Are you an SME owner wondering how to set up payroll for the first time? Read our guide to find out what steps you need to take to get it right.
How does payroll work in the UK?
Simply put, payroll is a list of employees for which you are responsible for paying Pay as You Earn (PAYE) tax. You will also have to pay their National Insurance and pension contributions.
If you’ve set up a Limited Company, you will need to register as an employer with HM Revenue and Customs (HMRC). The same rule applies if you are a Director-Only Company and you plan on paying yourself a salary.
Employees who work for you should be issued a payslip that breaks down their earnings and salary deductions.
It is your responsibility to determine how much tax you need to deduct from your employees’ pay and then pay your staff the remaining amount – also called net pay.
When you register your employees with HMRC, you will be provided with a tax code called 1250L, which you will need to include on each payslip.
You will also need to pay any deductions you’ve made from your employees’ salaries to HMRC and Pension Providers, which you need to do by set deadlines each month.
Additionally, you must adjust for allowances like maternity pay, sick pay, construction industry scheme payments, and student loans.
Finally, you need to keep detailed payroll records for each employee and report this information to HMRC annually.
Setting up payroll and registering for PAYE
Now that you know more about what payroll means and what is required of you as an SME owner let’s take a closer look at the steps you’ll need to take to get payroll right from the start.
Step 1: Register with HMRC
The first thing you need to do when setting up payroll is to register your business as an employer with HMRC. You can use this link to do so.
HMRC will then send you your PAYE reference number and your PAYE Accounts Office Reference. You will need both numbers to file your payroll data with HMRC.
Step 2: Decide who will run your payroll
Next, you will need to decide if you will be handling your payroll in-house – in other words, someone within your business will run payroll for you – or if you’re going to outsource this function.
If you choose to do it yourself, you must use HMRC-approved software. There is also payroll software that is offered by HMRC, which includes a free version for businesses with fewer than 10 employees.
Step 3: Salaries and deductions
Now, you must decide how much you will pay each employee and their deductions in terms of tax and benefits.
You are required to offer your employees a minimum of the National Living Wage if they are 25-years-old or over. You must pay the National Minimum Wage if your employee is younger than 25. Your pay as a director isn’t subject to these minimum wage requirements.
You’ll also need to decide on what benefits you’ll offer your employees, such as childcare vouchers and flexible holidays, and how this will affect their pay.
Step 4: Running payroll and reporting
If you are doing your payroll yourself, your payroll software will calculate how much tax and National Insurance must be deducted from an employee’s salary. This will result in the net amount you must pay the employee. The rest must be sent to HMRC by the 22nd of the following month.
If all this sounds a bit too much, we have the perfect solution for your SME. By hiring one of our virtual assistants, you can outsource your payroll and rest assured that it’s in good hands. Our trained virtual assistants can run your payroll and take care of all other business admin. Visit our website to learn more about how a virtual assistant can help you with payroll and so much more.