When we hear the word "payroll," the first immediate association is often with the calculation and distribution of employee wages. While that is typically true, the process extends beyond mere compensation by cutting a cheque every few weeks whether for a small business or a growing organisation.
To understand in detail let’s dive deeper into knowing what Running Payroll is.
What Does It Mean to Run Payroll?
Running payroll is the process of making sure everyone in a company gets paid accurately and on time. It involves calculating wages, managing benefits, following tax rules, and handling various deductions. The goal is to comply with laws, prevent errors, and communicate effectively with employees.
This comprehensive task includes creating clear payslips, addressing employee questions, and integrating with HR systems. Payroll is like the financial heartbeat of a company, demanding attention to detail, adherence to regulations, and clear communication to ensure every employee receives fair and accurate compensation.
Importance of Running Payroll
Now let's talk about why running payroll is a big deal. Running the payroll is not only crucial to the employers but is important for multiple stakeholders. Each of the stakeholders has a vested interest in the payroll process, whether it's maintaining financial accuracy, ensuring regulatory compliance, or securing fair and transparent employment practices. Like if I am an Employer, I must ensure accurate payments and adherence to tax rules.
For HR and Payroll teams the obligation is to handle day-to-day tasks affecting employee payroll calculation and ensuring employees stay informed about their pay and taxes. Accountants use payroll data for financial reporting. Tax authorities like HMRC monitor accuracy and timely submissions. Meanwhile, government entities maintain a vigilant eye to ensure that fair and rule-compliant employment practices are upheld universally.
What Are the Basics of Payroll?
In simple terms, payroll basics are like the ABCs of handling how staff get paid in a business. This includes collecting employee information, calculating earnings, deducting taxes, and maintaining accurate records.
Essentially, it encompasses the foundational elements necessary for ensuring accurate and compliant payment to employees. Establish an effective payroll system with Payroll Checklists for detailed documentation and mitigating risks of error.
Information Required to Run Payroll
Here is a list of key information required to start payroll run in the UK:
Employer Information
- Employer PAYE reference number
- Accounts office reference number
- Company registration number
Employee Information
- Full name
- Date of birth
- Employee address
- National Insurance Number
- Tax Code (provided by HMRC), National Insurance category letter and, if applicable, student loan or apprenticeship deductions
Payroll Schedule
- Payroll frequency (e.g. weekly, biweekly, semi-monthly, monthly)
- Payment date
Salary and Wages Information
- Gross salary or wages
- Overtime details
- Bonus or commission payments
- Allowances or non-cash payments
Absence and Leave Information
- Record of absences (sick Leave, holidays, etc)
- Details of any unpaid leave
Deductions
- Statutory deductions, including SSP, SMP, SPP, SAP codes, as applicable
- Student loan deductions
- Other voluntary deductions
Pension Scheme Information
- Enrolment details for employees in a workplace pension scheme
- Pension contributions for both employer and employee
Collecting information for payroll is a pivotal aspect, serving as the cornerstone for a seamless compensation process.
It involves the efficient and error-free management of all aspects related to employee remuneration, from data collection to payment distribution. Upon receiving the preliminary information, the payroll calculation can be initiated.
UK Payroll Calendar
According to the UK payroll calendar, the payroll month spans from the 6th of one month to the 5th of the next, while the payroll year aligns with the fiscal year, commencing on April 6th and concluding on April 5th of the following year.
What Are the Steps to Run Payroll?
Follow these five simple steps to ensure an effortless payroll execution.
Step 1 - Calculate Gross Pay
The first step to running a successful employee payroll involves the calculation of accurate Gross Pay. To calculate gross pay for:
- Hourly Paid Employee: Multiply an employee's hours worked by their hourly rate.
- Salaried Employee: Divide Annual Gross Salary by number of pay periods in a year.
Example 1: Hourly Paid Employee
Let's say the hourly rate is £12.50, and the employee worked 35 hours in a week.
Calculation: Gross Pay = Hourly Rate X Hours Worked
= £12.50 X 35
= £437.50
So, the gross pay for the hourly paid employee for the week is £437.50.
Example 2: Salaried Employee
For a salaried employee, let's assume their annual salary is £45,000.
Calculation: Gross Pay = Annual Salary / Number of Pay
Periods in a Year
=£45,000 / 12 (assuming monthly pay)
=£3,750
So, the gross pay for the salaried employee for a month would be £3,750.
These examples are basic and do not consider deductions or additional benefits. The actual gross pay might vary based on factors such as leave days, insurance, and any other applicable deductions or bonuses.
Using a separate spreadsheet or payroll software streamlines the calculation process, while manual calculations can become time-consuming for larger teams.
Step 2 - Determine Deductions and Allowances to Calculate Net Pay
The second step is to calculate net pay in compliance with tax laws after determining deductions and allowances to pay your employees. This is where you must pay close attention to how employees fill out their tax-related forms to withhold the proper amount.
The National Insurance Contribution (NIC) deduction varies by category thus, needs to be calculated sensitively. Also, understanding the intricacies of PAYE (Pay As You Earn) taxation and exemption threshold for calculating tax amounts becomes vital.
Further, ensure that the statutory payments are calculated using the latest rates (2026 for the time of writing). They are SSP £123.25 per week (payable from day 1) and statutory maternity/paternity/adoption/shared parental pay £194.32 per week.
After finalising the payroll employer must provide payslips to the employees for transparency. In the UK, according to HMRC, employees have the entitlement to receive a payslip. Payslips must also include National Insurance category letters, student/apprenticeship deductions and any statutory payment codes.
Step 3 - Keep Proper Payroll Records
The third step is to maintain honest and organised payroll records for future reference and corrections. You can provide a reasonable explanation by referring to your records if there ever is a discrepancy between an employee’s net pay and what they expect to receive. Even when mistakes happen, if you correct them quickly and honestly there is a good chance that it will resolve smoothly.
Step 4 - Report to HMRC
The fourth step is to report the calculation and payment information to the regulatory authority. It is crucial to adhere to the specific requirements of UK payroll, which includes compliance with Real Time Information (RTI) reporting. Employers must report only normal hours worked, as HMRC cancelled the proposed detailed hours reporting requirement for 2026.
Submission of EPS (Employer Payment Summary) or FPS (Full Payment Summary) to HMRC is mandatory for each employer registered in PAYE for reporting purposes. Failing to submit RTI reports on time can result in penalties imposed by HMRC.
Step 5 - Pay Payroll Taxes
The final step is to pay what you have withheld from the employee pay and as an employer, you are liable to pay to HMRC. Pay what you owe on or before the due date for PAYE (Pay As You Earn) liability, typically on the 22nd of each month (or the 19th if paying by post). Timely payment is crucial to avoid penalties and interest charges. Ensure all liabilities, including employee deductions and employer NIC contributions, are paid timely to avoid HMRC penalties and interest.
Conclusion
In summary, creating a simple yet strong and effective payroll process is crucial. A well-organised payroll not only enhances employee satisfaction but also mitigates the employer's stress associated with this recurring task. As you apply these guidelines, you set the stage for a smooth and accurate payroll system, establishing the groundwork for ongoing growth and success.
- Essential Guidelines for Running Payroll Effectively - 3 February 2025
