Paying employees correctly involves more than transferring their wages. Employers must calculate deductions, report pay to HM Revenue & Customs (HMRC), provide payslips and keep appropriate records. A reliable routine can reduce mistakes and unexpected costs.
1. Understand the payroll figures
The risk: Confusing gross pay, take-home pay and the full cost of employing someone can lead to inaccurate budgets.
What to do: Calculate gross wages, Income Tax and National Insurance under PAYE, employee pension deductions and any other lawful deductions. Net pay is the amount paid to the employee. Remember that employer National Insurance, employer pension contributions and other employment costs may be additional to gross wages.
2. Set up PAYE and employee records
The risk: Starting payments before the necessary payroll arrangements are in place can create reporting and compliance problems.
What to do: Check whether you need to register as an employer with HMRC and obtain a PAYE reference before the first payday. Use suitable payroll software and obtain the employee information needed for starter procedures, tax codes and payments. Check the worker’s employment status rather than assuming that describing someone as self-employed settles the issue.
3. Run payroll accurately and on time
The risk: Incorrect hours, rates, tax codes or deductions can leave staff underpaid or result in amounts owing to HMRC.
What to do: Agree a consistent payroll cut-off, check timesheets and changes to pay, and review calculations before payment. Provide an itemised payslip on or before payday. Where pay varies by hours worked, ensure the required hours information is shown. Submit a Full Payment Submission (FPS) to HMRC on or before each payday, subject to applicable exceptions.
4. Meet ongoing employer obligations
The risk: Payroll software alone does not ensure that every employer obligation has been met.
What to do: Pay PAYE and National Insurance to HMRC by the applicable deadline. Assess workplace pension automatic-enrolment duties, including eligibility, contributions and communications. Check National Minimum Wage requirements, holiday pay and statutory payments where relevant. An Employer Payment Summary (EPS) may also be needed in certain circumstances.
5. Keep records and correct errors
The risk: Missing records and unresolved mistakes can make it difficult to explain payments or respond to HMRC queries.
What to do: Retain payroll and PAYE records for at least three years after the end of the tax year to which they relate; other records, including certain pension records, may require longer retention.
Reconcile payroll reports to bank payments and HMRC balances. If an error is found, use the appropriate correction process for the tax year and payment concerned rather than assuming it can always wait until the next payroll.
6. Budget for the true cost of employment
The risk: A business may be able to afford an employee’s salary but overlook the additional costs and cash-flow timing.
What to do: Prepare a payroll budget covering gross wages, employer contributions, pension costs, holiday cover and payroll administration. Review it when pay rates or staffing arrangements change. For example, a £2,000 monthly gross salary is not necessarily a £2,000 total monthly cost to the business.
For further guidance on planning employment costs, read our Budgeting and Forecasting guide.
How Johnson Accountants can help
Johnson Accountants can assist small businesses with payroll processing, PAYE reporting and understanding the financial implications of employing staff. Where specialist employment law advice is needed, an appropriately qualified adviser should be consulted.
Find out more about our accountancy and tax services or book a meeting with Johnson Accountants to discuss your payroll requirements.
This article provides general information for UK small businesses and is not a substitute for advice tailored to your circumstances. Payroll rules and rates can change; check current HMRC and The Pensions Regulator guidance.
