Software packages and other payroll options

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.

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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.

Payroll payments

The payments you make could include:

  • wages
  • overtime
  • commission and bonuses
  • holiday pay
  • statutory payments, such as Statutory Sick Pay and Statutory Maternity, Paternity or Adoption Pay

Payroll deductions

The payroll deductions you take from your employees' pay could include:

  • Income Tax
  • NICs
  • 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 two 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

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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 one of these options:

  • 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 nine or fewer employees. Your choices are explained in more detail in the following sections.

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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 in-house.

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 another employee
  • that your own software is compatible with that used by the payroll provider

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 by:

  • removing the need for you to provide suitable IT equipment and internet connection
  • 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 specialists

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

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