Payroll systems

Paying your employees the right amount at the right time is essential if you want to motivate and retain them. 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.


1. Your payroll responsibilities

If you’re employing staff, you’ll need to efficiently arrange their monthly pay and ensure you send accurate reports to HM Revenue & Customs (HMRC). You’ll usually need to operate a PAYE system, which is what HMRC uses to collect Income Tax and National Insurance from employment. Check the HMRC payroll website for more information on whether your business may need to set up a PAYE system gov.uk/paye-for-employers.

It’s easiest to use payroll software as many paper forms have been replaced with digital real time information (RTI) submissions to HMRC. Payroll software programmes make the process simpler, faster and more automated by guiding you through the steps and forms that need to be completed. You can also choose to give your employees paper or paperless payslips. Just make sure that your choice of software complies with HMRC Payroll Standards accreditation.

As an employer, by law you must adjust wages to account for Income Tax and National Insurance contributions. For some employees, you’ll also need to make payroll adjustments for things like pension contributions, student loan repayments, sickness and maternity pay.

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2. Keeping payroll records

  • Tell 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) using payroll software and send a Full Payment Submission (FPS) to HMRC. You usually need to do this monthly, on or before your employee’s pay day.
  • Keep a detailed record of the total payments you make to HMRC for each pay period on a P32 (Employer's Payment Record).
  • Your End of Year Record (EOYR) should be automated if you’re using an RTI system, replacing the old P35 (Employer Annual Return) and P14 (End of Year Summary) forms.
  • Give each employee a record of their pay and deductions at the end of the tax year using a P60.
  • You must keep all payroll documentation for at least three years after the tax year it relates to.

When you hire a new employee, you’ll need to tell HMRC and then set them up on your payroll system. For step by step guidance visit gov.uk/new-employee. You can also find some helpful HMRC videos here on topics such as PAYE.

Be aware that failure to complete your businesses payroll responsibilities could result in a fine.

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Important legal information

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