All You Need to Know about Running Payroll in a UK Company

17th December 2020

If you have employees, or even if you just want to pay yourself in your limited company, you need to run payroll before disbursing any money.

Running payroll before the boom of digital services was usually an overwhelming, time-consuming monthly process. This is true of all accounting tasks.

Now, however, much of the legalities regarding running payroll are automated for you when you use accounting software such as Xero, Quickbooks or FreeAgent.

What is payroll?

The word “payroll” itself means “a list of a company’s employees and the amount of money they are to be paid.”

That says nothing for the current connotations of the term, specifically when used in the phrase “running payroll”.

Running payroll means the monthly procedure that deducts an employee’s tax (PAYE), National Insurance contributions as well as any other monthly deductions that must be made to HMRC before paying that employee.

If these deductions are not made properly or HMRC is not paid in a timely manner, it is the employer that is at fault.

Ouch!

Everything you need to know about payroll

Let’s be blunt: Doing payroll manually is not only a hassle, but it’s also risky. There is simply too much legislation that must be complied with to do it properly, and human errors can lead to costly penalties for employers.

Here’s what you need to do when running payroll:

  • You must deduct the applicable tax for each of your employees and pay it to HMRC as part of PAYE.
  • You must do the same for National Insurance contributions (employer and employee national insurance, as applicable).
  • Deduct any necessary student loan repayments (this needs to be noted on the payslip).
  • Deduct any charitable contributions.
  • P11 forms must be filled in and submitted to HMRC at the end of each year. A P11 form is a form that records all payments made to, and deductions taken from, an employee.
  • P60s must be filled in each year, showing the tax that was paid from an employee’s salary.
  • You must issue your employees with a payslip every time you run payroll, on or before their pay date. If you pay them every week, then you must issue them with this payslip every week. The payslip gives them an overview of their deductions and earnings.
  • If applicable, pension deductions should be made.
  • When you’re done with running payroll, you need to send a Full Payment Submission (FPS) to HMRC. This informs HMRC of all the payments to your employees and deductions you’ve made.
  • In some cases, you have to send an Employer Payment Summary (EPS) by the 19th of the following tax month.

Did we forget something? Probably.

Everything you need to forget about payroll

Since the beginning of the digital revolution, there have been companies engaged in making payroll easier.

Payroll is so involved and so intricate that many providers dedicate their entire offering to this service alone.

Whereas, say, Quickbooks integrates payroll into their accounting and bookkeeping system, companies like BrightPay have dedicated payroll software which takes care of all the myriad tasks you need to know about when running payroll. BrightPay also integrates with Quickbooks, Xero and FreeAgent.

There are other tools around as well. The UK government has a list on its website of all the payroll software that it has officially sanctioned for use. Errors in payroll can be costly, so it’s vital to only use software that has been properly accredited and validated.

Hiring an accountant to run your payroll

Hiring an accountant just makes sense, even if you’re a sole trader.

But the need is increased tenfold if you are a limited company and need to run payroll every time you want to get paid, or if you have employees.

Even though many aspects of running payroll happen “automagically” as a result of integrated software that does the job for us, having an accountant on board who can look over the numbers can result in:

  • Potential tax optimisations regarding your employees’ salaries (both optimising for them and for you as the employer).
  • Additional security against human-error when running the payroll.

Depending on the number of employees you have under your umbrella, hiring an accountant might be the best possible solution to running payroll at your office.

So, what do you need to know about running payroll?

You need to know that payroll is best done using efficient software. And you also need to know that this software doesn’t replace the need for skilled and knowledgeable humans.

If you do use automated tools to run payroll, make sure you have someone who knows the subject inside out to look over the figures and forms at the end of the day. This can either be an accountant or an in-house employee.

The ideal strategy for a successful business could be said to be: Do what you know and delegate the rest.

Payroll is one of those things that is best delegated to:

  • Software
  • Accountants (whether in-house or external).
Accountants London
Company Registration No. 07078392