Payroll for small businesses: What you need to know
Whether the business you’re accounting for is just starting up or it’s a seasoned SME, ensuring employees are paid correctly is a fundamental aspect of running a successful business. Regardless of its business sector, employee duties or opening hours, it is your legal obligation as an employer to deliver what’s expected when payday comes around.
Purpose of Payroll
Besides delivering employees’ salaries, the payroll system is responsible for everything from monitoring holiday pay to statutory sick pay and bonuses. Each time you run the payroll, the government requires you to record employees’ National Insurance (NI) and tax and report it online under the Real Time Information (RTI) PAYE system.
If this doesn’t happen on time, or there are data inaccuracies your business may face penalties. In order to fulfil the duties of the payroll system and avoid any penalties, there are a few standards which accountants must comply with:
Registering as an employer
Employing the company’s first member of staff changes your legal rights and responsibilities. HMRC needs to be made aware when this happens, so you must let them know up to four weeks before the employees’ first payday.
If you’re acting as the sole director of a one-person firm, you are still considered to be an employer and so should register yourself as one in the same way. The only exception for not having to go through this registration, is if the employees that work for you earn £112 a week (or £486 a month or £5,824 a year) or less.
This exemption does not apply if any employees has another job or receives a pay rise which pushes their weekly income over this threshold.
Filing employee details
Every employer must collect basic information on each employee, including their full name and address, NI number, date of birth and gender. This information is a fundamental requirement, and allows all employees to be paid through PAYE (including company directors).
Each employees’ P45 displays their tax code and details of pay-to-date and tax-to-date from previous employment. If an employee doesn’t have a P45, they will need to fill out an HMRC starter checklist.
Reporting payroll to HMRC
You must report details of gross pay, PAYE and NICs deducted, statutory pay (maternity, paternity, adoption, shared parental pay and statutory sick pay), pay dates and start and leave dates, if applicable.
These details must be written up for every employee, and sent off every time they are paid, sent in the form of a Full Payment Submission (FPS).
In order to calculate how much tax is due from each employee, as well as how much NI they each need to pay, you must fill out a P11 form. Alternatively, there is a similar software on the payroll system which gathers this information automatically, but the information must be collected each month regardless of which system is used.
Keep an eye on additional deductions in employees’ pay
This is usually out of the employers’ hands, as you cannot make deductions unless you are legally allowed or have received consent from the employee.
Additional deductions usually come in the form of pension and holiday pay schemes, loan repayments, union subscriptions and corrections of previous payslips.
Remember that if an employee starts at or leaves, it is your responsibility to inform HMRC; however, you no longer have to send any leavers’ P45s to HMRC.
There are several ways to manage your companies’ payroll system, with different options to best suit the size of the company:
This can be done in-house or externally, but this method means you as a business are responsible for documenting payroll information and sending it to HMRC each month. Choosing between internal and external may depend on whether or not you have the facilities, space, and resources to operate an in-house payroll system.
In very small companies, it may well be a director’s responsibility to do in-house payroll, but larger firms may have delegated individuals, teams or even departments to take on the role.
If you opt to do payroll internally, there are a few things to be aware of, on top of understanding all statutory payments and deductions. With everything, you must be aware of the laws relating to minimum wage and how HMRC enforces them.
A convenient and time-saving method of accounting, software calculates NI and tax, and prints payslips automatically each month. It also saves you from sending the information to HMRC, as it sends it automatically alongside all P45’s, P60’s and other employee documentation required each month.
However, its convenience comes with a downfall – this is the most expensive way of getting payroll done. So, as a small business owner, you should evaluate your budget before committing to anything.
Even the smallest firms may choose to outsource their payroll, and can be done so via a bureau, accountant or payroll service provider.
This method requires you to provide the information to the external provider, so they can produce the payslips, keep the records and send all details to HMRC under RTI PAYE.
Good communication between both parties in this instance is essential; if you forget to mention that an employee has left the business, they may still be paid. Despite this, externally-sourced providers are generally more efficient than in-house methods, as they have expert knowledge – making budgeting much simpler each month.
Many SMEs may not have a large enough department to do in-house payroll, so consider an external source if there is not enough time or staff in the company.
When conducting payroll, remember that HMRC has important deadlines running throughout the year. Tax and NI payments must be received by HMRC by the 19th of each month, unless done electronically, in which case the deadline extends to the 22nd.
Additionally, each employee must receive a P60, detailing their total pay and tax and NI deductions by 31st May of each year.
Employees who have received any workplace benefits must also receive a receipt in the form of a statement of ‘payrolled’ benefits by the 6th July. This includes any taxable benefits and their cash equivalents.
Using payroll information
If run effectively, payroll can provide you with a lot of useful information about both the business and its employees. Running payroll data through a time-recording system allows you to calculate how much time employees spend on specific jobs and tasks.
You can also find out how much you provide to employees in the form of benefits and what the total cost of employment is. Additionally, you can monitor individual employee records, including absences, holidays and individual costs.
As with most monetary-based systems, payroll is often vulnerable to fraud. To prevent being a victim, avoid having one single person responsible for the whole system.
Having an extra member of staff responsible for part of the load is recommended, and always ensure payments are signed off by a director or direct supervisor who has been allowed to authorise payments.