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Small business payroll guide

by Sarah Dunsby
20th Jul 23 2:54 pm

Payroll (the process of paying your employees and making salary deductions) can be one of the most taxing aspects of running a small business.

As an employer, not only are you legally bound to pay your employees on time per the conditions of their contract, you also have to correctly account for things such as income tax, national insurance, and pension contributions. Not easy if you’re not a trained Payroll specialist, though, of course, more manageable if you opt for payroll outsourcing.

In this guide, we’ll take you step-by-step through the payroll process, breaking down everything from how to set-up payroll in a small business  – both in-house and via a third party – to ensuring your payroll is compliant with GDPR and employment laws.

Setting up payroll

To set-up payroll for your small business, if you are paying staff £123 or more a week or they get expenses, benefits or have another job or income, you must register as an employer with HMRC.

PAYE, short for Pay As You Earn, is the system employers must use to process and report employee pay, income tax, and National Insurance deductions.

Upon registering, you’ll be issued with a PAYE reference and Accounts Office reference, which you will need to include when reporting your employee payroll.

For each member of staff you employ you’ll need the following information:

  • The employee’s full name, date of birth, gender, and home address
  • Their employment start date
  • Their contractual salary details
  • The total amount they’ve earnt, and paid in tax, for the current tax year
  • Their existing tax code and National Insurance number
  • Their student loan status

Much of the above can be obtained from an employee’s P45, a Starter Checklist or a new starter form.

FPS and EPS reporting

To process payroll, you need to keep accurate records of your employees’ earnings and salary deductions each pay cycle.

These calculations then need to be submitted as a Full Payment Submission (FPS) to HMRC either on or before the payment date of each payroll processed. If you’re using 3rd party payroll software you can submit your FPS through this software, otherwise you should use HMRC’s Basic PAYE Tools.

On occasion, you may need to submit an EPS in addition to (or instead of) an FPS. This must be submitted by the 19th of the following month.

An EPS (Employer Payment Summary) is required if you’re trying to reclaim statutory payments such as maternity leave, reporting eligibility for the Employee Allowance, reclaiming Construction Industry Scheme deductions, or paying the apprentice levy.

You should also submit an EPS if no employees receive any pay during the tax period.

Payroll year end

When you submit your last FPS for the tax year, you must mark as your final FPS. This must still be submitted on or before the last payment date within the tax year. If you find you need to amend your FPS after the last submission after 19th April, you will need to file a YTD FPS that addresses these changes.

Your final EPS should be submitted to HMRC by 19th April following the end of the tax year. If your business has ceased trading during the tax year, you’ll need to let HMRC know the date on which you officially closed shop.

Payroll compliance

Compliance in payroll is extremely important. Global legislation is being updated all the time, and if you process PAYE in-house it’s up to you to ensure that you’re abiding by the latest regulations, and that the payroll software you are using is up-to-date.

Paying employees incorrectly, reporting inaccurate information, missing FPS and EPS deadlines, or making late payments can all have serious legal, financial, and reputational consequences for your business.

You could also find yourself in hot water if you fail to correctly classify employees or contractors, all of which impacts upon employment tax, National Insurance, net income, and any benefits the worker may be entitled to.

On top of this, it’s vital that all of the information you collect and store about your employees is being processed in accordance with GDPR guidelines. With GDPR, especially, the fines and penalties are steep for businesses that are found to be non-compliant.

Outsourcing payroll

Of course, just because you own your own business doesn’t mean you can’t access outside support when it comes to aspects of your operation such as payroll.

Given the level of complexity and the ramifications for non-compliance, many small businesses elect to outsource their payroll to professional payroll providers.

In many ways, outsourcing payroll as a small business makes perfect sense. Managing payroll can be a time-consuming task, taking away from other revenue-generating aspects of running your business, such as sales and marketing.

Taking payroll off your hands will allow you to focus on your customers, while ensuring that your employees always get paid correctly and on time.

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