Small Business Payroll Explained!

Kirsty Young Employees, Limited Company

As a small business, payroll can seem like yet another daunting task to have to manage. Payroll does bring its own complexities with it, so in this short blog we’ll cover the basics for you.


Why might I need payroll?

There are usually two reasons you might need to consider running a payroll as a small business:

  • You’re a limited a company and need to pay yourself some salary as a director.
  • You’re a business that has employees and needs to pay them.

Running a payroll is often referred to as ‘operating a PAYE (Pay As You Earn) Scheme’. You may find information that makes reference to ‘paying a director under PAYE’ under ‘PAYE’. This all refers to running a payroll.

If you are wondering if paying yourself through payroll is a good idea as a director, check out our previous blog on the subject.


What do I need to do first?

Once you have decided that you can afford to take on an employee, the first step is to register your new employer with HM Revenue & Customs.

Even if you are just paying yourself as a director of a limited company, you will need to register as an employer. You will need to fill out an online form with your business details.

If you are taking on an employee, you should of course make sure you have the paperwork in places. This includes:

When you register as an employer, you will get an Employers PAYE reference. This is sometimes needed by your insurers.

Once you have registered for a PAYE scheme, you must regularly report to HMRC or you will receive a fine.


I have a PAYE scheme, so how do I ‘run’ payroll?

You need payroll software – the days of doing this on paper have long gone!

HMRC do have a free tool, and there are some other software providers that offer (basic) free software also. Generally, these are only good for paying under 10 employees. You can find a list of free payroll providers here.

There are plenty of paid payroll software providers. Big players such as Xero and QuickBooks who sell this service as a bolt-on to their accounting software.

With payroll software, you usually need to:

  • Add new employees to the system
  • Set up their pay
  • Set up their tax codes
  • Run the software to calculate the amounts to pay your team
  • Supply payslips (printed or PDFs)
  • Report to HMRC through the digital reporting inside the software
  • Pay any tax deducted from their wages to HMRC by the 22nd of the month following

Paying employees monthly is much easier from this perspective, as you only need to calculate and report once a month. For more detail on this process, HMRC have a small guide here.

The other option is to outsource your payroll to a payroll provider, (such as us!). This ensures the right deductions are made, and that payroll is done on time, every time. Again, monthly payroll is cheaper to outsource as the calculations are carried out once a month, rather than each week.


What else do I need to consider?

Workplace pensions are a biggie. They are basically a form of employee rights protection. The workplace pensions will come into play when you have a team member earning over £10,000 a year (at time of writing).

When this happens, generally you will need to ‘auto enrol’ them into a pension scheme. Once on the scheme, you will need to deduct pension contributions from their pay. As the employer you must contribute to an employee’s workplace pension as well. The employee can choose to opt out of the scheme, but only after they’ve been entered.

For you as the business owner, employee workplace pensions have some cost and/or hassle to set up a pension scheme whether it was ultimately needed or not. As a side note, most directors in a small owner managed business scenario won’t need a workplace pension.

We will do another blog on this subject, but for now you can see a guide on the HMRC site.


What happens if I don’t do all of this?

The usual thing – fines! HMRC issue fines for not following the rules, as does the Pensions Regulator.

From your employees’ point of view, if you don’t submit payroll records, HMRC and other government bodies (such as the Universal Credit system) will not have any record of their earnings. This can cause problems for them.

As a business, if you don’t report your payroll correctly, you could also put your tax deduction for the wages paid at risk.


I’m still perplexed about payroll

Ask your accountant for help. If you don’t have an accountant, or are looking to outsource running your payroll, we’d love a chat about how we can help.