How Do I Set Up Payroll in the UK?

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Don’t Use Excel

Computers do make payroll much easier than it was when we opened our doors nearly seventy years ago, but you have to use the right program for the job. Instead, unfortunately, some business owners are tempted by Excel. After all, they’re probably already paying for it in an Office subscription, and it can handle maths.

The sad truth is that Excel is prone to making errors once a spreadsheet becomes complex enough (and even with just a few employees, a spreadsheet covering payroll will). It’s also difficult to spot those errors creeping in and, even when you realise a mistake has been made, finding out where can be a nightmare.

If you have fewer than ten employees, then HMRC offers a free piece of software called Basic PAYE Tools. You can use that instead while your business grows to the point where something else is needed. (By that time, you’ll probably either have accounting software or a business accountant in any case).

Moving to Payroll

Most businesses start as sole traders, and sole traders don’t pay themselves a salary or wage (although they may choose to treat they payments as one). Technically, any payment a sole trader makes to themselves from the profit of their business is called a ‘drawing’.

Once you cease to be a sole trader, or if you go straight to starting up a business with employees, you will need to be ready to run payroll.

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Getting Ready to Run Payroll

You will also need to register as an employer with HMRC. This has to be done before your first payday, but it cannot be done more than two months before the first payday.

HMRC estimates that it can take up to 20 working days (or four weeks) to get your employer PAYE reference number. Thankfully, there is a process if you need to pay an employee (including yourself) before you receive this. After running payroll, store the full payment submission, and submit it to HMRC with the reference number as a late full payment submission.

Whenever you take on a new employee (including yourself) you must inform HMRC. You will need some employee information to calculate their tax code. In many cases, they will be able to provide you with a P45 from their last employment. If not, HMRC has a ‘starter checklist’ to be run in these circumstances.

HMRC recommend checking with your new employee whether they have student or postgraduate loans through the Student Loans Company even if you have been given a P45. You will want to know what plan to use for deductions.

You then make a Full Payment Submission (FPS) to HMRC to register this employee and can use the same information to set up a new employee.

The Payroll Running Process

With that done for every employee you currently have you can run payroll in your software! (And after reading through that, hopefully you can see why we recommend not using Excel, especially with HMRC offering a free option for under ten employees).

Your software will:

• Record everyone’s pay, including salary or wages as well as any bonuses, commission or other pay
• Calculate the deductions owed
• Calculate your Employers’ National Insurance contribution (if they’re earning above £242 per week)

Most payroll software will also produce payslips for each employee and create an FPS to report pay and deductions to HRMC. If not, you’ll have to do this separately, or if you’re using accountants to run your payroll, they will provide them.

Payments to HMRC are due on the 22^nd of the next tax month (or the 19^th if you pay by post) and missing this deadline may incur a penalty. Remember, tax months begin on the 6^th, so if you pay employees weekly, take this into account.

Payroll is something you absolutely have to get right (even if you set aside the consequences of late or incorrect payments to HMRC, incorrectly paying employees can destroy their morale) so we really do encourage you to only run payroll if you are confident you can do so correctly, have the time to do so each payment cycle, and can keep up to date with changing legislation.

If you’d like to discuss any questions arising from this or simply would like to take advantage of our professional payroll services for Lancaster and Morecambe businesses, contact us today and we can help.