feels overwhelming, there’s a risk of errors leading to penalties, or they simply want to focus more on core business activities.

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