How to Set Up Payroll for Your Small Business

Running a small business often means wearing many hats, and one of the most important responsibilities is paying your employees correctly and on time. Setting up payroll may seem complicated at first, but with the right approach, it can be a smooth and efficient process. Here’s a step-by-step guide to help you get started.

Register as an Employer with HMRC

Before you can pay employees, you need to register as an employer with HM Revenue & Customs (HMRC). This should be done before the first payday. Once registered, you’ll receive a PAYE (Pay As You Earn) reference number, which is essential for reporting employee earnings and deductions.

Choose a Payroll System

You can either manage payroll in-house using payroll software or outsource it to an accountant or payroll bureau. Payroll software approved by HMRC makes it easier to calculate tax, National Insurance contributions, and pensions automatically. Outsourcing, meanwhile, can save you time and ensure compliance, particularly if you’re unfamiliar with payroll legislation.

Collect Employee Information

To set up payroll, you’ll need accurate employee details, including full name, address, date of birth, National Insurance number, and a P45 if they’ve worked elsewhere. This information ensures the correct tax code is applied and contributions are calculated accurately.

Set Up PAYE and Deductions

Payroll must be run through PAYE, which collects Income Tax and National Insurance from employees’ wages. You’ll also need to account for other deductions such as student loan repayments, pension contributions, or child maintenance, depending on the individual’s circumstances.

Comply with Workplace Pension Rules

Under auto-enrolment legislation, most employers are required to provide a workplace pension. Eligible employees must be automatically enrolled, and both the employer and employee will make contributions. Your payroll system should handle these deductions alongside tax and National Insurance.

Report to HMRC and Pay Employees

Each time you run payroll, you must submit a Full Payment Submission (FPS) to HMRC detailing employees’ pay and deductions. Finally, ensure that wages are transferred to employees’ bank accounts on the agreed payday, along with payslips detailing their earnings and deductions.

Final Thoughts

Getting payroll right is vital for employee satisfaction and compliance with HMRC regulations. By setting up payroll correctly from the start—whether managed in-house or outsourced, you can ensure your small business runs smoothly and your team is paid accurately and on time.