Running payroll might seem straightforward on the surface, but it’s one of those areas where the details matter significantly. If you are running a small business and have staff, or are thinking of recruiting for the first time, understanding what is involved in running payroll is essential. Getting it wrong not only affects your employees, it can also result in costly penalties from HMRC.
What payroll actually involves
Payroll is more than just calculating wages and salaries. It encompasses a range of responsibilities that need to be handled accurately and on time. At its core, you’re managing employee payments, tax deductions, National Insurance contributions, and various reporting requirements.
The process involves calculating gross pay, making the appropriate deductions for tax and National Insurance, handling any additional deductions like pension contributions or student loan repayments, and ensuring the net pay reaches your employees on time.
Alongside this, you need to make payments to HMRC and maintain detailed records for compliance purposes.
Key considerations for small business payroll
PAYE registration and responsibilities
If you employ staff, you must register with HMRC for Pay As You Earn (PAYE) when your employee is;
- paid £96 or more a week
- they get expenses and company benefits
- they’re getting a pension
- they’ve had another job
- they’ve received Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit
This brings various obligations, including operating payroll, making deductions, and submitting regular returns to HMRC.
Real Time Information (RTI)
You’re required to submit payroll information to HMRC every time you pay your employees through the RTI system.
Real Time Information (RTI) was a key government programme which aims to improve how employers submit Pay As You Earn (PAYE) information about their employees to HM Revenue & Customs (HMRC).
This means that on or before each payday, you need to file a Full Payment Submission (FPS) to HMRC detailing what you’ve paid and what deductions you’ve made.
Auto-enrolment pensions
Most employers must automatically enrol eligible employees into a workplace pension scheme. This involves assessing eligibility, making contributions, and managing the ongoing administration.
The minimum contribution rates currently stand at 8% of qualifying earnings, with employers contributing at least 3%.
Every three years, there is a re-enrolment process whereby employees are enrolled into the pension, even if they have previously opted out and if they still do not wish to be part of the pension scheme, they must opt out again.
Statutory payments
You’ll need to handle various statutory payments, including Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), and Statutory Adoption Pay (SAP). Each has different eligibility criteria and calculation methods.
Record keeping
HMRC requires you to keep payroll records for at least three years after the end of the tax year they relate to. These records need to be detailed and accurate, covering everything from basic pay calculations to evidence supporting any claims for statutory payments.
Common payroll mistakes to watch out for
Many small businesses encounter similar challenges when managing their payroll, often because the requirements aren’t immediately obvious.
Incorrect tax codes
Using outdated or incorrect tax codes is surprisingly common. Tax codes can change during the year, and failing to apply updates from HMRC can result in employees paying too much or too little tax, creating complications later.
National Insurance calculation errors
The different National Insurance categories and rates can be confusing. Applying the wrong category or miscalculating contributions can lead to both underpayments and overpayments, both of which create administrative headaches.
Missing RTI deadlines
Late submission of RTI returns carries automatic penalties. What catches many businesses out is that the deadline is on or before payday, not after. If you pay employees on the last day of the month but only submit your RTI return a few days later, you’ll face penalties.
National Minimum Wage compliance
Ensuring compliance with National Minimum Wage legislation is a fundamental payroll responsibility that requires ongoing attention. The rates change annually in April, and there are different rates for different age groups and apprentices.
You need to consider not just basic hourly rates, but also how overtime, shift premiums, and deductions for accommodation or uniforms affect the calculation. It’s particularly important to monitor employees whose pay might fluctuate due to variable hours, commission, or piece-rate work, as these can sometimes inadvertently result in effective hourly rates falling below the minimum wage thresholds.
Auto-enrolment compliance gaps
Auto-enrolment involves ongoing responsibilities beyond the initial setup. Failing to assess new employees, missing re-enrolment dates, or incorrectly calculating contributions are frequent issues that can result in penalties from The Pensions Regulator.
Statutory payment miscalculations
The rules around statutory payments are detailed and can change annually. Miscalculating entitlements or failing to claim back what you’re entitled to from HMRC can impact both your employees and your cash flow.
Holiday pay calculations
For employees with variable hours or overtime, calculating holiday pay can be more complex than it initially appears. Getting this wrong can lead to disputes and potential tribunal claims.
The impact of getting it wrong
Payroll errors don’t just affect your business finances – they can have broader implications. Employees rely on being paid correctly and on time, and mistakes can damage trust and morale. From a compliance perspective, HMRC takes payroll obligations seriously, with penalties for late returns, incorrect calculations, and missing payments.
Beyond the immediate financial impact, payroll mistakes can consume significant time to resolve. Correcting errors often involves multiple parties – employees, HMRC, and potentially pension providers – and can create ongoing administrative burden.
The benefits of outsourcing payroll
Given the complexity and potential consequences of payroll mistakes, many small businesses find that outsourcing makes practical sense.
Expertise and compliance
Professional payroll services stay current with changing legislation and requirements. They understand the intricacies of tax codes, National Insurance categories, and statutory payments, reducing the risk of costly errors.
Time savings
Payroll can be time-consuming, particularly when you factor in staying up to date with changes, resolving queries, and handling year-end procedures. Outsourcing frees up your time to focus on growing your business.
Reliability and deadlines
Professional services have systems and processes designed to meet all payroll deadlines consistently. This removes the stress of remembering multiple submission dates and reduces the risk of penalties.
Software and technology
Payroll providers use sophisticated software that’s regularly updated for legislative changes. This eliminates the need for you to invest in and maintain payroll software yourself.
Support and guidance
When payroll questions arise – and they often do – having access to professional expertise can be invaluable. Whether it’s handling a complex statutory payment situation or understanding new legislation, support is readily available.
Scalability
As your business grows, your payroll requirements will likely become more complex. Professional services can adapt to your changing needs without requiring significant additional input from you.
Making the right choice for your business
The decision about how to handle payroll depends on various factors including your business size, complexity, and your own comfort level with the requirements. Some businesses prefer to maintain control by handling payroll internally, while others find the peace of mind that comes with professional management more valuable.
If you do choose to manage payroll internally, it’s worth investing in proper training and reliable software. However, even with these in place, staying current with all the legislative changes and compliance requirements requires ongoing attention.
For many small businesses, outsourcing payroll represents a sound investment. The cost of professional services often compares favourably to the potential costs of mistakes, penalties, and the time required to manage everything correctly.
Planning your payroll approach
Whatever approach you choose, it’s beneficial to plan ahead rather than leaving decisions until you’re under pressure to get your first payroll processed. This gives you time to understand your options, implement proper systems, and ensure everything is set up correctly from the start.
Consider your current situation, your growth plans, and your capacity to handle the ongoing requirements. Remember that payroll isn’t just about the monthly processing – it includes year-end procedures, handling queries, managing starters and leavers, and staying compliant with changing regulations.
Getting the support you need
Payroll represents a significant responsibility for small business owners, but it doesn’t have to be overwhelming. Whether you choose to manage it internally or outsource to professionals, the key is ensuring you have the right systems, knowledge, and support in place.
At Smethurst & Co, we understand the challenges small businesses face with payroll management. We can help you evaluate your options, provide professional payroll services, or offer guidance and support if you prefer to handle payroll internally. Our approach focuses on making payroll straightforward and stress-free, allowing you to concentrate on what you do best.
If you’d like to discuss your payroll requirements and explore how we can help, you can reach us on 01472 357125 or email payroll@smethurstandco.com to arrange a payroll consultation.
