Top Tips: Setting up a Payroll

So you have taken the plunge and set up your own business and started employing people (see our other ‘top tips’ articles on how best to do this), now you will need to have the capability to pay them appropriately and meet your Pensions Automatic Enrolment commitments. We’ll deal with Auto Enrolment in a separate article.

What to Consider When Setting up Your Payroll

The ability to pay people correctly is one of those requirements that doesn’t get recognition when done well however becomes a real issue for both employee and employer when it’s not done right.

As part of your payroll set up you will need to also ensure that

  • You comply with the wide and various requirements of UK Legislation, such as paying above the National Minimum Wage, ensuring the correct Tax and National Insurance is deducted and paid to HMRC appropriately, to name a few
  • Under Pensions Automatic Enrolment you are assessing your workers eligibility to join a pension scheme automatically and when they, are you are communicating this fact and processing pensions contributions correctly
  • You produce payslips every pay period setting out your employees Gross Pay, any deductions you may be making and their Net Pay

What Should Your Payroll Solution Look Like?

The solution you adopt will depend on a range of factors appropriate to your business, however the two main options are as follows:

Option 1 – Develop your own internal payroll capability within your company

This option will require you to have the functionality to set up an employee, gather any pay related information at a point in the pay period, normally referred to as a payroll cut off, and once received apply a series of calculations to ascertain how much Tax and NI will need to be paid.

The majority of companies that select this route purchase or subscribe to a payroll software option which has all the standard calculations built in. Some of the key players in this market are Sage, Xero, Run and Cascade to name but a few.

If you are looking at this option, some top tips are to:

  1. Ensure your provider provides an update service as part of your package, as if any changes are made to legislation or as a result of budget announcements, your system will need to be updated to reflect these changes to ensure you remain compliant with your duties
  2. Try where possible to simplify your pay components. The fewer variable pay and changes to basic pay you have the simpler it will be to run and reconcile your pay each pay period. Pay is normally made up of the following:
  • Basic pay; normally this is the employee’s hourly or daily rate and is subject to tax and NI
  • On top of the basic pay you may introduce elements of variable pay, this would include overtime which may have different rates such as time and a half for evenings and Saturdays and double time for Sundays and Bank Holidays
  • You may pay allowances such as a call out, shift or stand-by allowance
  • You may pay one off payments such as a bonus or incentive payment
  • And finally you will need to decide what wage types would be deemed as pensionable (the implication here is that when paid, these payments will attract additional costs to the employer of up to 3% and deductions for the employee of up to 5% – see further detail in the Top Tips: Auto Enrollment article)

All of these payments will need to be set up on your payroll system as separate wage types and then the appropriate calculations applied to them. Having fewer variable and one-off wage types will ensure employees understand how their pay is calculated and reduces the risk of processing errors.

  • Once you have set up your payroll you will then need to have a system in place to receive pay information to the payroll manager to allow the pay to be calculated; this could be in the form of time sheets, overtime dockets for example. Once pay has been calculated you will then need to send the appropriate information to HMRC; this will include:
  • EPS and FPS files to HMRC – Employer Payments Summary detailing Tax and NI related information the employer has made and Full Payment Submission which HMRC review to see what payments have been made to the employee via payroll
  • RTI file – Real Time Information to HMRC – detailing who you are employing
  • BACs or Chaps – to allow payments to be made to employees’ bank accounts if not paying by cheque
  • Pension Provider files and payment – these will contain the pension contributions you have taken from the employee’s pay that will need to be paid into their pension scheme by your pension provider.

So what are the pro and cons of developing your own payroll?

Pros:

  • It can be a cost effective approach as once the system has been purchased and set up you can simply add new employees as and when you recruit them. It is therefore worthwhile undertaking a cost analysis to ascertain at what point in employee number terms, the in-house solution is more cost effective than the outsourced bureau solution (see Option 2 below) and compare this to your business plan.
  • Changes can be made to the system to reflect your own requirements as your payroll manager will normally be provided with administration access to make changes to your system configuration
  • Allows you, if managed correctly, to reduce your payroll cut off period to pay processing as pay information will be managed within your company and not passed to another provider who may insist on dedicated cut off days for pay information.
  • Will allow, subject to configuration, you to discharge your Pensions Automatic Enrolment duties without incurring additional costs

Cons:

  • Initial set-up costs may be higher than the outsourced option based on the number of employees you currently employee
  • Speed of setup, as you will need to configure your payroll system, depending on the complexity of your pay and variable pay this may take time to set up and test before you go live.
  • You will need to either recruit or build into someone’s job description the role of Payroll Manager
  • Any issues with Tax and NI processing will need to be managed by the Payroll Manager

Option 2 – Outsourcing Your Payroll to a Third Party Provider

There are many specialist companies offering an outsourced service, from accountants to Payroll Bureaus.  These normally fall into two groups:

  1. Managed Pay Provider – these companies will normally take your pay information and do all the calculations for you to work out Tax and NI payments to HMRC, produce payslips and provide you with a payments schedule. It is then your job to make these payments to employees, HMRC etc.
  2. Fully Managed Service – this provides all the services of the Managed Pay Provider but will also make payments on your behalf to HMRC and your employees.

As with Option 1, your outsource provider will require a full breakdown of your pay components to allow them to set your company on their payroll system, however this is normally done through a mix of completing set-up documentation and meetings. In addition to set-up, the provider will also agree with you how they will receive any pay information required for them to process pay correctly within each pay period. Once set-up your provider will run your pay on your behalf each period.

Pros:

  • It is simpler to set-up as your provider will do all the configuration for you
  • You do not need to have a payroll manager in your business, only someone who collects the pay information and passes to your provider along with being your provider’s point of contact for queries
  • Speed of set up. Most providers can set-up a payroll quickly so if speed of set-up is important, say you have just taken on your first employee and you need to pay them, this may be the better option for you.

Cons:

  • Costs, as whilst the set up may be cheaper you may have to pay for the ongoing services such as payslips, reports etc., so when considering this option it is worth asking what the total set-up and monthly running costs would be to allow a better comparison with the alternative approach of developing your own payroll
  • Due to the outsource provider managing a range of payrolls they may have strict cut off dates to process your pay so if you miss these, your employees may not receive the correct pay in the period. This is particularly relevant if you have a wider range of variable pay elements such as allowances and overtime.

Summary

In summary whichever option you choose you will need to assess your immediate and longer-term need to ensure your payroll solution meets your ongoing requirements, as paying people quickly and effectively is something your employees will expect.  You’ll get no thanks when it goes well, but oh boy, wait until something goes wrong!

For help and support on setting up a payroll, please contact:

Mark Dyer, Director – Petaurum Solutions

July 2018