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How does Payroll work for a small business?

Payroll is an essential function of any small business, as it is the means to reward your workers for carrying out their duties.  Many employers can find this overwhelming, from keeping records of the hours worked, processing the pay as well as keeping on top of their responsibilities.  This is where payroll systems come into their own. But, have you ever asked the question “how does Payroll work for a small business”?

How Does A Payroll System Work?

A payroll system manages everything that has to do with the payment of employees and the filing of ­employment taxes. This includes keeping track of hours, calculating income tax and National Insurance deductions and other deductions, printing/emailing payslips and making the payments to the employees and paying employment taxes to the government.

How To Do Your Own Payroll

Software is often used for payroll and requires minimum input from employers. Employers are required to input salaries, or hours worked, and then the software uses this information to calculate the net pay, as well as the tax due to HMRC and amounts due for pensions. Most payroll software is also automatically updated when tax laws change.

Types Of Payroll Software

There are several providers of free software.  HMRC Basic PAYE Tools is a free piece of software that can be used for up to 10 employees.  However, this is not able to deal with the pension requirements of auto-enrolment, so will not suit everybody.

It is worth considering what you use to undertake the process of your business accounting.  Many of the accounting software packages, such as Xero, Sage and FreeAgent, have a payroll module that will also input the accounting entries into the software.  They also have modules that allow employees to record their time, request holidays and receive their payslips electronically, making managing the whole process much easier.

Like any business decision you need to assess what you need.  Important things that you need to consider are:

  • What features are required? Do you need to manage the workers time/holiday?  How do you want them to give you their timesheets?  Do you want to be paperless?
  • Which cost structure works best for your business?If you are running payroll on a weekly or monthly basis, paying per payroll run may be more cost-effective for your business.  If you run payroll several times each month, it may be better to pay a monthly fee.
  • Do you need to integrate your payroll with other software? Look for a flexible solution if you need your payroll software to integrate with other platforms you rely on, such as your accounting software.
  • Does the payroll solution provide employees with self-service access? Employees should be able to log in and view payslips and P60’s.

Further Information

There may be additional information, or additional circumstances, that are specific to your business situation.  If you would like some guidance on payroll services, or just have a few small questions about employing someone, please get in touch.  You may wish to deal with this yourself, but we will be able to set you off on the correct path for you.

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