When you start hiring employees to expand your business, or just to set it up in the first place, this brings a major new component into your cash flow calculations: monetary compensation.
However, payroll is more than just paying employees. It’s a system of managing tax obligations, maintaining meticulous records, and adhering to evolving regulations.
In this article, you’ll find an in-depth explanation of the main aspects.
Here’s what we cover:
Payroll definition
Payroll is a system to ensure your employees are paid correctly and on time. This includes salaries, wages, benefits, and reimbursements.
Payroll also involves deducting taxes and other contributions, such as insurance or pensions.
In essence, payroll is a process of calculating and distributing employee compensation, while also managing related tax and reporting obligations.
A payroll system helps businesses pay the right amounts to the right people within the required timeframe.
This involves:
- Calculating gross pay, which includes benefits and reimbursements
- Deducting taxes and other contributions such as employee insurance and pension
- Paying employees their net pay, the amount left after deductions
- Paying employer taxes to HMRC
- Keeping detailed payroll records for government reporting.
Payroll can be done manually for very small businesses. However, for most businesses, it’s one of the largest expenses. With so much at stake many companies prefer to use payroll software or outsource to a payroll specialist or accountant.
Getting payroll right is crucial to avoid financial, legal, and reputational issues. It ensures employees are paid correctly, tax authorities are satisfied, and your business runs efficiently.
Key components of payroll documentation
The various documents involved in running payroll tend to share several features, many of which are essential for accurate payroll records:
- Payroll number: a unique identifying number tied to each employee, and mentioned in all reports sent to HMRC. It’s usually at the top of a payslip, P45, or P60 document. The payroll number helps you track employee payment history, tax deductions, and other payroll-related information.
- Employee details: this includes the employee’s full name, address, bank account, National Insurance number, and contact information. Up-to-date details ensure accurate tax reporting and correct payment delivery.
- Hourly rate or salary information: if the employee is paid hourly, the hourly rate and hours worked are included, if salaried, the annual salary is divided into the pay period amounts.
- Gross pay: this is the employee’s total earnings before any deductions. It includes salary, wages, overtime, bonuses, and commissions.
- Net pay: this is the employee’s take-home pay after all deductions have been made.
- Tax deductions: this includes income tax and National Insurance contributions (NIC), which are legally required deductions.
- Other deductions: these may include pension contributions, student loan repayments, health insurance premiums, and other voluntary or mandatory deductions.
- Payslips: these documents detail the employee’s earnings, deductions, and net pay for a specific pay period.
- P45 and P60 forms: these are tax documents that summarise an employee’s earnings and tax deductions for the tax year. P45s are given when an employee leaves a job, and P60s are given following the end of the tax year.
- HMRC reports: these are sent to HMRC on or before each payday, detailing the employee payment and deduction information.
- Company benefits: details of any company benefits provided, such as healthcare or pension packages.
Running payroll: The options available
Now we have a clear payroll definition, it’s worth running over the methods for operating payroll smoothly and accurately.
Manual payroll calculation
For very small businesses, you may be able to calculate your payroll manually. This means checking your figures thoroughly and updating them regularly to ensure accurate record-keeping.
However, remember that contractors are not employees, and their payments and tax obligations are handled differently.
Mistakes can easily happen with manual data entry, so you must allow extra time to check your records. Things such as undeclared expenses or benefits can cause problems in balancing the books if declared overdue.
You must ensure all numbers are up to date and accurate, and keep your records intact for three years from the end of the tax year they relate to, storing them safely to comply with GDPR and local data protection laws.
Hire an accountant to run your payroll
If the idea of managing payroll for your business fills you with dread or you need to spend your time on other things essential to the company, one option is to hire an accountant to run it for you.
They will know the current rules and laws surrounding payroll, and can advise on policy for the business. They’ll also have the correct software to keep records up to date and compliant.
If you have numerous employees
Hopefully, your business will thrive and grow due to careful and successful financial management.
When you inevitably gain more employees, there may come a tipping point where you feel either using a single accountant or running manual payroll processes yourself may not allow you to manage the numbers efficiently.
You can then consider hiring a payroll team to manage your workforce payroll needs end-to-end.
Use payroll software
Even before you reach the point of having to outsource or expand your team, there are benefits to implementing purpose-built payroll software.
Modern solutions can cope with paper records by reading expense receipts via a scanner, or you can input data directly (such as logging benefits, annual leave and more).
Either way, it means your records stay accurate and up to date.
Software gives you a much firmer grip on your payroll processing, particularly if it’s taking too long to manually collate all your employee data.
It’s a valid option even if you have an accountant or a payroll team managing day-to-day needs, and an essential tool for providers of payroll services.
Final thoughts
Payroll encompasses multiple aspects beyond simply calculating each employee’s pay. It factors in taxes, deductions, and reporting obligations
Getting it right from the start—whether you choose to manage it in-house or outsource—is key to keeping business finances in order and ensuring your employees are paid on time.
High quality, cloud-based payroll software keeps an accurate tally of employee payments but can also deliver specific reports at the touch of a button, offering a range of insights for everyone from your payroll team to your chief financial officer (CFO).
