Software packages and other
If you employ anyone, even if it's only yourself, then your payroll
is an essential part of running your business. It involves paying your
employees correctly, making calculations and deductions such as PAYE
tax and National Insurance contributions (NICs), keeping payroll records
- and reporting your payroll information electronically to HM Revenue
and Customs (HMRC).
This guide helps you make the right choice when you choose a payroll
system or provider - if you're a new employer wondering where to begin,
or you currently operate your payroll manually but need to change.
On this page:
Choosing HMRC-recognised PAYE software
If you already know you want to use payroll software, rather than
get someone else to run your payroll for you, you can go straight to
a list of HMRC-recognised software.
of tested products from commercial software suppliers
However, if you would like to know more about the other payroll
options that are available, please read the rest of this guide.
There are a wide variety of commercial payroll software packages to
choose from - and some you can use for free. Features vary from package
to package, so it's important you choose 1 with the functions you
HMRC keeps a list of commercial products which they've tested to see
whether they can satisfy a range of general payroll tests and are compatible
- reporting your payroll information electronically through the Government
- providing updates if there is a change in the amount you need to
deduct from wages such as a change in the rate of Income Tax following
the Budget, or to fix problems or provide new features
If you are a very large employer with thousands of employees you may
prefer to use software that supports Electronic Data Interchange (EDI)
for transferring these large volumes of data.
of tested products from commercial software suppliers
Your payroll system
Payroll is made up of the payments you make to your employees and the
deductions you take from these payments, so your payroll system must
be able to calculate and record these values correctly. It's important
that the payroll system or provider you choose can handle all the types
of payments and the deductions you might need to make.
The payments you make could include:
- commission and bonuses
- holiday pay
- statutory payments, such as Statutory Sick Pay and Statutory Maternity,
Paternity or Adoption Pay
The payroll deductions you take from your employees' pay could include:
- Income Tax
- student loan repayments
You must make these deductions before you pay your employees their wages
or salary, and pay the amounts due to HMRC.
Operating your payroll
You have 2 main options for operating your payroll:
- in-house electronic payroll - you use payroll software
to store employee records on a computer, calculate pay and deductions
automatically, and report your payroll information electronically
- outsource your payroll - you can pay a payroll provider
(such as an accountant or payroll bureau) to look after some or all
of the necessary calculations, reporting and record-keeping
Your payroll responsibilities as an employer
Whether you operate a payroll system in-house or outsource your payroll,
you're responsible for ensuring that your payroll information is reported
to HMRC electronically, on or before each payday. These reports will
include details of your employees, the payments you make to them and
their deductions. You'll also have to send certain other reports at
This needs to be done online via your payroll software. You can't
send the reports manually or use HMRC's online portal or a web form.
HMRC only accepts payroll information on paper from a very small number
of employers who are exempt from online filing. For more information
see the guide 'Guidance for employers exempt from filing or unable
to file online'.
Guidance for employers exempt
from filing or unable to file online
Operating your payroll in-house
If you're handling your payroll in-house you need to ensure you choose
a payroll system that suits your needs. You can only use 1 of these
- commercial payroll software
- HMRC's Basic PAYE Tools
You can't use a manual payroll system, because you need to report your
payroll information to HMRC electronically.
Choosing payroll software
Commercial software can provide you with a complete payroll package,
while HMRC's Basic PAYE Tools is a basic product and is designed for
employers with 9 or fewer employees. Your choices are explained in
more detail in the following sections.
HMRC's Basic PAYE Tools
As an alternative to commercial software (some of which is free) you
can manage your payroll using HMRC's Basic PAYE Tools.
Basic PAYE Tools is software that you download onto your computer.
It will help you run your payroll throughout the year. It is designed
for employers with 9 or fewer employees, and you can use it to work
out payroll deductions and then report payroll information online in
real time. Basic PAYE Tools will:
- record your employees' details
- handle mid-year tax code changes
- work out and record your employee's pay, tax, NICs and any student
loan deductions every payday
- generate the payroll data that you need to send to HMRC, including starter and leaver information
- produce an employer payment record that works out how much you
need to pay HMRC
- provide calculators to help you to work out statutory
payments such as Statutory Sick Pay and Statutory Maternity Pay
- transfer employee details from 1 year to the next so you don't
have to re-enter their details
- allow you to claim the new NICs Employment Allowance
- allow you to amend or correct an employee payment
- add a mistimed employee payment
When calculating the maximum number of employees that you have at
any 1 time, remember that you must include on your payroll everyone
you employ, no matter how short a time they work for you or how little
they get paid. So you must include everyone, even temporary and casual
staff and those who get paid below the PAYE threshold and NICs Lower
Limitations of the Basic PAYE Tools
Before choosing to use the Basic PAYE Tools you should be aware of
its limitations. Basic PAYE Tools isn't a complete payroll package
so it won't:
- produce payslips
- record any other deductions unrelated to PAYE such as an attachment
It also has limitations:
- Certain changes in director's NICs category letters during the tax year.
- You can only enter a trivial commutation payment where the trivial commutation or other lump sum payment is the first and only payment from the pension.
- You can only operate 1 National Insurance category letter per
pay period. Where the letter changes, the new letter will be applied
for subsequent pay periods.
The Basic PAYE Tools does not handle certain scenarios where you:
- enter a leaving date for an employee and subsequently want to change the leaving date or restart the employment
- operate net pay arrangements
- need to operate the special National Insurance category letters for Foreign-Going Mariners and Deep Sea Fishermen
- need to send an Earlier Year Update for either a trivial commutation payment or for a non-individual, where the original Full Payment Submission was not submitted using Basic PAYE Tools
If any of these scenarios arise during the year and you're using HMRC's
Basic PAYE Tools, you'll need to start using a commercial payroll software
package and transfer all your employer and employees details to it
- or change to using a payroll provider.
Using Basic PAYE Tools to operate payroll and report in real time
Using a payroll provider
There are many providers that can offer you a payroll service. The payroll
service you receive will depend on the provider you choose and the contract
you agree with them.
Choosing a payroll provider
The level of involvement you want from your payroll provider will determine
your choice. Your options are:
- Payroll Bureau. Often you will require some in-house
payroll knowledge if you choose a payroll bureau to help with your
payroll. In its simplest form, you will control payroll data in-house
and provide this to the bureau. The bureau will then use their IT and
software to run your payroll for you. Often the service can be tailored
to provide payslips, make payments to HMRC and your employees and other
payroll related matters. You will need to be clear what level of support
you will receive so that you know how much of the payroll administration
will remain in-house.
- Managed service. In a fully managed service all
aspects of payroll will be managed by your payroll provider. Some providers
offer partially managed services which will require you to have some
in-house payroll knowledge and resource. If you choose the partially
managed option you will need to be clear which payroll tasks remain
You may already employ an accountant. You might wish to ask if they
provide payroll services, or can recommend a bureau or payroll provider
that will meet your needs.
When deciding which payroll provider to choose you might want to check:
- the payroll provider can tailor a suitable package for your needs
- they are experienced with your type and size of business
- what documentation they can provide, for example weekly/monthly payslips,
annual returns and real time PAYE returns
- the costs for setting up the payroll and administering the system
- how easily scalable their service is - for example, if you take on
- that your own software is compatible with that used by the payroll
Pros and cons of using a payroll provider
Getting help from a payroll provider will increase costs for your business.
However, you might feel this increase is justified by the time and money
you save by reducing your administration costs and paperwork.
Outsourcing your payroll to a payroll provider can also make savings
- removing the need for you to provide suitable IT equipment and internet
- not having to buy your own payroll software package and pay a maintenance
charge for updates
- allowing you to concentrate on other areas of business
- reducing employee costs as you'll no longer need to employ payroll
Your contract with your payroll provider
You need to make sure that you fully understand the contract you agree
with your payroll provider. Remember that even if you use a payroll provider,
you are still responsible for ensuring that your statutory obligations
are met, including checking and recording employee information, calculating
and recording pay and deductions, reporting your payroll information
and making your payments to HMRC.
So make sure that you:
- specify that they'll calculate tax and deductions accurately, given
the information supplied
- confirm that they'll make these deductions on the actual days you
run your payroll
- agree that they'll ensure all your statutory obligations in respect
or your payroll are met
- are clear that if they are at fault for failing to meet these obligations
and you are charged a penalty or interest, provision is made for them
to reimburse you
- are clear who will keep payroll records that are specified by HMRC
- specify that some provision is put in place for any future expansion
of their service
Changing payroll software
If you change your payroll software or payroll provider - eg moving from one payroll bureau to another, you will continue to operate PAYE and report payroll information under the same employer reference.
If your new software doesn't allow you to continue with the same Payroll ID that you have previously reported:
- include a new 'Payroll ID'
- set the 'Payroll ID indicator changed' to 'Yes'
- include the 'Old Payroll ID for this employment'
Note: If you don't have the old Payroll ID and a new Payroll
ID is being used, if there is or has been:
- Only 1 employment for that employee in the PAYE scheme - HMRC will link
the new Payroll ID to the existing employment and update the Payroll
ID on the record.
- More than 1 employment for that employee in the PAYE scheme - HMRC will
not know which employment to link the new Payroll ID to and this will
create a 'duplicate employment' on HMRC's records. It is essential that
every effort is made to obtain and report the old Payroll ID alongside
the new Payroll ID when the change occurs.
If you haven't already looked at this, you can read more about 'duplicate
employments' in the guide 'Information you must get right when
running your payroll'.
Information you must get right when running your payroll