Payroll for Small Businesses

In this article, we discuss;

Managing payroll for small businesses
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Estelle Hardwick

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About Estelle Hardwick

Estelle is the Director of AMR, overseeing the bookkeeping and payroll team within AMR, and has been associated with the company since 2007. She makes sure that AMR provides exceptional support to each and every client.

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Paying your staff the right amount at the right time is at the heart of any business. For many small businesses, the responsibility for handling all payroll matters rests with the owner, or a key employee. As anyone who has been involved in managing payroll knows, it can be complicated, and take up a lot of time – time which could be better spent looking after the business. 

Find out about payroll services from AMR Bookkeeping Solutions

What is payroll?

It’s a basic question, but worth asking. Payroll in its original meaning is a listing of employees and how much you pay them. Sounds simple, doesn’t it? In practice, payroll responsibilities cover a long list of details and reporting requirements and needs to take account of statutory deductions under HMRC’s PAYE (pay as you earn) system. PAYE is the way HMRC collects Income Tax and NI (National Insurance), and is designed to ensure the right amount of tax is collected by HMRC.

There is a suite of other deductions and payments covered by payroll, including sick leave, bonuses, expenses, pensions, holiday pay, maternity leave and student loans. All details need to be correct for each employee, making payroll a task that requires plenty of focus as well as knowledge about what is required.

What happens if your payroll is wrong?

If your payroll isn’t accurate and well-managed, businesses can end up with a huge number of headaches such as lack of clarity on its liabilities, financial penalties and de-motivated staff.

Salaries and tax due to be paid are financial liabilities for a business and need to be recorded with the same degree of accuracy as any sums owed. If your payroll systems aren’t good enough, your business finances can quickly get into a mess.

If you don’t pay employees the right amount on time, you will create ill-will and sour working relationships. It’s a fundamental duty of employers to make sure that staff are rewarded as agreed. Late or incorrect pay and deductions can easily create difficulties for employers and employees alike, as well as being very time-consuming to put right.

Find out more about the pitfalls of late and inaccurate payroll reporting.

What are the legal obligations for payroll?

It is a legal requirement for employment contracts to make it clear to employees what their job is, how they’ll do their work and what their employer will pay them. It will also include hours of work, and entitlements to sick pay and holidays.

If an employer fails to fulfil their side of an employment agreement, they are, in the words of the law, in breach of contract. That can lead to legal action being taken by employees, or at least to various forms of mediation. A breach of contract is always likely to take up time and energy, cause resentment and damage an employer’s reputation. If a case goes to court, there could also be financial penalties with the employer being sued for damages.

Employers also need to ensure that their employees have the right to work in the UK. If the employee cannot produce a passport, birth certificate, or any other relevant document, employers can use the Employer Checking Service to verify their right to work.

Do I need to set up a PAYE scheme?

It is now mandatory to use online reporting with the only exemptions being on issues such as religious belief on computer usage, disability and lack of internet access. You also do not need to register for PAYE if none of your employees are paid £123 or more a week (the Lower Earnings Limit below which no NI is payable – 2022/23 figures). However, you must keep complete payroll records.

How do small businesses pay payroll in the UK?

The steps to follow for setting up a PAYE system is fundamentally the same for small businesses as for larger ones. 

Employers are responsible for completing all PAYE tasks, whether or not they use payroll service providers to support them. Regardless of the size of the business, there is a mandatory range of steps to take.

Step 1

You must register as an employer with HMRC and receive a login for online PAYE.

Step 2

Your payroll reporting will need to use HMRC recognised payroll software, selected either by yourself or your payroll service provider.

Step 3

You must keep accurate and up-to-date records on:

  • pay
  • deductions
  • reports and payments to HMRC
  • tax code
  • expenses and benefits
  • payroll giving to charity

Step 4

Keep HMRC informed about new employees – see our guide

Step 5

Keep a record of pay and deductions, and report them to HMRC before the first payday

Step 6

Make payments to HMRC for all tax and NI due from you.  

Is it better to manage payroll yourself or use a bookkeeper?

To find the right answer, you need to be clear about how much time and focus you devote to payroll as an employer, and to ask yourself how well you do it. The same questions apply if you’ve assigned responsibility for payroll to a member of your team.

For owner managers, payroll can take up a disproportionate number of hours during the working week. That can be time which would be better spent on providing your customers with the services or products which make your business what it is. It’s sometimes difficult to remember the opportunity cost – that is, the missed opportunities for taking your business forward because your time is being swallowed up with payroll management.

If you are paying a member of your team to handle payroll, the same question can be just as relevant – would their time be better spent focussing on your core business activities? Payroll may not occupy your staff’s whole week, but it may diminish how well they perform in their main role.

If yours is a large enough business to pay staff solely to look after payroll, all well and good. But it is always worth evaluating whether it would make more financial sense to use external support. 

At AMR Bookkeeping Solutions we look after payroll and other financial records and processes for a wide range of businesses, limited companies, sole traders and contractors. For some clients we manage the complete payroll operation, for others we support in-house staff in specific areas. We also work with professional practices to free up the time of partners and managers – especially by managing payroll for accountants.

Which payroll software should you use?

There is now a wide range of payroll software to trawl through before choosing the best for your business. 

Basic free software comes from a number of providers, and includes HMRC’s basic payroll online tool. However, do be aware that free tools, including HMRC’s, can leave you needing to make additional efforts on issues such as pensions auto-enrolment, payments and deductions. 

You can see the full range of free and paid for PAYE options in HMRC’s frequently updated guide to PAYE software. There is plenty of information available online, and also from experienced payroll service providers. At AMR Bookkeeping Solutions we are always happy to guide clients through the most appropriate software for their needs, and to provide training as required.    

The right software can deliver very real benefits in terms of speed, and accuracy of reporting. You can rely on HMRC-recognised systems to comply with the government’s real-time information (RTI) initiative which was introduced in 2013 and is designed to ensure the right amount of tax is paid during the course of the tax year rather building up large payments at the end of the tax period.

What does payroll software do?

Payroll software essentially replaces what employers used to do on spreadsheets or hand-written records. As with all digital record keeping, software helps in terms of speed, accuracy and access to stored information. For payroll, the records and calculations your software will cover are:

  • your employees’ details
  • your employees’ pay and deductions
  • reporting payroll information to HMRC
  • working out how much you need to pay HMRC
  • calculating statutory payments such as maternity or sick pay

The software is significantly more reliable than spreadsheets which are prone to errors through inaccurate data entry, and can, in spite of best efforts, be unstable.

Which payroll software features do you need?

Payroll software also offers significant help in a number of payroll functions, including:

  • production of payslips
  • recording pension deductions
  • making pension payments
  • paying different people over different periods (for example both weekly and monthly)
  • sending reports to HMRC

PAYE software and MTD

Ideally, businesses will want their payroll systems to link seamlessly with other digital financial management systems. With the government’s Making Tax Digital (MTD) initiative firmly in place, the complete move of records online is very much part of the way businesses will need to operate in the years to come. At AMR Bookkeeping Solutions we have a strong track record of providing expert advice on all aspects of MTD, and can ensure that your payroll systems are fully integrated into your digital record-keeping, reporting and payments.    

Can I use paper returns for PAYE?

It is possible to use HMRC’s forms for paper returns for PAYE, but you must have HMRC’s agreement for you to do so. The forms cannot be downloaded and will be sent to you by HMRC for completion and return. The process is significantly more cumbersome than online reporting, and does not relieve businesses of any obligations for providing full information. 

Can contractors, freelancers and temps go on payroll?

For the length of a contract, it is perfectly allowable to add contractors to your payroll, in which case they will be taxed as PAYE employee. 

However, contractors, freelancers and temps who supply their services through their own limited company (and outside IR35), usually pay tax and NI contributions through their self-assessment tax return. Another option for contractors is the use of umbrella companies where they are taxed as PAYE employees.

Does your business manage payroll as efficiently as possible? Get in touch with AMR Bookkeeping Solutions for a free consultation.

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