Setting up a payroll system

When you have an employee, you’ll need a payroll system to:

  • pay them the right amount each week or month through PAYE (including bonuses, overtime and holiday pay)
  • deduct the right amount of tax and National Insurance Contributions (NICs) from their pay
  • report your payroll information each payday to HMRC (known as Real Time Information or RTI)
  • calculate your employers National Insurance Contributions (NICs)
  • deal with other factors such as pension contributions, student loan benefit, sick pay and maternity pay

You’ll need your payroll records to complete your Employer Annual Return, too.

Your bookkeeper or accountant may offer this service. Read on if you plan to save money and do it yourself.

Payroll systems: your options

HMRC has provided information on its website about payroll software, together with a list of HMRC-recognised software. 

Payroll software - the benefits

Whilst using payroll software may sound daunting to those who are used to manual payroll, it does offer significant benefits...

  • it will save you time
  • complicated calculations will be automated
  • it helps you to avoid mistakes
  • payslips can be produced and printed automatically
  • it helps you to keep clear, accurate records

You can get hold of free software that will do the basics for you by calculating deductions, but have a look at commercial software first to see what else it offers. Make sure you choose a provider who has been recognised by HMRC.

A good software provider will...

  • automatically send you updates - for example, when tax rates change
  • make it easy to add and remove employees (when they join or leave your business)
  • make it easy to handle one off payments such as bonuses
  • deal with RTI efficiently 
  • generate end-of-year reports - useful for annual returns

Take action

  • have a look at our article about PAYE
  • visit the payroll section of the HMRC website for clear and up-to-date guidance
  • find out which payroll software providers are recognised by HMRC

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