If your small business has started to grow, you may have been advised to scale up and start employing some permanent members of your team. This is equal parts exciting as it is scary, but it doesn’t mean it has to be difficult.
When approaching small business payroll, there’s plenty to think about and consider. Paying employees properly is crucial to team morale and helps you avoid interference from HMRC. Your business needs to operate legally and once you start employing people, this becomes even more important.
Below, we take you through how to approach small business payroll and how to stay compliant.
Disclaimer: The advice below is not a substitute for proper legal or financial counsel. Always consult your accountant or financial advisor if you’re unsure of how to run payroll.
What is payroll?
Let’s face it, your employees might be passionate about the work they’re doing, but they’re not doing it for free. We all need to earn a wage and are entitled to relevant benefits and remuneration. Payroll ensures that salaries are paid on time, at the right amount, and that your employees are contributing the right amount of tax. This keeps people happy, allowing them to feel secure in their roles.
But it’s not just about wages. Payroll enables you to know exactly how much money you need to attribute to your staff and how to calculate tax. The payroll process covers:
- Working out employees’ wages
- Recording any bonuses or additional benefits
- Calculating holiday, sick, or maternity pay
- Working out National Insurance contributions (both staff and company)
- Keeping records.
Why is payroll important?
Aside from the obvious (giving your staff a salary), payroll is important from an overall business perspective.
It allows you to forecast your budget and plan for the future, whether that means bringing on more employees or offering higher salaries to your current staff.
Payroll is essential for compliance. Legislation and regulations around payroll change often and can also be quite difficult to understand, especially if your small business starts to grow at scale. Complying with payroll from the very beginning will ensure that every time you bring on a new employee, the process is smooth.
Aside from compliance, payroll is important for employees. Payslips are often requested from banks and loan companies as proof of income. Without this evidence, your team members will come up against obstacles during some of the most important times in their lives. Simply introducing payroll can help alleviate this, keeping your employees happy and harmonious.
How does payroll work?
Although initially setting up payroll can feel overwhelming, it’s actually a straightforward process. Don’t be afraid to utilise the services of your accountant or accounting software.
Setting up payroll via accounting software, such as Xero or FreeAgent, allows you to keep invoicing and cash flow all in one place, and is often an inexpensive way to run payroll. However, always seek advice before determining if this method will work for you.
Before you can start the payroll process, you need to register as an employer with HMRC. You can either do this yourself or ask your accountant.
Payroll works by following these steps each month:
- Ensure you record your employees and your own pay (yes, don’t forget to pay yourself!). This includes salary and sick / holiday pay.
- Calculate deductions (we’ll go through these in a minute) including tax, National Insurance etc.
- Calculate your company’s National Insurance contribution.
- Create payslips.
- Complete a Full Payment Submission (FPS) to HMRC – a Full Payment Submission is a detailed document that outlines your employees’ details and pay, as well as any deductions, to HMRC. You should submit this every single month.
You can find out more information on how to run payroll from the GOV.UK website.
What is payroll compliance?
Compliance is essential for running small business payroll. If you don’t have the luxury of a legal team or maybe even an accountant, being up to date with rules and regulations is vital.
Payroll compliance doesn’t have to be difficult, however. As with most things, it just needs a little education and common sense. We’ve gone through the basics below.
- Process accurate payments and ensure all deductions are made.
- Provide all employees with a clear and detailed payslip.
- Submit your taxes to HMRC in a timely manner.
- Keep payroll records up to date.
Regardless of how much your employees earn, everyone must be included in payroll in order to be compliant.
What are payroll deductions?
Payroll deductions are certain amounts of money that are calculated and deducted from employee salaries before you pay them. Payroll deductions include:
- Pension scheme contributions
- Income tax
- National Insurance
- Student loan payments
- Child maintenance
If utilising payroll software, this can automatically calculate your payroll deductions. From a compliance perspective, it’s very important to deduct the right amount of tax and have this recorded.
How to report to HMRC
We touched briefly on Full Payment Submissions (FPS) earlier. This is a document that the employer must submit to HMRC each month or every time employees are paid. Usually, you will send this to HMRC via your accounting software, but if you don’t use these tools, you can send it directly yourself. Reporting to HMRC demonstrates that your business is compliant and your employees are being taxed correctly.
What have we learnt?
Although this is a brief overview of approaching small business payroll, it covers all the basics and compliance factors. Payroll might seem daunting at first – but so does starting your own business!
Maintaining records and keeping things up to date is the best way to fulfil your small business payroll requirements. When in doubt, always seek the advice of a professional, such as a financial advisor or accountant. Saving on physical office costs with a virtual office can leave you with an additional budget for important tasks – like payroll submission.