Small business payroll – Getting started guide for SMEs, startups & entrepreneurs

Last checked and updated on 8 August 2022

Running a small business is hard work, and one of the many things you have to worry about is payroll. Paying your employees on time and in the correct amount can be a daunting task, but it doesn’t have to be. In this guide, we will teach you everything you need to know about small business payroll.

We will compare different software and services, and give you tips on how to stay compliant with UK law. So whether you are just starting out or have been running your business for years, this guide has something for you!

Payroll for limited company or sole trader?

When it comes to payroll, there are a few things you need to take into account. The first is the type of company you are running. Are you a limited company, a sole trader, or something else? Each type of company has slightly different rules and regulations when it comes to payroll.

How does payroll differ for limited companies compared to sole traders?

For limited companies, payroll is a bit more straightforward. You need to calculate employees’ salaries and deductions, and pay Income Tax and National Insurance contributions (NICs) to HM Revenue & Customs (HMRC). You may also need to pay Employers NICs.

For sole traders, the process is a little more complicated. Not only do you need to calculate employees’ salaries and deductions, but you also need to pay Income Tax and Class II National Insurance contributions. You may also need to pay Employers NICs.

Registering for payroll

First of all, you need to register with HMRC as a PAYE employer. This can be done online and is free to do. Once you are registered, you will be given a PAYE reference number. You will need to quote this number on all of your payroll forms and correspondence with HMRC.

Calculating employees’ salaries and deductions

Now that you are registered as a PAYE employer, it’s time to start calculating employees’ salaries and deductions. The first step is to work out each employee’s taxable pay. This is their salary minus any allowable deductions, such as pension contributions or childcare vouchers. You then need to calculate the amount of Income Tax and NICs that needs to be paid on this taxable pay.

What paperwork or forms need to be submitted to HMRC?

There are a few key forms you need to submit to HMRC monthly or yearly. The first is the Full Payment Submission (FPS), which is used to report employees’ salaries, deductions, and NICs. You will also need to submit an Employers Annual Return (P35), which reports all of your employees’ earnings and NICs for the year.

How do I calculate the National Insurance contributions?

The National Insurance contributions (NICs) are calculated based on an employee’s salary and how much they have earned in a given tax year. There are two types of NICs: Class I and Class II. Class I NICs are payable by employees and employers, while Class II NICs are only payable by employees.

What about Employers NICs?

Employers NICs are paid on top of the employee’s National Insurance contributions. Learn more here.

Software and services for small business payroll

Now that you know the basics of small business payroll, it’s time to choose a software or service provider. There are many different options available, so it can be difficult to decide which one is right for you.

You can choose to use payroll software yourself and run your own payroll, or you can outsource your payroll to be managed by a payroll services provider or payroll bureau.

Each option has its own advantages and disadvantages, so it’s important to do your research before deciding which one is right for you.

Small business payroll software

There are many different options available, both online and offline. The most important thing is to find software that is easy to use and fits your budget. Once you have chosen a software, you will need to set up a payroll account. This is where all of your employee data will be stored, including their pay rates, tax information, and National Insurance numbers.

Top 5 best payroll software options for small UK businesses

There are many different payroll software options available, but not all of them are created equal. Here are five of the best options currently on the market:

  1. QuickBooks Payroll: This is a cloud-based software that is easy to use and perfect for small businesses. It comes with a variety of features, including payslip templates, automatic tax calculations, and employee self-service.
  2. Sage 50 Payroll: This program is also accessible from the cloud, making it ideal for small enterprises. It includes payslip templates, automatic tax calculations, and employee self-service tools, among other things. Read our Sage Payroll review.
  3. Xero Payroll: This is another cloud-based program that’s ideal for small businesses. It includes payslip templates, automated tax computations, and employee self-service options. Find our Xero Payroll review here.
  4. Paychex: This is an offline software that is perfect for businesses with more than five employees. Recommended by us because of their good customer service.
  5. ADP: This is an offline software that is perfect for businesses with more than five employees. Recommended by us because of there good customer service. Read our ADP Payroll review.

Payroll processing for small businesses

Once your payroll account is set up, you can start processing your payroll. This involves calculating your employees’ pay and deductions, and then issuing payslips and paying taxes and National Insurance. You will also need to submit monthly returns to HMRC, detailing all of the payments you have made.

Outsourcing payroll services for small businesses

If you don’t want to deal with the hassle of running your own payroll, you can outsource the job to a payroll services company or bureau. This is a great option for businesses that don’t have the time or resources to do it themselves.

There are many different payroll services companies available, so it’s important to do your research before choosing one. Make sure to ask for quotes from several different companies, and read reviews from other businesses that have used their services.

Here are some things to look for when choosing a payroll company:

  • Experience: The company should have a lot of experience processing payroll for small businesses.
  • Reputation: The company should have a good reputation and be known for providing high-quality services.
  • Range of services: The company should offer a wide range of services, including preparing payslips, filing monthly returns, and paying taxes and National Insurance.
  • Ease of use: The company should make it easy for you to submit your payroll data and track your payments.
  • Cost: The company should be affordable and offer a variety of payment options.

5 of the best payroll services companies and payroll bureaus for small UK businesses

If you don’t want to process your own payroll, there are a number of companies that can do it for you. Here are five of the best:

  1. Just Payroll Services: this company offers a wide range of services, including preparing payslips, filing monthly returns, and paying taxes and National Insurance. They have a good reputation and are known for providing high-quality services.
  2. ADP: Is well known to be one of the largest providers of outsourced payroll services in the world. They offer a full range of services, such as payslips, quarterly returns, and taxes and National Insurance payments. Read our ADP Payroll review.
  3. Cintra: Another provider to consider, not least because they offer a 100% satisfaction guarantee. They have over 25 years of experience in providing payroll services to businesses of all sizes.
  4. Moorepay: This company is a specialist in providing payroll services to small businesses. It comes with a variety of features, including payslip templates, automatic tax calculations, and employee self-service. Read our MoorePay payroll review.
  5. IRIS Payroll: Finally, IRIS Payroll is a popular choice for small businesses. It provides you with several services, including payroll templates, automatic tax calculations, and employee self-service. Read our IRIS Payroll review.

This is just a short overview of the different options available for small businesses when it comes to payroll. For more detailed information, please see our comprehensive guide to payroll processing.

Tips for staying compliant with UK payroll law

Proper payroll compliance is essential for a business of any size. Here are a few tips to help you out:

  • Keep accurate records of employee salaries and deductions
  • Make sure you pay employees on time
  • File your PAYE Returns (P45, P46, etc.) on time
  • Comply with the National Minimum Wage and National Living Wage
  • Make sure you are registered as an employer with HMRC

For more information, please visit the HMRC website.

The importance of payroll records

Finally, always remember to keep your payroll records up to date. This includes recording all of your employee data, as well as their pay rates and deductions. You will need this information for both HMRC and your employees themselves.

Conclusion

Running a small business is hard work, but with the right tools and payroll advice, it can be a lot easier. In this guide, we have taught you everything you need to know about small business payroll. We have also compared different software and services, and given you tips on how to stay compliant with UK law. So whatever type of company you are running, we hope this guide has been helpful!

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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.