How to set up payroll for your small business

March 21, 2024

As a small business owner, setting up payroll can seem cumbersome and long-winded. While managing payroll for a couple of employees might be relatively simple, it grows exponentially more complex the more people you employ.

Laying down the right foundations is key to managing payroll properly both now and as your business expands.

In this article, we’ll walk you through the essential steps to set up payroll for your small business, ensuring compliance with regulations and laws.


Register as an employer with HMRC

The first step in setting up payroll is registering as an employer with HMRC. You’ll need to do this even if you’re your company’s only employee.

To register, you’ll need to provide information about your business, including your company name, address, and contact details. Most people register online through the HMRC website.


Choose a payroll software

Next, you’ll need to choose payroll software compatible with real time information (RTI). RTI requires employers to submit payroll information to HMRC every time they pay their employees.

Many payroll software options are available, from free basic packages to more comprehensive solutions. Some popular options include Xero, QuickBooks, and Sage.

When choosing payroll software, consider factors such as ease of use, features, and customer support. Spend time learning how to use your chosen software – they can have steep learning curves.


A note on real time information (RTI)

Real Time Information (RTI) is a system introduced by HMRC in 2013 to improve the accuracy and efficiency of the PAYE system.

Under RTI, employers are required to submit payroll information to HMRC every time they pay their employees rather than just at the end of the tax year.

The information submitted through RTI includes details such as pay amount, deductions for Income Tax and National Insurance contributions, and employee information.

As an employer, ensuring that your payroll software is compatible with RTI and that you’re submitting accurate and timely information to HMRC is crucial. Failure to comply with RTI requirements can result in penalties and fines.

Some key points to keep in mind regarding RTI:

  • Submit information on or before each pay-day: You must submit your RTI submission on or before each pay-day, not monthly or quarterly.
  • Include all necessary information: Your RTI submission should include details such as your employees’ full names, National Insurance numbers, and the amount of pay and deductions for each employee.
  • Ensure accuracy: Double-check your RTI submissions for accuracy before submitting them to HMRC. Inaccurate or incomplete submissions can result in penalties.
  • Keep records: Keep records of your RTI submissions and any related information for at least three years after the end of the tax year.

If you have any questions or concerns about RTI, consult JCS Accountants for more advice.


Determine employee tax codes

Each employee will need a tax code, which determines how much tax they’ll pay on their earnings. You can obtain tax codes from HMRC or from your employees’ P45 forms if they’ve previously been employed.

If an employee doesn’t have a P45, they’ll need to complete a starter checklist, which you can find on the HMRC website. It’s important to ensure you’re using the correct tax codes for each employee to avoid overpaying taxes.


Set up a PAYE system

PAYE (Pay As You Earn) is the system used by HMRC to collect Income Tax and National Insurance contributions from employees.

As an employer, you’ll need to set up a PAYE system to deduct these amounts from your employees’ pay and send them to HMRC.

Your payroll software should have a built-in PAYE system, making calculating and deducting the necessary amounts easy.


Consider National Insurance contributions

When setting up Payroll, you’ll need to consider income tax and National Insurance contributions.

Both employers and employees pay National Insurance contributions, which fund various state benefits such as the NHS and state pension.

The amount of National Insurance contributions you’ll need depends on factors such as your employees’ earnings and employment status. Your payroll software should automatically calculate the necessary contributions.


Decide on a pay schedule

You’ll need to decide on a pay schedule for your employees, which can be weekly, biweekly, or monthly. Monthly is by far the most common schedule.

Once you’ve decided on a schedule, communicate it clearly to your employees and stick to it.


Keep accurate records

It’s crucial to keep accurate payroll records, including employee information, pay rates, and deductions. You’ll need these records for various purposes, such as completing end-of-year tax returns and providing information to HMRC if requested.

Your payroll software should make storing and accessing records easy, but keeping a backup copy in a secure location is still a good idea.


Wrapping up

At JCS Accountants, we understand the unique payroll needs of small businesses, from medical practice partners to charities and SMEs.

Our team of experienced accountants can provide guidance and support to help you set up and manage your payroll, ensuring compliance and allowing you to focus on what matters most – running your business.

Contact us to find out how we can assist you with your payroll.

Ready to talk?

Dick Haffenden JCS

Then we’re ready to listen.

Tell us about yourself, your goals and what you need to achieve them and one of our team of friendly accountants will be in touch to begin the conversation.

020 8643 1166

jcs Accountants

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