Hired your first employee? Here’s how to set up payroll

By Anna Jordan on Small Business UK - Advice and Ideas for UK Small Businesses and SMEs

This step-by-step guide to setting up payroll is right for you if you are a sole trader that is hiring for the first time but you’re yet to hire an HR manager. We’ll explore what payroll actually is as well as how to manage it.

What is payroll?

Get ready – this will likely be one of, if not the biggest, expense you have in your business. Payroll is the process of compensating your staff for their work. This isn’t just salary or wages, it could be benefits and holiday pay too.

It has multiple meanings. Payroll could be the department in charge of employee remuneration, or it could refer to a list of the company’s employees or the records of compensation. It also contributes to calculations of the total money going out of the business at any given time, letting the company know how much money it has left over.

It’s beyond crucial to get your payroll right. Mismanagement can lead to financial, reputational and legal issues.

How to set up payroll

First, register as an employer on HMRC and get a login for PAYE Online.

Then it’s a case of choosing your payroll software, keeping your records, telling HMRC about your employees, recording pay (including deductions) then reporting it to the taxman and paying what you owe. More on all of that in a minute.

How to do payroll

Do it in-house or outsource. For very small businesses, it could be worth doing your payroll manually. You just need to ensure you keep on top of the figures – keep both digital and paper receipts intact for at least three years from the end of the tax year that they relate to so that you stay in line with GDPR.  

But that’s a big ask if you’re in a flurry with everything else. An accountant can do this for you if you wish. This means that there will be fewer mistakes in your payroll to catch you out further down the line. They’ll be up to date with the latest legal and policy changes too, plus they’ll have their own software that they’ll be well-acquainted with.

Even with these resources, you’d be wise to explore payroll software of your own. Software can keep paper and digital records with accuracy, but it can also provide reports to give you insights and provide access for your accountant should they need it. One example is Sage Payroll, which lets you file expenses in a few clicks and manage payroll for up to 150 employees.

With your payroll software, you must record pay every time you pay your employees – this could be salary, wages or other forms of pay.

Other types of pay to include are:

• Statutory Sick Pay (SSP)
• Statutory pay for parents
• Maternity and paternity pay
• Adoption pay
• Parental bereavement pay
• Shared parental pay

Note that you can reclaim statutory pay for parents. Everyone needs to be included in the payroll, even those earning less than £123 a week.

Expenses and benefits (say, uniforms or company cars) are paid at the end of the tax year.

Be warned that even if you use payroll software, you might need different software to produce payslips. Whatever the case, make sure you read up on employees’ rights – they specify what must go on their payslips.

Next, calculate deductions like National Insurance and tax and then calculate employers’ NI on earnings above £242 per week. Produce payslips for each employee. Then, report their pay and deductions to HMRC through Full Payment Submission (FPS).

Choose to pay HMRC by:

1. Direct Debit
2. Approve a payment through your online bank account
3. Make an online or telephone bank transfer
4. By debit or corporate credit card online
5. By cheque through the post

HMRC will let you know if it thinks you’ve paid late, either online or through the post. You’ve probably seen the ads that warn you that you could be fined if you don’t pay on time or in full.

There’ll be a late filing notice if you fail to pay on time, unless you have a valid reason for doing so. This can also have a knock-on effect on your other benefits, such as Universal Credit.

HMRC will close your PAYE scheme if you’re a new employer and you don’t send a report or pay HMRC within 120 days.

What is a payroll number?

This is the unique identifying number attached to each employee. Payslips will be generated using the payroll number, so they can be identified in the system accurately.

A payroll number is usually found at the top of a payslip, p45 or p60 document. before and after deductions, the amount of deductions that may change each time you’re paid (e.g. tax and National Insurance), and the number of hours worked.

Changing paydays

You can move paydays if you want to change the day or how often you pay employees.

If the new payday is in that month or week, treat the first new payment as an extra payment for that period. You don’t need to do anything specific if the new payday is in a different tax month or week.

If you plan on paying your employees less often, you need to contact the employers’ helpline so that you don’t get a late filing notice from HMRC. Be careful about how much National Insurance you deduct to keep you on the safe side.

Pay employees more often using the new earnings period in the ‘pay frequency’ field in your FPS.  

If you send more than one FPS in a year, HMRC will assume you no longer wish to operate as an annual scheme and send you a letter to confirm.

I’m still confused about payroll. What should I do?

Your best bet is to contact an accountant for some extra guidance. The government website also has a page on PAYE and payroll for employers.

Read more

How to spend less time on accounting and payroll – This article breaks down how you can better manage your business’s accounting and payroll processes and make more time for yourself and growing your business  

How to get the best out of AI-powered accounting automation – AI in the workplace has been one of the hot topics of 2024, and the conversation is unlikely to let up as we head into 2025

8 Accounting Software Platforms for Making Tax Digital – Mariah Tompkins scrutinises accounting software options that small businesses can use for their digital VAT and tax returns.

The post Hired your first employee? Here’s how to set up payroll appeared first on Small Business UK.