Running Payroll - A Step-by-Step Guide For New Businesses

If you’ve gotten to the position where you’re looking to run payroll for your business, then congratulations - for this means that you are about to take a major step on your quest to becoming a fully fledged operation. 

Paying your employees (and yourself, of course) correctly is essential, as well as being a legal requirement, and there are a number of steps that have to be taken each month. These will ensure that not only will you pay everybody correctly and on time, but that you’ll comply with HMRC reporting and payment deadlines. 

So read on for the lowdown on how to run payroll for small businesses. We’ll outline the steps to take to successfully run payroll each month (or your chosen pay period), along with any costs associated with doing so, plus the various ways to run payroll.

What does running payroll mean?

The phrase ‘payroll’ refers to a list of your employees, and what you will pay them. It includes salaries, bonuses, allowances and benefits. Deductions - including income tax, National Insurance, pension contributions and student loan repayments - are also included as part of your payroll.

When we say ‘running payroll’, we mean the act of paying the people on that list, at the same time as making the appropriate deductions, paying what is owed to the relevant bodies and reporting your payroll activity to HMRC.

What are the different ways of running payroll for your company?

Whilst the steps for running payroll will be broadly the same for all companies, there are several different ways that you can administer payroll each pay period.

Firstly, we have the old school spreadsheet method. This is the cheapest way to run payroll, but it does mean you’ll need to calculate everything yourself using formulas, which can be time consuming as well as prone to mistakes. You also run the risk of your payroll documentation not being in keeping with what HMRC expects. For example, the reporting of RTI (Real Time Information) - or a report detailing pay and deductions - must be submitted electronically.

Alternatively, you can have an outsourced payroll specialist, such as an accountant or payroll bureau, handle the running of payroll for you. Whilst this could be a good option for very new businesses, as you grow you’ll need to communicate more regularly with them in regards to new starters and general changes to the payroll such as salary increases, bonuses etc. And many providers charge additional fees for these elements.

Third, there is the option of online payroll software. This automates large elements of the payroll process, including calculating all pay and deductions based on inputting a gross salary, and allows you to have full control over the whole process.

Many payroll software platforms also sync with popular pension, accounting and HR platforms that allow small businesses to do everything from one convenient place. The best software will also create reports for HMRC in the correct format in an instant, saving you having to worry about complying with the tax authorities.

How to run payroll - the steps to take every payroll run

Below, we outline the steps to take each and every payroll run. Be sure as well to give our payroll best practices blog post a read, to ensure you are integrating good principles at every step.

Calculate and record gross employee pay

By taking each gross annual salary and dividing it by the number of payroll runs you will undertake over the course of a year, that is the gross amount owed to that employee in that pay period. Most businesses pay their staff monthly, and this is the recommended frequency that aligns with HMRC reporting requirements, as well as most payroll software.

So for a monthly payroll run, you would divide the annual salary as stipulated in the employee’s contract by twelve.

If you are using payroll software, the gross employee pay would be entered into the system once, with all deductions calculated automatically every time you run payroll, even when tax codes change. If opting for the more manual method, then it’s time to move onto the next step.

Take away pre-tax deductions

If running payroll manually, you’ll need to calculate pre-tax deductions from the gross amount yourself. Thankfully, we’ve built a handy salary calculator which will break down and illustrate each element for you. 

These will be as follows:

• National Insurance (employee portion) : there are different NI ‘classes’, meaning that those with differing arrangements, for example self-employed, if you offer benefits etc., will be liable to differing amounts of National Insurance. In addition to the employee portion deducted from the gross salary you as a business will also need to understand what you need to pay when it comes to National Insurance;

• pension contributions : split into two amounts, one being a percentage of the gross salary that you will contribute towards the employee’s pension scheme as a business, and the second being the amount that will be deducted from the employee’s final pay;

• student loan repayments : again, this will be a percentage of the gross salary, dictated by how much that employee earns, or whether or not they took out a student loan in the first place.

Remove PAYE

Now comes the calculation of the amount of income tax that will be deducted from gross pay. There are varying income tax brackets depending on salary, so you’ll need to understand what is to be deducted from each pay packet (payroll software does this automatically for you).

If you are paying your staff member a bonus, you’ll deduct and record the tax on that benefit at this stage.

Time for those post-tax deductions

Tax-free items, such as child support payments, are taken out of the equation at this stage.

Pay your staff the rest

And after all of that, your employee gets to keep the rest! Be sure to know exactly what you have taken out beforehand, as this will need to be reported to HMRC in an itemised fashion, and when it comes to sending the relevant payments to them, you’ll want to know how to be able to reconcile those costs against your company accounts.

Send reports of what you’ve done to your staff and HMRC

Your staff will expect a payslip at the end of each pay period, detailing a breakdown of their salary in terms of the gross pay amount, all various deductions, plus the final net amount. Most payroll software generates payslips automatically - one less thing to worry about each payday. 

And finally, you’ll need to let HMRC know pay activity for each employee, including taxes and deductions, as well as the company as a whole. This is what’s known as Real Time Information, or RTI. And there are two elements to this - a Full Payment Submission (FPS) and Employer Payment Submission (EPS). Both need to be sent to HMRC by a particular date each month, with any payments due following soon after.

Check out our article on RTI for a full breakdown of your responsibilities as an employer, and to help you remain compliant at all times.

How much does it cost to run payroll?

How much it costs to run payroll depends on a number of factors. Usually, the determining factor is how many employees you have, as payroll providers - software based or otherwise - tend to charge a per payslip fee. Outsourced providers such as payroll bureaus and accountants often charge additional fees for every new starter added onto the system, as well as to create documents such as P45s, P60s and P11Ds (for benefits reporting).

You should always be very clear as to any additional costs of running payroll, so be sure to ask this of your prospective software, accountant or bureau at the initial consultation stage.

Running payroll: why use payroll software?

We’ve alluded a few times throughout this piece to the benefits of using an in-house owned payroll software to run everything yourself.

A huge benefit is the speed with which everything can be done, with very few manual inputs. For example, calculations (automated), the generation of payslips (automated), the collation of liabilities for reporting to HMRC (automated) and the creation of documents such as P45s, P60s and other employee forms (all automated).

Weaved into the automation side of things is a far lower risk of errors (after all, the only point of manual data entry is for the gross salary). As a small and flourishing company, having that time back in your day for meaningful growth initiatives will help you get to where you want to be a lot quicker.

And above all, payroll software gives you the control over your own company’s payroll destiny. There’s no time spent going back and forth with your payroll provider, constantly having to ask for things, querying fees or to pass on the endless questions on deductions from your staff.

Payroll software puts you (and your staff, through a limited access login) in the driving seat, empowering you to become a payroll whizz even with little to no knowledge of the subject.

Come and learn about the wider benefits of payroll software, and the capabilities of PayFit in general, on a short demo with one of the team.