The official definition of payroll is a company’s list of employees. However, it’s commonly understood to mean the combined wages and salaries paid out to all employees, and the department that looks after them.
As an employer, payroll is one of the most important areas within your business. Not only is it likely to be your largest expense, it can lead to a substantial fine if not done correctly.
Payroll can be confusing and time-consuming for many businesses, so we’ve put together this guide to cut through all the jargon and explain everything you’ll need to know.
- Why payroll is important
- How it is calculated
- How to make the process easier as an employer
- How to pay employees
Why is payroll important?
An effective payroll system goes a long way to contributing to a well-run business. Here we go into more detail about why it’s so significant.
It keeps morale high. With a shocking 75%+ of large UK companies admitting to paying their employees late or incorrectly in the past year, it’s unsurprising that there can be grumblings around pay day. Paying your employees on time will make them feel valued and cared for, which in turn will help to boost performance and output.
It frees up resources. By integrating a reliable, successful payroll system into your business, you can cut down the amount of calculations and paperwork involved in the process. This in turn saves on costs and creates more time for exploring ways to improve revenue and rankings.
It complies with employment law. As an employer you are legally obligated to register your business, check employees’ right to work, report payments to HMRC and make deductions for PAYE (Pay As You Earn), the government’s system for taking tax. Failure to do so can lead to fines from HMRC, which can greatly impact a small business.
How is payroll calculated?
The most important function of payroll is to ensure each employee gets the correct amount in their pay packet, every time. But before you can celebrate this achievement, there are some steps to go through first.
To start with, each employee’s gross pay (pay before tax) must be calculated, which can differ between those who receive wages (paid by the hour) and salaries (paid a fixed amount per month). Roughly speaking, wages will be multiplied by hours worked, while salaries will be divided by 12 to find the monthly gross pay.
This part is fairly simple, but there are a number of other factors that need to be taken into account which can vary from business to business. These are:
- Sick days
- Commission or tips
- Benefits, i.e employee discounts
- Pension plan
These factors must also be taken into account for each employee and their gross pay adjusted accordingly.
Next, the net pay (pay after tax) must be calculated through the deduction of PAYE, which involves taking Income Tax and National Insurance. The amounts deducted are dictated by the individual’s tax code, which HMRC will generate on receipt of the employee’s P45.
Now you just need to report all payments and deductions to HMRC on or before pay day.
Once this is complete, you can pay your employees!
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How to make payroll easier
Following our guidelines should help you understand how payroll works, but there are some extra things you can do to ensure everything runs smoothly.
Keep clear records
Log employee details, wages, salaries and hours all in one place, so you can send everything off to HMRC without searching through different folders to gather all the information.
Implement a payroll policy
Clearly communicate when and how your employees will be paid and your policies for expenses, pension etc., and make sure everyone understands. This will help to clear up any confusion so there’s no surprises on pay day.
Keep track of contracts
Regulations and rights can differ for employees, contractors and workers, which will reflect in their payslip. Regularly review contracts and keep an eye on changes in employment laws to make sure you’re not caught out.
Set reminders for pay day and keep on top of any admin that needs doing before then to reduce any last-minute panic and ensure your employees are paid on time. When it comes to payroll, it’s always better to be proactive than reactive.
How to pay employees
There are a few different avenues to choose when processing your company’s payroll, with each coming with its own good points and potential problems.
The old-fashioned way is still surprisingly popular with a lot of businesses, as it saves on costs and offers employers more control over the process. However, this option is also time-consuming, leaves more room for human error and can lead to costly fines if not done correctly.
Hire an accountant
Outsourcing payroll to a professional accountancy firm is an appealing choice, as it leaves the employer’s hands free to run the other aspects of the business. The accountant will be an expert in their field, and will work quickly, efficiently and (hopefully) error-free. The problem with this option is that it can prove costly, which can be a downfall for small and start-up businesses.
Use payroll software
The use of software to process payroll is an increasingly popular choice with businesses, due to it being easy, accurate and affording complete control. Most software options are highly customisable, allowing you to tailor each feature to perfectly suit your business. All they require is someone to be trained on how to use them.
Our HR software can save you hours on HR-related admin, such as generating a ‘Payroll Journal’, every month.
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