How to do Payroll in the UK

It can be an exciting time when you’ve reached the stage of hiring your first employee. It’s a huge step in any small business’s journey to expand your team, but one that must be done carefully to ensure you remain compliant with HMRC.

Once you’ve hired an employee, you’ll need to set up PAYE and begin the payroll process. There might be a lot of pressure if you’ve never touched payroll before, but trust us, payroll doesn’t have to be a pain.

How to Pay Employees

Here’s what you need to do:

1. Register with HMRC as an Employer

HMRC (His Majesty’s Revenue and Customs) is the UK’s tax, payments and customs authority, including PAYE (Pay As You Earn).

To be able to pay employees, you’ll need to be registered as an employer. Even if you’re only going to be paying yourself as a director, you still need to register with HMRC.

You need to enrol with HMRC no more than 2 months prior to your first payday, but at least five working days before. This allows you to get your employer PAYE reference number in time.

Most limited companies can register online, but there are some who may need to enrol in different ways.

2. Choose How You Want to Run Payroll

There are two ways you can do payroll:

Using a payroll software provider
Using an accountant or payroll support company

For those who prefer to do things themselves, payroll software can be a more affordable and instant option. Rather than having to find someone else to run payroll for you, you can just do it yourself and quickly. It does mean that you need to find a payroll software provider who is prepared for small businesses and doesn’t charge extortionate monthly fees.

By using an accountant, you can instantly and efficiently run payroll without the stress. They’ll be able to guide you better, but the additional cost isn’t always feasible for small businesses, especially if they’re already paying staff.

3. Start Record Keeping

HMRC, and the PAYE system, require extensive record-keeping. It’s best to do this digitally using a payroll or similar software, such as HR software, as these are less likely to be destroyed, lost or stolen. With the rise of cyber-attacks and infrastructure challenges, having clear digital records has become a necessity for all businesses, as it enables continuity and transparency. Whether you’re doing payroll yourself or getting someone to do it for you, records are an important part of being an employer and doing payroll.

You need to keep a record of:

What you pay your employees
All and any deductions made (National Insurance, pensions etc.)
The reports you’ve made to HMRC
Leave and illness
Tax code notices
Taxable expenses and benefits
Any giving scheme documents

You also need to keep records that prove you’ve paid minimum wage. Not showing that you have paid minimum wage can result in a fine from HMRC.

With all your records, you’ll also need to prove that you’re in line with data protection regulations. This includes how you transfer it to a third party, whether a payroll software or an accountant.

4. Set Up Your First Employee

Before you can start paying your employee(s), you need to set up your first employee in a timely manner. If you they don’t have a P45, you will need to register them with HMRC using the new starter checklist. This information will enable you to work out their latest tax code using HMRC’s tool, meaning that you can correctly update payslips and avoid the need for rebates or overpayment by an employee. It’s best to get the employee to fill in the new starter checklist, as this ensures the information is correct, then cross reference this against their P45, if it’s available.

At this point, you’ll need to consider if your employee has any student loan repayments as well as check their pension enrolment status.

Once you have this information, you can add them to a payroll software and prepare to run your first pay run.

5. Preparing your First Pay Run

When using a payroll software, your first pay run is always a new experience.

Here’s what you need to do:

Record what you are paying each and every employee, from their basic pay, holiday pay or any statutory pay.
Calculate all and any deductions. These include things like taxes, national insurance, pensions etc.
Work out your contributions for national insurance, pensions and anything else.
Generate your payslips. This should be able to be done within your payroll software, as PDFs, letters or even automated emails.
Report pay and deductions to HMRC using the FPS (Full Payment Submission). Again, your payroll software of choice should be able to handle the task.

Then, the next tax month, you’ll need to:

Claim your reductions from HMRC through your EPS (Employer Payment Summary).
Check what you owe HMRC and pay them by the 22nd of the month. If you pay less than £1,500 a month, you may be able to pay HMRC quarterly. Contact them to find out more.

Remember, if you don’t pay HMRC on time, you can get fined, and your employees may suffer with their benefits and delays in receiving payment.

Repeat!

Once you’ve done your first pay run, take a deep breath, and celebrate! Having employees and paying them is a huge achievement for you and your business.

Each month, you’ll need to prepare a pay run, pay your employees and pay HMRC. This can seem daunting and time-consuming, but with Staffology’s automation, each month we can run all of the automatic processes for you, .

How Staffology Can Help You Pay Employees

At Staffology, our payroll software is fully cloud-based, and easily scalable. No matter whether you’re a fully remote company, or growing rapidly, we can help.

Our automation removes as much manual processing as possible, creating efficiencies in payroll. And, the ease of using Staffology means that anyone can do a pay run.