Setting Up Payroll

Our 4 easy-to-follow steps

Setting up payroll is one of the most important aspects of running a business. It’s also a complex process if you’ve never done it before. This guide will talk you through setting up payroll in easy-to-follow steps, explaining everything you need to register your employees and your business correctly.

Hiring an employee is an exciting first step in any business but it also introduces the need for payroll, something you may not have dealt with before.

However, setting up payroll can feel a little daunting. With everything from HMRC-compliant software to your employer PAYE reference number to source, the process isn’t without its complexities.

Once set-up you’ll also have to report your employees’ pay and tax deductions to HMRC each pay cycle, so it’s a big responsibility to take on, particularly for those less confident with payroll software and tax accounting.

So, what are the main steps to setting up payroll?

1 – Invest in company payroll software

You’ll need this to process your payroll and share the details with HMRC each month.

• If you have fewer than ten employees, you can manage your payroll using HMRC’s basic and free payroll software.
• If you have more than ten employees, you’ll need to invest in a more comprehensive payroll tool to continue processing your payroll in-house.

When doing this, make sure you use a tried and tested provider that is HMRC-compliant.

2 – Register as an employer with HMRC

You should do this at the point in which you take on your first permanent employed staff member. You will also need to do this if you’re employing yourself as a Company Director.

Registering with HMRC is a straightforward process you can do online. It can take around 10 working days to receive your Employer PAYE reference number.

Note: if you make an application around 6 April (the new tax year) it can take longer for you to receive your employer PAYE reference number.

3 – Receive your PAYE reference number

PAYE stands for ‘Pay as You Earn’ and it’s the process by which income tax and national insurance deductions are taken from an employee’s earnings. As an employer, it’s your responsibility to calculate these deductions each pay cycle and make the payments to HMRC.

As we’ve outlined above – you should receive an employer PAYE reference number automatically after registering with HMRC. You will need this number to ensure the salary deductions you take from your employees are logged with HMRC correctly.

4 – Record clear and consistent information for payroll

When setting up payroll, you’ll need to keep clear and consistent records of each of your employees from the first day they begin employment at your business.

This includes:

• Working out which tax code they need to be on, which you can do by asking them for their P45 from their previous employer, or requesting they complete an HMRC Starter Checklist.
• You also need to record if an employee has a student loan and, if so, whether it’s Plan 1, Plan 2, Plan 3, Plan 4, or Plan 5.

All of these details will need to be uploaded into your payroll system before you can process payroll for the employee. For this reason, it’s a good idea to get into the habit of collecting this information on the first day that a new employee joins your business.

For each employee on your payroll you’ll also need to record if any of the following have taken place during the pay cycle for which you’re accounting:

• Absences or leave (including paid holiday)
• Tax code notices
• Taxable expenses or benefits
• Bonuses or commission
• Paid overtime
• Maternity or paternity leave
• Statutory sick pay

You’ll need to keep these records for a minimum of three years. If you don’t, HMRC could issue you with a £3000 fine.

Common questions about setting up Payroll

Who needs to be registered on my company payroll?

If you employ anyone who is earning £123 a week or more, receives any expenses or benefits, is in receipt of another form of income (pension, benefits or another job), you need to register as an employer and include all employees on your company payroll.

Please note, that while it is up to you to determine how much you are willing to offer an employee in terms of salary, you must comply with the National living Wage for employees aged 21 years+ and the National Minimum Wage for employers who are younger than 21.

The only exception is how much you choose to pay yourself as a Director not working under a contract of service. This isn’t subject to any minimum wage limitations.

When do I need to pay employee deductions to HMRC?

For every payroll cycle you process, you will need to pay all of the tax and national insurance deductions you take from your employees’ to HMRC by the 22nd of the following month.

What if I don’t feel equipped to take on payroll in-house?

If you don’t feel able to process your employee payroll in-house that’s perfectly normal. HMRC are happy for you to outsource this to a specialist payroll services provider, so there’s no need to burden yourself unnecessarily.

Organisations of all sizes take advantage of third-party companies to help with all sorts of business functions. Outsourcing your payroll is no different. In fact, this is one area where it makes sense to entrust in an expert.

Outsourcing vs in-house payroll

Many business owners choose to outsource their payroll responsibilities to a third-party payroll services provider precisely for these reasons.

If you prefer to keep the process in-house (and that’s entirely your choice) it’s important you’re clear and comfortable with what’s expected of you. Otherwise, you could find yourself facing a penalty from HMRC, not to mention disgruntled employees who are none too happy about having their pay messed up!

To help you master the steps to setting up payroll correctly, we’ve pulled together this handy guide, explaining all the actions you need to take to become payroll ready.

Of course, if after reading you decide that perhaps managing your payroll in-house isn’t for you after all (and who could blame you?) you can always reach out to our team for more information on our payroll services.

For more information about outsourcing your company payroll with HWB visit our payroll services page.