Understanding your legal obligations
Before diving into the process, it’s crucial to understand what’s legally required. As a UK employer, you must:
- Register as an employer with HMRC before your first payday
- Operate PAYE (Pay As You Earn) for employees earning over £123 per week or £533 per month
- Calculate and deduct Income Tax and National Insurance contributions
- Auto-enrol eligible employees into a workplace pension scheme
- Keep accurate payroll records for at least three years
- Submit Real Time Information (RTI) returns to HMRC
Now, let’s move on to the step-by-step process that will (hopefully) make payroll seem like a stroll in the park.
Step 1: Gather essential employee information
Start by collecting all necessary details from each employee.
You’ll need their full name, address, date of birth, National Insurance number, and P45 from their previous employer (if applicable).
For new employees without a P45, you’ll need to use a starter checklist to determine their tax code.
Don’t forget to collect bank details for salary payments and any relevant information about student loans, court orders, or other deductions that might apply.
Step 2: Set up your Payroll System
Choose between manual calculations, spreadsheet templates, or dedicated payroll software.
For most small businesses, investing in payroll software saves time and reduces errors. Moreover, most options are only £30-80 per month, with prices varying based on the number of employees.
Popular UK options include Employment Hero, IRIS, Sage Payroll, and QuickBooks Payroll. We have our preferences, so feel free to get in touch with us if you’d like to know more about that.
Just ensure your chosen system can handle real-time information (RTI) submissions, calculate tax and National Insurance automatically, manage different pay frequencies, and generate the reports you need for your records.
Step 3: Determine Pay Periods and Rates
Decide how frequently you’ll pay employees; options include weekly, fortnightly, four-weekly, or monthly. Monthly payroll is often easier for small businesses to manage, but consider your employees’ preferences and cash flow requirements.
Check out our article on weekly vs. monthly payroll to find out which is best for your business.
Set up each employee’s gross pay, whether they’re salaried, hourly, or commission-based, and remember to factor in any regular allowances, benefits in kind, or additional payments that form part of their package.
Step 4: Calculate Gross Pay
For each pay period, calculate the total gross pay before any deductions.
This includes basic salary or wages, overtime payments, bonuses, commission, holiday pay, sick pay (including Statutory Sick Pay if applicable), maternity and paternity pay and any taxable benefits.
Be particularly careful with overtime calculations and ensure you’re complying with minimum wage legislation.
As we mentioned at the start, it only takes a couple of errors for people to start looking for employment elsewhere, so getting overtime calculations correct is vital.
Also, remember that different rates may apply for employees under 23, apprentices, and those receiving accommodation.
Step 5: Apply Tax Codes and Calculate Income Tax
Each employee has a tax code that determines how much Income Tax to deduct.
The standard tax code for 2024-25 is 1257L, but employees may have different codes based on their circumstances.
Use the tax code to calculate the tax-free allowance for the pay period, then apply the appropriate tax rates to any income above this threshold.
The current rates are 20% basic rate, 40% higher rate, and 45% additional rate.
Step 6: Calculate National Insurance Contributions
Both employees and employers pay National Insurance contributions.
For 2024-25, employees pay 12% on earnings between £242 and £967 per week, then 2% on earnings above £967. Employers pay 13.8% on earnings above £175 per week.
Different rates apply for employees under 21 and apprentices under 25, so ensure you’re using the correct calculations for each individual.
Step 7: Handle Pension Contributions
Under auto-enrolment legislation, you must enrol eligible employees into a workplace pension scheme.
Eligible employees are aged 22 or over, under State Pension age, and earning more than £10,000 per year.
The minimum contribution rates are 8% of qualifying earnings, with employees contributing at least 5% and employers contributing at least 3%.
These contributions are calculated on earnings between £6,240 and £50,270 per year.
Step 8: Process Additional Deductions
Calculate any other deductions that apply, such as student loan repayments, court orders, union dues, or voluntary deductions like additional pension contributions or cycle-to-work scheme payments.
Student loan deductions depend on which plan the employee is on (Plan 1, Plan 2, or Postgraduate Loan), each with different thresholds and rates.
Step 9: Calculate Net Pay
Subtract all deductions from the gross pay to arrive at the net pay, i.e., the amount the employee will actually receive. Double-check your calculations to ensure accuracy, as errors can be costly and time-consuming to correct (and obviously, could lead to people leaving… have we mentioned that already?)
Step 10: Generate Payslips
Provide each employee with a payslip showing their gross pay, all deductions, and net pay.
Payslips can be provided electronically or on paper.
Still, they must include specific information required by law, including the employer’s name, employee’s name and payroll number, pay period, and breakdown of pay and deductions.
Step 11: Process Payments
Transfer the net pay to each employee’s bank account. Most businesses use BACS(Bankers’ Automated Clearing Services) for salary payments, which typically take three working days to process.
Don’t forget to account for bank holidays when planning payment dates, and ensure you have sufficient funds in your account to cover all salaries and associated costs.
Step 12: Submit Real-Time Information (RTI) Returns
Submit your Full Payment Submission (FPS) to HMRC on or before your payday.
This return includes details of all payments made to employees and deductions calculated. Late submissions can result in penalties, so ensure this deadline is never missed. You already pay HMRC enough, so I’m sure you don’t want to be sending them any more on account of missed deadlines.
You may also need to submit an Employer Payment Summary (EPS) if you’ve made no payments in a tax month, need to recover statutory payments, or want to report the apprenticeship levy.
Step 13: Pay HMRC
Calculate the total amount due to HMRC, which includes all Income Tax and National Insurance deducted from employees, plus the employer’s National Insurance contributions.
This payment is typically due by the 22nd of the month following the pay period (19th if paying by post).
Set up a direct debit or make manual payments through your business bank account or HMRC’s online services.
Step 14: Maintain Accurate Records
Keep detailed records of all payroll transactions, including gross pay, deductions, net pay, HMRC payments, and copies of all RTI submissions.
These records must be retained for at least three years and may be required for HMRC inspections or employee queries.
Consider backing up digital records and maintaining both electronic and paper copies of critical documents. The last thing you want after following this article and doing everything correctly is for documents to get lost.
Year-End Procedures
At the tax year end (5th April), you’ll need to provide P60s to all employees who were on your payroll on that date.
You may also need to complete P11D forms for employees receiving benefits in kind worth more than £8,500 per year; however, you only have to submit P11D forms if you do not payroll your benefits. Payrolling benefits via salary sacrifice can save you a huge amount in your employer’s NI contribution. To find out more, check out Pay Perk Plus.
Review your processes annually and ensure you’re up to date with any changes to tax rates, National Insurance thresholds, or pension contribution requirements.
Common Pitfalls to Avoid
Many small businesses make costly mistakes that could easily be avoided.
- Never miss RTI submission deadlines, as penalties start from the first late submission.
- Always double-check tax code changes and ensure you’re applying the correct rates for different age groups and circumstances.
- Be particularly careful with starter and leaver procedures, ensuring you collect P45s from new employees and provide them when employees leave. Mistakes here can lead to employees paying the wrong amount of tax.
Getting Professional Help
While many small businesses manage payroll in-house, don’t hesitate to seek professional help if you’re unsure about any aspect.
The cost of professional payroll services or accountancy support is often outweighed by the time saved and peace of mind gained. Global HRIS, for example, offers free payroll consultancy to organisations with less than 50 employees.
Consider whether outsourcing payroll might be more cost-effective than managing it internally, especially as your business grows and payroll becomes more complex.
Staying Compliant and Up to Date
HMRC regulations change regularly, so make sure you stay informed about updates that might affect your payroll process.
Subscribe to HMRC’s email alerts, regularly check their website, and consider joining employer forums or professional associations for ongoing support and guidance.
Remember that getting payroll right isn’t just about compliance; it’s about maintaining trust with your employees and ensuring your business runs smoothly.
Accurate, timely payroll processing helps create a positive workplace culture and reduces the administrative burden on your business.
By following this step-by-step approach and maintaining sound systems and processes, you’ll find that payroll becomes a routine part of your business operations rather than a monthly source of stress.
Are you looking for assistance with your payroll? Give us a call. We’re always happy to help.
+44 161 317 2903
hello@globalhris.co.uk
