Choosing a payroll system
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 your end-of-year payroll tasks much easier to complete now that online filing of the Employer Annual Return 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.
On this page:
- What is payroll?
- Your payroll options
- Outsourcing payroll - options and considerations
- Operating in-house payroll using commercial software
- Operating in-house payroll manually
- More useful links
What is payroll?
''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:
- wages and salaries
- overtime
- commission and bonuses
- holiday pay
- statutory payments - Statutory Sick Pay and Statutory Maternity, Paternity or Adoption pay
Payroll covers things like employer's 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.
Your payroll options
You have three main options:
- outsource your payroll - you can pay your accountant or a specialist agency to look after all the necessary calculations and record-keeping
- in-house electronic payroll - you use specialised payroll software to store employee records on a computer and calculate PAYE and NICs automatically; choose from commercial software or the free P11 Calculator on the HM Revenue & Customs (HMRC) Employer CD-ROM
- in-house manual payroll - you keep written records of each employee's details, and calculate PAYE and NICs yourself
At the end of the tax year, you’ll need the figures from your payroll records to complete and file your Employer Annual Return. Almost all employers are now required to file their annual return 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 your annual return and then allow you to file online automatically.
- The free P11 Calculator on the Employer CD-ROM will do the same provided you have nine or fewer 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.
More about filing the Employer Annual Return online
Outsourcing payroll - options and considerations
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:
- whether the service provider can tailor a suitable package
- whether they're experienced with your type and size of business
- whether they can supply weekly/monthly payslips, and provide weekly, monthly and annual returns
- the charge for setting up the payroll system
- the charge for administering the system
- whether the fees include making all the types of deductions
- whether they charge any additional fees
- how easily scalable their service is - eg, if you take on another employee
- what software they use - whether it's HMRC accredited, whether it's compatible with software you use, and whether it keeps your records in a format that will allow for easy online filing of your Employer Annual Return (form P35 and forms P14)
Checklist - using an outsourced payroll supplier
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:
- allowing you to concentrate on other areas of business
- reducing employee overheads as you'll no longer need to employ a payroll specialist
- improving the accuracy of your systems as they're likely to be computerised
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:
- specify that they'll calculate tax and deductions accurately, given the information supplied
- state that they'll make these deductions to your specific timescales
- agree that they'll ensure mandatory requirements are completed or met within the regulatory timescale required
- stipulate that in the event of their failing to comply with these requirements, provision is made for them to reimburse you for any resulting penalties
- specify that they'll keep the necessary records of any taxes and deductions as required by HMRC
- spell out that any additional payroll charges you might incur should be specified
- specify that some provision is put in place for any future expansion of their service
Operating in-house payroll using commercial software
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.
What will commercial payroll software do?
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:
- calculate Income Tax, NICs and student loan deductions every payday
- calculate the NICs you have to pay as an employer
- produce pay statements for your employees
- keep records of payments and deductions
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.
Online filing
Many software packages also make it easy to file your Employer Annual Return online. They automatically transfer the necessary figures from your payroll records to your return, which is then sent direct to HMRC over the Internet.
Starting with the 2009-10 return, due to HMRC by 19 May 2010, almost all employers are now required to file their Employer Annual Return (P35 and P14s) online rather than using paper forms.
There are separate deadlines for filing a number of other PAYE forms online, including employee starter and leaver information on forms P45 and P46. Whatever software package you choose, it’s essential that you’re ready for these deadlines.
More about filing your annual return online
More about employer deadlines for filing PAYE forms online
Check that your software meets the HMRC Payroll Standard
It is recommended that any payroll software you use has been awarded the Payroll Standard – this means it meets HMRC’s minimum standards.
Look for the Payroll Standard logo when purchasing your payroll software. This means the software:
- has a full range of payroll functions and has been officially tested and approved for payroll purposes
- allows you to file your Employer Annual Return (P35 and P14s) online through the Internet or Electronic Data Interchange (EDI) - this facility may be extended to include other PAYE forms
- lets you make electronic payments online
See a list of HMRC accredited payroll software products and suppliers
Download our leaflet 'Payroll standard' which identifies key software features
Operating in-house payroll using free HMRC software
As an alternative to commercial software you can manage your payroll using HMRC's free P11 Calculator on the Employer CD-ROM. 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 requirement to file their Employer Annual Return online. If you have nine or fewer employees on the last day of the tax year (5 April), the P11 Calculator will:
- use the figures from your payroll records to complete your annual return automatically
- connect you to HMRC and file your return online
There are separate deadlines for filing a number of other PAYE forms online, including employee starter and leaver information on forms P45 and P46. You cannot currently use the P11 Calculator to file these forms online.
Check the features and limitations of the P11 Calculator
More about filing your annual return online
More about employer deadlines for filing PAYE forms online
Where to get the Employer CD-ROM
Before the start of a new tax year we issue a CD-ROM to be used from 6 April. An updated edition of the CD-ROM, incorporating any Budget changes, is issued in May.
You can also order a copy online or by calling the Employer Orderline on Tel 08457 646 646 - open from 8.00 am to 8.00 pm Monday to Friday and from 10.00 am to 1.00 pm on Saturdays, closed on Christmas and New Year bank holidays.
Check what's included on the Employer CD-ROM
Order the Employer CD-ROM online
Operating in-house payroll manually
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 at the end of the tax year now that online filing 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.
What you need
Everything you need to run your payroll manually is in the New Employer Pack (sent when you register as an employer with HMRC) including:
- details of PAYE and NICs rates, and help books explaining how to use them
- calculators and tables for working out PAYE and NICs deductions
- form P11 Deductions Working Sheet - which you can use to record details of employees' wages and deductions
You don't have to use the P11 to record wages and deductions - you can create your own form if you prefer. Whatever records you keep, however, must include the details shown on the P11.
For help completing the P11 and paying your employees read our related guides.
If you don't have the New Employer Pack, you can find out how to get one by reading our guide on registering as an employer.
More useful links
Guidance for employers
still permitted to file their annual return on paper
