How Does a Small Business Manage Payroll?

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General business Posted on August 01, 2017

How does a small business manage payroll?

What are your payroll responsibilities, and how does a small business manage payroll on a monthly basis? Read on to find out more.

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It’s a little-known fact that almost three quarters of private sector businesses in the UK do not employ any staff. This neatly illustrates how dependent our economy is on single-person firms and sole traders. However, there are more than a million companies that do employ staff, and many of these are fairly small set-ups.

If your company falls into the latter category, you’re legally obliged to manage your staff’s payroll. You’ll soon here about it, otherwise, and not just from the government!

What is payroll?

For every member of staff you employ there are laws about how tax and National Insurance are deducted from their pay.

To work within the law, you need to issue payslips and keep accurate records, and it’s these activities that constitute what we know as payroll. In other words, it’s about more than just handing out wages at the end of the week.

As soon as you start employing staff above the low-wage threshold, sorting out payroll is something you must do by law. And it can be quite a headache. So how would you go about it and what are the risks?

How does a small business manage payroll?

When it comes to deciding how to organise your payroll, you have two choices. Either you do it yourself in-house or hire a specialist company to look after it for you. Both options have advantages and disadvantages.

1. Do it yourself

Running your own payroll is much easier if you’re a larger company with lots of staff and the clerical resources to administer it. You need to designate a person, or team of people, to oversee the work. If you’re a small company, the responsibility for doing it might fall to you, the business owner.

How to do payroll yourself

The most critical part of payroll is that whoever is doing it needs to understand the PAYE (Pay As You Earn) system. It’s a system for deducting tax and National Insurance contributions for all staff earning more than the income threshold of £112 per week, direct from their gross wage.

The tax office needs to receive a report prior to each payday, as well as being informed every time an employee joins or leaves your company.

Be aware that legislation governing payroll administration changes frequently, and every budget the Chancellor gives you something else to consider. So you have to stay informed and have a keen eye for detail if you want to do it yourself.

2. Use payroll software

If this seems a little daunting, there are plenty of commercial systems available to help you undertake the job. Everything can be done by hand if you prefer, but this usually takes longer, and these days HMRC requires returns to be submitted electronically anyway, so using software makes sense.

Most systems do the necessary calculations for you. They automatically produce payslips and other documentation such as P45s and P60s, and also compile the all-important electronic returns. This makes life easier and removes a lot of the risk for making mistakes.

If you manage your own payroll, a commercial system is a necessity, so invest in something suitable and ensure good quality training is provided to everybody using it.

3. Outsource to business accountants

Payroll can quickly get complicated, especially if you're wondering how to do payroll yourself. If you would rather focus your time on growing your business, consider approaching a reputable firm to manage your monthly payroll responsibilities for you.

Larger employers can invest in in-house payroll departments, but if you’ve only got a few staff, outsourcing is much more cost-efficient and time-efficient.

Specialists can only work with information they receive, so good communication is essential. You also need to factor in the additional costs involved.

But attempting to manage payroll yourself can lead to mistakes in how or when your staff are paid, as well as risking legal fines. Using specialists minimises this risk. They provide the accuracy, thoroughness, and expertise required of payroll management, leaving you to concentrate on the aspects of your business that interest you most.

If the stress and worry of administering payroll is on your mind, we can help. Find out more.