Payroll systems

Paying your employees on time

Paying your employees the right amount at the right time is essential if you want to motivate and retain your staff. We look at how operating a good payroll system can help you achieve this, from keeping accurate records to dealing with legal issues and various payment methods.


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 Your payroll responsibilities

Payroll is any system you use as an employer to work out your employees' salaries and make the correct deductions from their pay. You’re obliged by law to adjust wages to account for:

  • Income tax.
  • National Insurance contributions.

Plus certain other items depending on the employee, such as:

  • Pension contributions.
  • Student loan repayments.
  • Sickness benefit.
  • Maternity pay.

Deductions are worked out using tax tables provided by HM Revenue & Customs.

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 Keeping payroll records

You are required to:

  • Notify HM Revenue & Customs (HMRC) each time a new employee starts or leaves work, using form P45 (or P46 if your employee doesn't have a P45).
  • Work out and deduct PAYE income tax and National Insurance contributions (plus any other relevant deductions) for each employee every pay day, and record them on form P11 (Deductions Working Sheet).
  • Keep a detailed record of the total payments you make to HMRC for each pay period on a P32 (Employer's Payment Record).
  • Pay the deducted amounts to the HMRC.
  • Submit full pay and deduction details to HM Revenue & Customs at the end of the tax year (April 5) using forms P14 and P35.
  • Give each employee a record of their pay and deductions at the end of the tax year using a P60.

Failure to complete these tasks could result in a fine.

You can send tax returns to HMRC via the Internet.

Apply online for an HMRC New Employers' starter pack.

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 Legal essentials

You must keep all payroll documentation for at least three years after the tax year it relates to:

  • Any data on individuals is covered by the Data Protection Act (1998). To find out whether you need to have a DPA registration, contact the Information Commissioner on 01625 545745. Find out more about your data protection responsibilities on the Information Commissioner's office website.
  • Under the Employment Rights Act (1996), employers must give every employee a contract of employment. In addition, every employee has the right to be told how their pay has been calculated. This is usually done by means of a payslip detailing gross salary, deductions and net salary.
  • If you employ five or more employees, including owner-directors, you will have to offer a stakeholder pension scheme to your staff.

For further information see our Employment law business guide.

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 Payment methods

There are various methods for paying employees, including cash, cheque or electronic transfer directly into the employee's bank account. Cash can be labour-intensive to organise and is also a security threat. Cheque payments are more secure, though employees have to wait several days for the cheque to clear. Electronic transfer is a quick and secure option. Talk to your bank for guidance on setting this up.


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 Payroll system options

You can choose to invest in software to manage your payroll or to outsource it using a payroll service company.


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 Payroll software

There are many good payroll software programs available, which can help make the process easier by:

  • Saving you time.
  • Producing payslips automatically.
  • Avoiding complicated calculations involving tax and NI tables.
  • Automatically generating the information required for your end-of-year returns.

Shop around for the best software for your company. The program should:

  • Comply with HM Revenue & Customs (HMRC) Payroll Standards accreditation.
  • Be regularly updated by the supplier to comply with the latest changes in legislation and in tax and National Insurance rates.
  • Allow you to input people joining and leaving the company easily and handle end-of-year reports.
  • Allow you to change employees’ pay details and calculate items such as one-off payments or bonuses.

Any payroll software will require an annual licence fee to be paid to keep it up to date, and may use special stationery which could cost extra.

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 Payroll service companies

These companies provide fully-qualified managers to administer your payroll. The main advantages are:

  • You don't need to be a payroll expert, as much of the burden is taken away from you.
  • Such companies usually have all of the automatic links required with the banks and HMRC (for the submission of end-of-year returns).
  • All statutory obligations will be taken care of as and when they change.
  • Security-sealed payslips and comprehensive management reports are supplied.

Remember that, even if somebody else is running the payroll function for you, the application of the PAYE and NICS system remains your legal responsibility.

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 Payroll bureaux

There are several payroll bureaux that give you the control of running your own payroll system without needing to have the technical infrastructure and logistics in place. However, you'll need comprehensive payroll knowledge, and many of these systems are driven by a coding structure that requires a certain amount of prior training.


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