Have you just hired your first employee? Here’s how to establish payroll.

This comprehensive step-by-step guide to setting up payroll is ideal for sole traders hiring for the first time, especially if you don’t yet have an HR manager. We will delve into the essentials of payroll and how to effectively manage it.

Understanding Payroll

Prepare yourself—payroll will likely be your largest expense. Payroll refers to the process of compensating your staff for their work, encompassing not just salaries or wages, but also benefits, bonuses, and holiday pay.

Payroll has multiple facets. It can denote the department responsible for employee remuneration, a list of employees, or the records that detail employee compensation. Understanding payroll is crucial, as it directly impacts your company’s cash flow and helps track outgoing expenses.

Correctly managing your payroll is vital. Any missteps could lead to financial discrepancies, reputational damage, and potential legal issues.

Setting Up Payroll: A Step-by-Step Process

Start by registering as an employer with HMRC and obtaining your PAYE Online login.

Next, select your payroll software, maintain accurate records, inform HMRC about your employees, record their pay (including deductions), then report this information to HMRC along with your tax payments. We’ll cover these steps in greater detail shortly.

How to Manage Payroll

You have the option to handle payroll in-house or outsource it. For very small businesses, managing payroll manually may be feasible. However, staying organized and retaining digital and paper records for at least three years—as required by GDPR—is essential.

If managing payroll manually feels overwhelming, consider hiring an accountant. This reduces the likelihood of errors and ensures you remain compliant with recent legal and policy changes. Additionally, many accountants are proficient with specialist payroll software.

Regardless of your method, evaluating dedicated payroll software is a wise move. Such software not only maintains accurate paper and digital records but can also generate insightful reports and provide access for your accountant when needed. Sage Payroll, for example, allows you to handle payroll for up to 150 employees with ease.

When using payroll software, record employee pay every time they are compensated, which may include various forms of pay such as:

• Statutory Sick Pay (SSP)
• Statutory pay for parents
• Maternity and paternity pay
• Adoption pay
• Parental bereavement pay
• Shared parental pay

Note that you can reclaim statutory payments for parents, and all employees, including those earning less than £123 a week, must be included in your payroll.

Expense claims and benefits—such as uniforms or company cars—are processed at the end of the tax year. Be mindful that even with payroll software, you might require separate software to generate payslips. Familiarize yourself with employee rights, which dictate what information must appear on payslips.

Next, calculate deductions for National Insurance and taxes, and determine employer National Insurance contributions for earnings exceeding £242 per week. Generate payslips for each employee, then report their pay and deductions to HMRC through Full Payment Submission (FPS).

You can choose to pay HMRC using one of the following methods:

1. Direct Debit
2. Approving a payment via your online banking
3. Online or telephone bank transfer
4. Online payment by debit or corporate credit card
5. Mailing a cheque

Be attentive, as HMRC will notify you if it perceives late payment, either online or by post. Timely payment is crucial to avoid potential fines and consequences such as affecting your other benefits, including Universal Credit. If you fail to submit a report or payment within 120 days, HMRC may close your PAYE scheme.

What is a Payroll Number?

A payroll number is a unique identifier assigned to each employee, vital for generating payslips. Typically, you can find it on payslips, P45, or P60 documents, providing a clear system for tracking employees before and after deductions.

Changing Paydays: What You Need to Know

If you wish to change paydays, you can adjust the frequency of payments or the specific day of payment. If the new payday falls within the same month or week, treat the initial payment as an additional compensation for that period. If the change occurs in a different tax month, no further action is necessary.

For less frequent payments, it’s important to contact the employers’ helpline to avoid late filing notices from HMRC. Ensure accurate National Insurance deductions to maintain compliance.

To pay employees more frequently, update the ‘pay frequency’ field in your FPS to reflect the new earning period. Sending multiple FPS submissions within a year signals to HMRC that you may not wish to continue operating as an annual scheme.

Still Confused About Payroll?

If you have lingering questions, contacting an accountant for tailored advice is highly recommended. Additionally, refer to the government’s resource on PAYE and payroll for employers for further assistance.

Further Reading

How to Spend Less Time on Accounting and Payroll – Discover strategies to streamline your accounting and payroll processes, freeing up your time to focus on growing your business.

Get the Best Out of AI-Powered Accounting Automation – Explore the impact of AI in the workplace, a hot topic as we head into 2025.

8 Accounting Software Platforms for Making Tax Digital – Mariah Tompkins reviews the accounting software options suitable for small businesses aiming for digital VAT and tax returns.