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 & 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:
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.
A list 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 one with the functions you require.
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 with:
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.
A list of tested products from commercial software suppliers
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:
The payroll deductions you take from your employees' pay could include:
You must make these deductions before you pay your employees their wages or salary, and pay the amounts due to HMRC.
You have two main options for operating your payroll:
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 other times.
This needs to be done online. You can't send the reports manually using the online portal or 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 online'.
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 one of these options:
You can't use a manual payroll system, because you need to report your payroll information to HMRC electronically.
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 nine or fewer employees. Your choices are explained in more detail in the following sections.
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 nine or fewer employees, and has been updated so that you can use it to work out payroll deductions and then report payroll information online in real time. Basic PAYE Tools will:
When calculating the maximum number of employees that you have at any one 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 Earnings Limit.
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:
It also may not handle certain scenarios:
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 (RTI) to operate payroll and report in real time
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.
The level of involvement you want from your payroll provider will determine your choice. Your options are:
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:
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 by:
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:
