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Your Complete Guide to Setting Up Payroll

When you are at the junction of setting up your payroll, it is likely your business is either hiring its first employee or rapidly growing in terms of employee numbers. Whichever it is, it is a sign of business growth, and it is crucial to set up a payroll process that runs correctly, efficiently and is legally compliant.

Small business owners must exercise due diligence to avoid payroll issues. To avoid payroll issues and unhappy employees, small business owners must either set up their payroll in-house or partner with outsourced payroll providers who offer payroll services for small businesses.

Failure to set up payroll correctly can result in disgruntled employees, and you could end up paying HMRC hefty fines.
So, what do you need to do as an employer to set up employee payroll and ensure that your business runs smoothly?

1. Register as an employer with HMRC

You must register as an employer with HMRC whether you are employing your first employee or yourself as the director of a limited company, or even subcontractors. It is crucial to register with HMRC before the first payday because it takes about 5 working days to get an employer PAYE reference number, and you cannot register with HMRC more than 2 months before your employees’ first payday.

2. Get a login for PAYE online

Shortly after registering with HMRC, you will get a PAYE reference number which you will put on all payslips. However, suppose you still need to get the number after registration. In that case, you must set up PAYE online because it is essential for paying your bills, submitting tax information to HMRC, checking what you owe HMRC, and appealing penalties.

3. Choose payroll software

If you want to handle your payroll in-house, you must define the software features you need and adopt the software that works best for you.
HMRC has free software you can use, and you can also choose from a list of free and paid-for software recognized by HMRC. It is essential to carefully review this software and consider the necessary factors (such as business size, number of employees, using physical or electronic payslips, etc.) before adopting it.

4. Collect and keep records

Record keeping is a must once you start running a payroll because HMRC checks your records to ensure that you pay the correct amount of tax. Suppose your documents are not available or up-to-date HMRC can fine you as high as £3,000.

What records should you keep? You need to keep records of what you pay your employees and the deductions you make, employees’ sicknesses, maternity and leave absences, tax code notices, and taxable benefits or expenses, among other things. These records should be kept digitally on your payroll software or physically on paper and must be kept for three years from the end of the tax year they are from.

5. Tell HMRC about your employees

You need to collect data from your employees, both new and current employees, and share them with HMRC. First, you must check if your employees meet the criteria (earn £120 or more weekly) to be paid through PAYE. Secondly, you must work out your employees’ tax codes and register them to verify if they still have outstanding student loans. Once you access this information and complete the necessary checks, you can register your employees with HMRC through Full Payment Submission (FPS).

6. Work out and report pay and deductions to HMRC

If you are operating PAYE as part of your payroll, you must carry out some tasks with your payroll software before your employees’ payday. These tasks include recording employees’ pay, calculating employees’ National Insurance contributions and deductions from their pay, and generating payslips. Lastly, you must report income and deductions to HMRC through an FPS, which should be sent on or before the payday.

7. Calculate and pay HMRC the amount you owe

After reporting to HMRC, you must pay HMRC all you owe them in the last tax month, including income taxes and National Insurance contributions. Using payroll software makes this task easy for you as it can quickly tell you the amount you need to pay HMRC.

Pay Check can help
Setting up your payroll in-house includes various processes you must complete accurately to ensure that you process your payroll correctly, so it can feel like a daunting task. However, outsourced payroll providers like Pay Check can manage your payroll for you, relieving stress and ensuring your payroll is compliant. To find out more about Pay Check’s payroll outsourcing services, and how we can help you, get a quote today.


This article was written by
The Pay Check Team
+44 (0) 20 7866 4600