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Managing payroll is a key task for any employer. It involves paying your employees correctly, making deductions for tax and National Insurance contributions (NICs) and keeping proper records of all this.
You can handle payroll in-house, or you can outsource it. If operating payroll in-house, there are significant advantages to using electronic payroll software rather than manual methods. Using software saves time, reduces errors and makes many of your payroll tasks much easier to complete. It's a particularly good choice now that online filing of the Employer Annual Return and in-year starter and leaver forms is a requirement for almost all employers.
This guide aims to help you make the right choice when you choose a payroll system, whether you're a new employer wondering where to begin or are considering changing from paper to electronic payroll, or from in-house to outsourcing.
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'Payroll' refers to the records - paper or electronic - and calculations that you make to work out your employees' pay and deductions under the Pay As You Earn (PAYE) system. It covers all the payments you make to your employees, including:
Payroll covers things like employers' NICs and the value of perks and benefits too. It also shows all the deductions you make before paying your employees, like Income Tax, employees' NICs and any student loan deductions.
It's essential to your business that you pay your employees the right amount and on time - and that you make the correct deductions. So keeping accurate payroll records is really important.
You have three main options:
Whichever method you choose, you'll need the figures from your payroll records to complete and file your in-year starter and leaver forms (P45 and P46) and your Employer Annual Return (P14s and P35). Almost all employers are now required to file these forms online, so there are big advantages to maintaining your records in an electronic format throughout the year. Most commercial software will seamlessly transfer the figures from your payroll records into these forms and then allow you to file online automatically. HMRC’s free P11 Calculator will do this for forms P45 and P46 and for your annual return, provided you have no more than nine employees at the end of the tax year.
If you outsource your payroll, it's important to note that you're still legally responsible for deducting the correct amount of tax and NICs and for paying it over to HMRC.
Filing your Employer Annual Return online: P35 and P14s
There are many providers that can offer you an outsourced payroll service. Most accountants offer a payroll service. Some may even run a specific department that deals just with this.
It might make business sense to ask your accountant if they can provide you with payroll services. They'll already be familiar with your business and might offer you a competitive rate as part of a package of services. Alternatively, you could outsource your payroll to a payroll agency.
Either way, you can normally specify the level of involvement you want from them. For example, you may choose to completely outsource your payroll or you may simply wish them to provide you with your weekly/monthly payslips.
However, before handing over your payroll operations, you need to consider:
Outsourcing your payroll to a third party will generate another overhead for your business. However, you might feel this cost is justified by the time and money that is saved through reduced administration costs and paperwork. Outsourcing your payroll can also make savings by:
However, to reap these benefits you need to make sure that any contract you agree with an outsourced payroll supplier is written carefully. Make sure that you:
A computerised payroll will almost certainly be more convenient and less time consuming to operate than carrying out manual calculations, particularly if you're going to employ a number of people.
You'll have to record the employee's details initially, using information from the form P45 or form P46. However, once you've done this, the software will:
The software will also produce the figures you'll need at the end of the tax year, and help you deal with other payroll related events, for example if an employee leaves.
Your software provider will send updates as and when necessary - for example, if a tax rate changes following the Budget. Make sure you install these updates so that all calculations are carried out correctly.
Read more about commercial software supplier products
Many software packages also make it easy to file your in-year starter and leaver forms and your Employer Annual Return online. They automatically transfer the necessary figures from your payroll records to these forms, which are then sent direct to HMRC over the internet.
Almost all employers are required to file these forms (P14, P35, P45 and P46) online rather than using paper forms.
Filing your PAYE in-year forms online: P45, P46 etc
Filing your Employer Annual Return online: P35 and P14s
HMRC strongly recommends choosing commercial payroll software that meets the criteria it has set for the Payroll Standard accreditation scheme or the PAYE Recognition Scheme.
List of payroll software within the HMRC PAYE Recognition Scheme
List of HMRC-accredited payroll software products and suppliers
As an alternative to commercial software (some of which is free) you can manage your payroll using HMRC's free P11 Calculator. This doesn't offer a complete payroll system but it will work out your employees' deductions for you.
The P11 Calculator also provides many employers with a simple way of meeting the requirements to file in-year starter and leaver forms and their Employer Annual Return online.
You can file your starter and leaver forms online directly from the P11 Calculator. And if you have up to and including nine employees on the last day of the tax year (5 April), the calculator will also:
Check the features and limitations of the P11 Calculator
Filing your PAYE in-year forms online: P45, P46 etc
Filing your Employer Annual Return online: P35 and P14s
A set of Basic PAYE Tools are now available to download straight to your computer. In addition to the P11 Calculator, the tools include:
Download Basic PAYE Tools from the Business Link website (Opens new window)
Whereas payroll software automatically works out payments and deductions and then updates your payroll records for you, with the manual method you use either calculators or tables to work out the figures and update your records yourself. This is a more time-consuming way of managing your payroll than using software.
It also creates additional work for you when an employee starts or leaves your business and at the end of the tax year now that online filing of in-year starter and leaver forms and of the Employer Annual Return is a requirement for almost all employers. Even if you keep manual payroll records throughout the tax year, you'll still need to transfer key details into a format that can be filed online at the end of the year. A simpler option is keep your payroll records in an electronic format that's ready for online filing from the start of the year.
To get started, HMRC recommend you download helpbook P49 'Paying someone for the first time'. You can find this and other helpbooks, as well as tax tables and other support for manual payroll in our guide 'Forms and publications for employers'.
If exceptionally you are unable to download the forms and guidance, telephone HMRC's Employer Orderline.
If you need more help, you can read the guide 'New employer - getting started' on the Business Link website.
Forms and publications for employers
Download helpbook P49 'Paying someone for the first time' (PDF 5.6MB)
Find contact details for HMRC's Employer Helpline
Find contact details for HMRC's Employer Orderline
New employer - getting started on the Business Link website (Opens new window)
Download HMRC's Basic PAYE Tools from the Business Link website (Opens new window)
Guidance for exempt employers: filing your PAYE forms on paper
