Payroll processing – how does it work and what’s required? Costs, services and software compared

Last checked and updated on 20 June 2022

The processing of your company’s payroll is an essential activity that must be done accurately and on time. Some companies prefer to employ their own payroll administration staff to work in-house whilst others outsource their payroll to a specialist company who provide a payroll processing service.

In our guide we will look at what payroll processing entails and answer some of the most Frequently Asked Questions on payroll processing.

What is payroll processing?

Payroll processing is simply the act of managing all of the payments that you make to your employees. This covers the inputting of employee details onto payroll software, working out who has worked what number of hours, including overtime, sick pay etc, and then processing pay checks.

What does a company need to do in order to ensure their payroll processing is compliant with UK law? 

Payroll compliance is absolutely essential, and every company needs to make sure that their payroll is fully compliant with the relevant UK laws. These simple steps can help your payroll manager remain compliant:

  1. Accurate personnel records – maintain your records to include any changes and remind your employees they should advise you of changes in their personal details. 
  2. Set out company policies – set out appropriate policies within the company for things like overtime and expenses ensure that any timescales for submitting these are clearly understood. 
  3. Workplace pensions – if your company has more than one employee you have a responsibility under the pension law to provide a workplace pension.
  4. Audit Trail – ensure you have an audit trail in place that is robust and accurate. 
  5. Keep up to date – legislation around payroll changes continually. To ensure compliancy make sure you keep up to date with the latest information from the government.
  6. International legislation – if you operate in multiple countries make sure you are fully up to date with any changes in their payroll regulations.
  7. Training – Training courses will help you with best work practises and keep you up to date with changes in legislation. 
  8. Request feedback – encourage employee feedback, this helps to offer peace of mind that you are there to help. 
  9. Be aware of deadlines – ensure everything is submitted on time; penalties are imposed for late submissions. 
A note on GDPR
General Data Protection Regulations (GDPR) are incredibly important. Introduced in May 2018, these are the laws that govern personal data and how it is stored. The nature of the personal data that is used to process pay makes this an important regulation to follow. Any processes that are in use should be monitored to make sure that are compliant with current GDPR rules, meaning the data you hold should be kept in as few locations as possible 

ISO27001 can also assist you in meeting your security obligations under GDPR. Any communications from employees should also be kept in a secure manner. Cloud based systems allow for greater security in contrast to a paper based system, and employees can be issued with online authentication in order to access documents like payslips.

Steps in payroll processing – how to do payroll processing, and what do companies need to do? 

There are a number of steps that should be taken during the payroll processing procedure, so it can be a good idea to have a checklist to ensure that you have completed everything in a timely fashion:

How to do payroll processing

  1. Ensure your data is clean

    When data is unclean, miscalculations can occur so check everything before you begin. If you have new employees with a new member on it make sure their personal information including tax code are correct. 

  2. Check timesheet information

    Make sure there are no inconsistencies in terms of hours worked, pay scale and employee type.

  3. Know your payroll costs

    When you know how much your payroll should cost, spotting discrepancies is easier. Think about tax and National Insurance withholdings, gross wages and benefits. You will also need to account for other types of payments including sick pay, pension payments and, if relevant, commission or tips.

  4. Produce payslips

    Each employee needs a payslip showing their gross pay, deductions, net pay and worked hours for the pay period. It can include, but doesn’t need to: National Insurance number, tax code, rate of pay, and total deductions and pay for the full year to date. This can be done via payroll software and even distributed electronically.

  5. Be on time with payments and reports

    Tax and National Insurance need to be paid monthly to HMRC on the basis of figures you report on your Full Payment Summary (FPS) for the previous month, this excludes any reductions you have from your Employer Payment Summary (EPS) sent before the 19th day of the current tax month. If this is not done in time, there are financial implications for your company.

  6. Complete annual reports

    Complete all tasks and annual reports in preparation for the next tax year. Ensure your records are up to date as this makes the entire process easier in the long run.

Best payroll processing companies – review of the top 10 providers

By now you should have a better understanding of the payroll process and what it entails. Lets take a look at ten of the best UK payroll providers and what they offer:

RankPayroll processing companyWhy we chose it
1Payroll OptionsA great choice for smaller businesses, Payroll Options offer a reasonably priced simple to use payroll solution. If you don’t need software that offers you too many complex options, then this really is one of the best you will find.
2BuzzacottIf you are a niche business then you will benefit from a company who are used to dealing with those who are a little more unusual. Buzzacott are a great choice for a specialist payroll processing provider.
3Jeffreys Henry LLPAn incredibly well established name on our list. Whether you are looking for a fully or part managed service Jeffreys Henry LLP have been around for over 100 years and certainly know what they are doing.
4PayplusPayplus believe in what they do, so much so that they offer a guarantee; if your employees are not paid the right amount, on time, you will get your money back. With a guarantee like that you know they stand by the quality of the service they offer.
5Crystal HR & Payroll LtdOffering a personal and friendly service, Crystal HR & Payroll Ltd are a great company to work with. They offer specialist packages, including person payroll, carer payroll, and even nanny payroll. 
6ADP PayrollADP is a global company offering UK coverage. They provide HR and payroll services ensuring companies are supported with every stage within the employee lifecycle, starting with recruitment all the way to P45s. (Read our ADP Payroll review)
7Just Payroll ServicesAs the name suggests Just Payroll Services only deal with payrolls, so you know that they are specialists in this area. They offer both fully and part managed services. 
8MHRMHR use great technology, namely iTrent. This software is considered one of the best available and offers a centralised business hub for employee data.
9PayescapePayescape offer a payroll solution that is incredibly efficient and designed to make processing payroll as smooth as possible for smaller companies. They use a software program that is intuitive and cloud-based to ensure data security. Their pricing structure is also transparent.
10MoorepayMoorepay have over 10,000 customers so are a very popular choice. They offer a range of different tailored payroll solutions, suitable for every size and type of business. You can be sure that they will offer a payroll solution that will work for your business. (Read our Moorepay review)

Payroll processing services – what types of service are on offer from different providers?

There are several different payroll processing options you may want to consider; it really depends on how much help you would like with your payroll. 

A fully managed payroll service will allow you to outsource all of your payroll requirements to a company who specialise in payroll. This alleviates the requirement for you to handle any tasks related to payroll in-house. 

A part-managed service on the other hand means that you will do some of the payroll work yourself and only outsource part of it. This is a good option for those companies who have someone in-house with experience.

Payroll processing software – what are the leading products and how do they compare?

The market is full of different payroll processing software options. Some of those which you may want to consider include Sage Business Cloud Payroll, Kashflow Payroll, Intuit Payroll, Xero Payroll, IRIS Payroll and FreeAgent.

There is also HMRC Basic PAYE Tools which is a free software that offers all of the basics. Each software will offer something a little different, and some are cloud based whilst others are not, so it really does depend on what your company actually needs. 

For many companies, online or telephone support is a must with any payroll software that they are looking to use, and most of these companies have dedicated helplines. 

Online payroll processing – pros and cons of hiring an online payroll processing company

There are pros and cons of any decision that you might make for your business, and that is certainly true when it comes to payroll processing. The biggest pro of choosing to outsource your payroll processing is that a specialist payroll provider will have access not only to the most up to date software but also will have a team of highly experienced individuals who know all the latest legislation regarding payroll and can apply that knowledge to your payroll. 

Outsourcing also means that you will not have to find the time to deal with payroll, which can be time consuming, instead spending your time working on something else within the company. 

The main reason many companies do not want to outsource their payroll is simply that they do not want to share personnel information with a third party in this way. Whilst the possibility of any kind of security breach is slim, it is worth remembering that many payroll processing companies use cloud based systems which are much more secure.

Payroll processing costs – how much do payroll processing companies charge? How does outsourcing compare to software costs? 

The price of payroll processing will vary from one company to another. It may also vary depending on your location, the number of employees that you have, and of course your location.

Here we look at how those cost might stack up:

ProviderAverage cost
Provider 1Price range £39 – £149 per month as a base charge. Additional employee costs £6 – £12 per month. 
Provider 2Standard cost of £12-£30 per month with an additional £4 per month and £1 per employee. A more advanced package costs £8 per month with the additional £1 per employee.
Provider 3Base cost of £35 per month and then an additional cost calculated at 5% per employee.

The cost of outsourcing is usually based on a price per month, with an additional monthly cost per employee. The cost of payroll processing software to use in-house is similarly structured with a monthly fee based on number of employees. This amount can often be paid as an annual amount, with some companies offering discounts for paying this way. If you are using the software in-house you should also consider the salary cost of the person who will run your payroll when making a cost comparison.

Free payroll processing – is this possible? What are the concerns?

HMRC have put together a list of companies that offer free payroll processing software to those companies that have fewer than 10 employees. Whilst this may seem like a great way to save money there are a couple of things to consider. 

The first is, of course, if you go over 10 employees then you will need to find an alternative. You will also still need to employ someone to run your payroll. Perhaps that most important concern around free payroll processing is however than unless the person you are using to run your payroll in-house is highly experienced you can run the risk of not following all of the current legislations and with hefty financial implications available this may not be a wise move.

FAQ

What is payroll processing?

Payroll processing refers to the administration of any employee pay based on wages, salary, employee type and deductions that need to be made.

What is involved in payroll processing?

Payroll processing involves inputting all of your employee details into your system, including their personal details and any information relating to their pay, tax codes, deductions etc. On a given day each month it is then necessary to generate a payroll run in order to ensure that each employee receives the correct monthly pay amount, taking into account any deductions or things like maternity / paternity leave payments and sick leave pay.

How much does payroll processing cost?

A quick look around the market would suggest that the average cost most companies pay for payroll processing is £4 per employee per month. However, the cost can vary from between £5 – £12 per month and is dependent on the number of employees in a company and the sort of services required. Part managed will not cost as much as fully managed services.

What is the best payroll processing software?

The best payroll processing software for your company is the ones that fulfils all of your payroll requirements, this may not always be the best software for other companies. Software to consider includes Sage Business Cloud Payroll, Kashflow Payroll, IRIS Payroll, Intuit Payroll, Xero Payroll, HMRC Basic PAYE Tools and FreeAgent.

How to learn payroll processing?

There are specific payroll qualifications that you can take via accredited organisations like SIPP, however these are not always required. Entry level or apprenticeship positions are a good place to start learning payroll processing with a requirement of minimum of 4 GCSE’s grades 9-4 (A* to C), including Maths and English, usually being required.

How to do payroll processing?

In order to ensure that you can process payroll you need to make sure that you have all of the relevant employee information and that it is up to date, this includes details of any sick leave or benefits, pension payments and additional payments like overtime, tips and commission.

How does payroll processing work?

Payroll processing works by taking the employee information that you have carefully inputted into your system; pay grades, salary information, pension deductions etc and working out exactly how much should be paid to each employee per month based on the data you have, it also works out any deductions and then tells you how much each employee should be paid that month.

Who is the best payroll processing company?

There are many payroll companies in the UK including Payescape, Henry LLP, Just Payroll Services, MHR, Payplus, Crystal HR & Payroll Ltd, ADP Payroll, and Moorepay to name just a few. Each company is different so consider what your business needs from a payroll processing company in order to find the best one for your own individual needs.

What is end to end payroll processing?

End-to-end payroll processing is the integration of payroll into other aspects of the workforce – such as training, performance measurement, benefits, compensation and scheduling. When this connection is made, you improve your record keeping, communication, analytics and efficiency for the duration of the employee life cycle.

Why outsource payroll processing?

Outsourcing payroll is becoming an increasingly popular choice for many companies and offers a number of benefits. The most significant is that your payroll is undertaken by a team of experts with access to the latest software and who have a significant amount of experience. They ensure that your employees get the right amount of pay on the correct date without delays. This offers peace of mind to your employees and can boost retention. There are also some cost savings to be made by outsourcing this service.

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Important – The information provided in our articles is intended to be for general purpose use only, and not advice for you or your business. We strive to publish accurate information, but encourage you to fact-check and seek expert guidance. We recommend that you always speak to a qualified professional to get advice about how to operate your business under your specific requirements and circumstances.