Starting a payroll system

Businesses assume a number of extra responsibilities when they begin to employ people. In terms of finance, ensuring that you have a working and efficient payroll system in place is amongst the most important of these responsibilities.

What is a payroll system?

In basic terms, a payroll system is the means by which you keep track of employees’ details, the payments you make to those employees, the deductions you make from their wages, and the employers’ National Insurance Contributions that you make on their behalf.

Each employee has their own record in the payroll. The system that you use to keep track of these records should be constructed in such a way as to make it possible for you to efficiently keep track of the relevant information.

There are three main ways in which companies can run a payroll system:

Automated payroll - whereby payroll software automates regular tasks, and records are kept and entered on computer.

Manual payroll - whereby records are kept on paper, and you calculate all deductions by hand.

Outsourcing - whereby your payroll tasks are completed by a third party company.

Each of these methods has a number of advantages and drawbacks, depending on the nature of your business.

Automated payroll systems

An automated, computerised payroll system will be the best option for most companies. Many accountancy packages offer payroll ‘modules’ that can be plugged into the existing software to provide the functionality that you need as an employer. If you employ several people, payroll software is really the only viable option.

Initially you will need to enter the information contained on the employee’s P45 or P46 form manually, in order to provide the software with the data it needs to calculate deductions. After that, however, the software will automatically produce payslips, work out the relevant deductions, and keep records of all relevant activities. These records will sync seamlessly with your accountancy software.

Furthermore, most payroll software offers automatic updates. This means that, in the event of a change to the tax rates or similar occurrence, the software will automatically change its calculations accordingly.

When buying payroll software you should always ensure that it complies with HM Revenue and Customs standards. HMRC runs a Payroll Standard Accreditation Scheme, and all compliant software bears a Payroll Standard logo.

Manual payroll

If you only have one or two employees, and particularly want to keep records by hand, it is still possible to operate a manual payroll. Some business managers choose to do this in order to avoid the cost of payroll software, but it is worth remembering that the initial outlay involved in buying a payroll package is likely to be recouped very quickly as a result of the time you will save.

However, if you particularly want to run a manual payroll system, HMRC provide a set of standard forms intended to make the process simpler. Much like the annual self assessment, these forms provide step-by-step instructions explaining how to calculate the relevant deductions.

Manual payroll forms, along with further information on becoming an employer, are available from the HMRC New Employer Helpline. This can be reached on 0845 60 70 143.

Outsourcing payroll

Many companies choose to outsource their payroll tasks. Businesses with a small management team and several employees tend to have difficulty finding the time to fulfil their payroll responsibilities. As such, although there is an added cost associated with outsourcing your payroll to a third party, it is frequently more cost effective than trying to do it yourself.

If you want to outsource your payroll, your accountant is a good first port of call. Many accountancy firms offer payroll services, and they may be able to give you a good deal if you are already a client.

Regardless of whether you choose your existing accountant or a separate payroll provider, there are a number of factors that you should consider before making a decision. Flexibility is key; you should be able to dictate the degree of involvement that you require of your payroll provider. For example, you should find out whether they will be able to produce payslips at the intervals required by your business.

Similarly, it should be noted that many payroll providers make extra charges for certain deductions. For example, some standard payroll services do not include student loan deductions, for which you may be charged more. Finally, you should also enquire about the software they use. It is important that the data they provide you with is compatible with your accountancy software.

In most cases, using automated payroll software or outsourcing your payroll are the best options. Although these involve an extra cost, the amount of time you will save is potentially huge. This time can be used in ways that directly generate revenue, rather than bogging you down in a mire of paperwork.

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