How to start and manage payroll effectively

Payroll is a crucial aspect of running a small business. As you're calculating and paying people's wages, as well as deducting taxes and benefits, you can't afford to get it wrong.

Whether you're just starting out or looking to improve your existing processes, mastering payroll management is key to keeping your team happy and your operations running smoothly.

In this blog, I'll walk you through the essential steps to kickstart your payroll and share some practical advice and actionable insights to help you conquer payroll with confidence.

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What is payroll?

Payroll is the process of calculating and paying employees' salaries and wages within a business. It involves:

• keeping track of the hours staff have worked

• calculating their earnings

• deducting taxes and other payments (such as National Insurance, pension contributions and student loan repayments)

• making sure employees receive accurate and timely payment for their work

• providing payslips

For small business owners, payroll is an essential part of managing the workforce. It's the system by which staff are paid for their services and, done properly, helps keeps employees motivated and satisfied.

Payroll also involves complying with various laws and regulations, including tax laws and employment standards.

When do you need to start payroll?

Generally, you should start running payroll as soon as you've hired your first employee. This not only makes sure you're paying them on time, but also helps you keep to the relevant laws (see Payroll law in the UK below). It's important to know that you can be penalised for failing to pay employees on time or accurately.

If your small business has only a few employees, you may be able to handle payroll yourself in the early stages. However, as the company grows and you recruit more staff, you might need to put a more formal payroll system in place.

As well as setting up your payroll system, you must also think about how frequently your payroll cycles are going to run. You might choose to run payroll every week, fortnight or month, depending on the needs of the business and your employees' preferences for when they'd like to be paid.

How do you manage payroll as a small business?

There are several ways to manage your payroll. If you decide to do it yourself in-house, you might use:

• manual processing – i.e. spreadsheets (Excel or Google Sheets, for example) or traditional pen and paper

• payroll software

If you'd rather entrust someone else with your payroll, you can outsource the responsibility to a dedicated payroll company that will take care of it for you.

Setting up payroll starts out simply enough. To pay your employees, you need to register as an employer with HMRC. Most companies and sole traders can do it online at the government's website.

When you register, you'll receive your PAYE (Pay As You Earn) reference number. Now you can start paying your staff. How you go about it is up to you, but here are some of your options.

Manual processing

While manual processing can be a low-cost option for small businesses with simple payroll needs, it may not be the most efficient solution as your business grows and your payroll becomes more complicated.

It's important to weigh the pros and cons and consider consulting a finance or payroll professional to find the best approach for your business.

Can I manage payroll in Excel?

Microsoft Excel is a powerful tool that many people use to track and organise their finances, so it's natural to consider using it for payroll as well.

The short answer is yes, you can manage payroll in Excel, but there are some considerations to keep in mind. While Excel is great for organising and calculating data, it does lack the advanced features and capabilities that dedicated payroll software offers.

Ultimately, the decision to manage payroll in Excel or use dedicated payroll software depends on:

• your business's size and complexity

• how comfortable you are with technology

• your willingness to invest in a payroll solution

Challenges of using Excel for payroll

• Making sure your data is accurate and that you're keeping to tax laws and regulations. Payroll involves complex calculations and deductions, which can be prone to human error when done manually in Excel.

• Hard to stay up to date with changes in tax laws. This can be difficult when using Excel, as it doesn't have built-in tools to help with compliance.

• Takes time and effort to set up and maintain a payroll system in Excel. You'll need to create and update formulas and spreadsheets to accurately calculate wages, taxes and deductions for each employee.

How do I manage payroll in Excel?

Start by setting up an Excel spreadsheet that can track employees' hours, wages and deductions. You can do this by creating separate columns for each category: Employee name, hours worked, hourly wage, and deductions for taxes or benefits.

Using formulas and functions in Excel can help automate calculations for things like overtime, taxes and net pay.

A vital aspect of managing payroll in Excel is to make sure you're entering accurate data and keeping to the relevant laws and tax regulations.

This may mean staying up to date on changes in tax rates, deductions and other relevant information that could affect employees' pay. You must also keep thorough records and back-ups of payroll spreadsheets to protect your data's integrity and security.

Managing payroll in Excel means being highly organised and communicating openly with employees. For instance, keeping track of requests for time off, sick days and other absences can help make sure you're paying staff accurately.

Communicating clearly with workers about pay periods, deadlines for submitting hours, and any changes to payroll procedures is also crucial for a smooth payroll process.

Finally, using Excel's data analysis and reporting features can give you valuable insight into payroll trends, expenses and budgeting. By creating pivot tables and charts, you have a visual representation of the data that you can use to make informed decisions and anticipate payroll changes in the future.

Using payroll software for small businesses

One common way to manage payroll is using small business payroll software. Payroll software can automate many aspects of the payroll process, such as calculating wages, taxes and deductions and generating payslips. This can significantly reduce the time and effort it takes to manage payroll, while lowering the risk of mistakes.

Using dedicated payroll software can streamline the entire process and help you obey tax laws. These systems often have built-in tools for automating payroll processes, working out tax, and generating reports. They also typically offer support for direct deposit, making it easier to pay your employees accurately and on time.

When you process your payroll, you'll need to submit a report (Full Payment Submission) to HMRC via your payroll software. You also need to submit this report before or on the day you're making salary payments to employees and not later, to avoid any penalties.

What software can I use to manage payroll?

Here are some of the options currently available to small businesses in the UK. You can learn more in our guide to accounting and payroll software.

• Sage Payroll

  • Benefits: Scalable solution suitable for businesses of all sizes, extensive payroll features, customisable reporting, seamless integration with other Sage products.

• QuickBooks Payroll

  • Benefits: Simplified payroll processing, automatic tax calculations and filings, employee self-service portal, integration with QuickBooks accounting software.

• Xero Payroll

  • Benefits: Cloud-based payroll solution, automatic updates for tax rates and changes in the law, mobile accessibility, seamless integration with Xero accounting software.

• FreeAgent

  • Benefits: Easy-to-use interface, automated payroll processing, support for a number of payment schedules, HMRC-compliant submissions, integration with FreeAgent accounting software.

• BrightPay

  • Benefits: User-friendly interface, automation features, compliance with HMRC regulations, real-time reporting, HMRC integration, excellent customer support.

• KashFlow Payroll

  • Benefits: Simple and intuitive payroll processing, automatic calculation of tax and National Insurance, direct integration with KashFlow accounting software.

• Moneysoft Payroll Manager

  • Benefits: Affordable payroll solution, user-friendly interface, support for various pay frequencies, automatic updates for tax legislation.

Each of these payroll software options has its own set of features and benefits, so it's essential to consider your needs and budget before making a decision.

Outsourcing to a payroll service

Many businesses choose to outsource their payroll to a third-party provider that has expertise in payroll processing. This can be particularly beneficial if your small business lacks the resources or knowledge to manage payroll in house. Outsourcing payroll can also free up time for you and your staff to focus on other aspects of the business.

One of the biggest benefits of outsourcing payroll is that it avoids costly mistakes. By outsourcing to a company that specialises in payroll, you don't need to worry about issues with paying staff or failing to meet the rules and regulations.

While there are many benefits to outsourcing payroll, it's important to carefully evaluate potential providers to make sure they're reputable and reliable. Consider factors such as the provider's track record, expertise and the level of customer service they offer.

What does the law say about payroll in the UK?

There are specific laws and regulations that govern how payroll should be handled in the UK. These laws are in place to make sure employees are paid fairly and accurately, and that businesses meet their legal obligations.

• Employment Rights Act 1996. One of the main laws that govern payroll in the UK. It sets out the basic rights and responsibilities of both employers and employees, including the right to be paid for work done. It also lays out the rules around deductions from pay, such as tax and National Insurance contributions.

• HM Revenue & Customs (HMRC) payroll rules. These include reporting employees' earnings and deductions, paying PAYE and National Insurance contributions, and keeping accurate financial records.

• The Working Time Regulations 1998. These set out the rules for working hours, rest breaks and entitlements to annual leave, all of which have an impact on payroll.

  As an employer, you must keep to these regulations, which means making sure you're paying employees for the correct amount of time worked and allowing them their entitlement to annual leave.

There are also specific laws and regulations that govern payroll for certain groups of employees, such as minimum wage laws and rules for paying temporary workers and contractors. It's really important to be aware of them, and keep to them, to avoid any potential legal issues and fines.

Tips for managing payroll effectively

1. Keep it simple

Payroll is one of those things that can be overly complex, and the importance of simplifying it can't be overstated.

Many companies, especially small and medium-sized ones, have their own quirks about how they manage their payroll. This can make it difficult for somebody else to step in, or for the business to train someone new. Keep things as simple as possible wherever you can.

2. Create a schedule

At least once per year, and preferably more often, it's important that your payroll professional takes some time to create a payroll calendar. This will allow you to highlight any dates that may cause a lag in your employees getting paid.

It will also let you plan for any potential shortcomings or other issues that may arise from holiday closures or oddities in the calendar.

Making a mistake with payroll is a sure-fire way to damage employees' morale, so being aware of these dates ahead of time is crucial.

3. Rely on automation

As explained above, finding the right software to help with payroll can automatically take care of simplifying and scheduling, freeing up valuable time for your payroll specialist.

It also eliminates the potential for human error in payroll processing and gives you a crystal-clear picture of your finances. There are many options available these days that are easy to learn and straightforward to maintain.

4. Brush up on the law

Payroll rules and regulations can change frequently and for any number of reasons. You must stay informed on any changes and proactively plan for them.

A lot of time can go into correcting a payroll error, so know what's happening ahead of time to avoid this.

Now it's common to have employees working remotely, you should also be aware of any regulations that may pertain to staff who are geographically located in a different area from your business.

Final thoughts

Payroll is most effectively managed when it's simple, straightforward and co-ordinated. When it starts getting tough to keep it that way, it's likely a sign that your company has grown and you're ready for more robust support.

Relevant resources

• How to avoid common payroll mistakes in your small business

• An essential guide to how much you should pay yourself

• How to choose the right accounting software for your small business