How to process payroll and pay employees on time
Even if your business is small, processing payroll can sometimes seem like a lengthy and complicated process.
Between organising payment schedules, making deductions, arriving at NET pay, and ensuring employees are paid on time, there are many moving parts to keep track of.
Processing payroll efficiently can help ensure that employees are paid accurately and on time each month. In this post, we’ll look at what’s involved in payroll processing, what you or your HR team needs to consider and the three key stages of payroll processing.
What is payroll? Payroll is the process of calculating an employee’s pay. In addition to an employee’s salary or wages, they may also receive allowances, benefits, and bonuses that you need to take into account. Processing payroll also involves calculating National Insurance, income tax and other deductions and paying and reporting the correct amount to HMRC. Learn more about what payroll is and how to pay employees in our complete guide to payroll for small businesses 📌
Table of contents
- What does payroll processing involve?
- What does HR need to consider to ensure a seamless payroll process?
- The three stages of payroll processing: A step-by-step guide
- Wrapping up
What does payroll processing involve?
If you’re employing your first member of staff or have a small team, you may take on the role of payroll administrator yourself.
But as you grow, you may want to appoint a payroll provider (or software) to process payroll on your behalf to streamline processes and save valuable time.
No matter who is in charge, here’s what the payroll administrator will need to do to ensure seamless payroll processing:
- Build a comprehensive, organisation-wide pay policy document. This should include leave policies, allowances, benefits, and bonuses. We’ll outline what makes up a comprehensive payroll policy later on in this guide.
- Define payslip components. You need to issue employees with payslips that include details on the gross pay, deductions and their final net pay.
- Gather other payroll inputs. Payroll processing relies on data from multiple facets of the business. You’ll need to compile these inputs and accurately store them.
- Calculate net pay and gross pay. You’ll need to calculate both an employee’s gross salary as well as their take-home pay.
- Deliver employee salaries. Ensure that you have a pre-agreed payment schedule and method so that employees know when and where they can expect to receive payment.
- File for payroll taxes, deductions, and other contributions. Employers need to manage and accurately track their employees’ tax payments to the government. You may also need to manage other deductions and payments to be removed from your employees’ pay.
What does HR need to consider to ensure a seamless payroll process?
Payroll is often run by either the human resources (HR) department or the finance department. Smaller businesses may prefer to outsource this responsibility to a dedicated HR specialist or a payroll provider. In some cases, the business owner may handle payroll themself, especially if they are a new business with few employees.
That said, no matter who is running payroll, it’s important that your various departments work well together to ensure everybody is on the same page.
For example, if an employee is due to receive a bonus, the HR team will most likely be privy to that information before a finance team is. If finance and HR are not in open communication, that bonus may not make it onto the intended payslip and thus cause a grievance that could have been avoided.
Therefore, before processing payroll, it’s important to follow this simple checklist to reduce the risk of making payment-related mistakes.
1. Confirm employee data is accurate
Sometimes errors creep into the employee onboarding process. It can be all too easy to rush the onboarding process and skip key details if you’re keen to hire new talent and are managing the process yourself as a new business owner.
Perhaps your new employee never received and completed the right forms or they may have incorrectly filled in one of the fields, such as the “employee statement” on the starter checklist for PAYE.
If so, this could result in mistakes surrounding employee classification which could impact tax deductions and pensions.
Before you begin processing payroll, always check that the employee data you have on file is correct. Ask employees to double-check that their personal information and tax codes are accurate before you process payroll.
Top Tip: Employing your first members of staff is an exciting milestone for any small business. But without proper processes, onboarding can become complex and time-consuming. To learn more about how to correctly recruit and onboard someone, read our complete guide on how to employ someone for the first time 💡
2. Check your timesheets
If your business employs people at an hourly rate, you should have a timesheet to track attendance and employee time.
Since timesheets are often recorded manually, it can be easy for human error to cause a simple miscalculation of hours.
To avoid this from happening, try and ensure that each timesheet goes through two pairs of eyes before approval to prevent any unexpected errors that may be a result of missed shifts, early check-in, and over time.
Storing your timesheets digitally and making them accessible only by password login can help prevent fraud or other people from modifying the sheet.
3. Create and send payslips
It’s a legal requirement to give each of your employees an accurate payslip on payday. Payslips must include the following payroll-related information:
- Hours worked for the given pay period (if your employees are paid on an hourly basis)
- Gross pay
- Net pay
- Payment method
It’s good practice to also include your employee’s tax code, National Insurance number, their pay rate as well as their pay and deductions to date.
4. File tax reports on time
You must pay your employees’ tax and National Insurance to HMRC every month. All contributions are reported on your Full Payment Submission (FPS) tax month (minus any reductions on the Employment Payment Summary (EPS) you sent before the 19th day of the current tax month).
HMRC will send you a late filing notice if you pay your employees and don’t send an FPS or send it late.
Late or incorrect payroll reports could negatively impact your employees’ Universal Credit payments.
Make sure to note payroll dates and bank holidays that affect closings so you’re not caught out.
5. Maintain accurate records
HMRC has the authority to run a tax compliance check at any time. For that reason, all of your records on employee payments and deductions need to be accurate and up to date.
These records must be kept for three years from the end of the tax year they relate to.
You should also ensure that your policies are clearly written so that anyone checking your files can understand them.
6. Produce annual reports
You must provide HMRC with an annual report that includes details on your employees’ pay, payroll benefits, and deductions in an FPS.
For the following tax year, you need to update your employee payroll records from the final day of the tax year. You must also report all employee expenses to HMRC along with giving your employees a P60, which shows how much tax they’ve paid on their salary in a tax year.
7. Stay up to date with payroll legislation
Payroll legislation is constantly evolving. It’s your job as a business owner to stay on top of these changes and make appropriate adjustments within the organisation.
If you outsource this role to a payroll provider (or software), or an HR manager, they will monitor these changes on your behalf and keep you apprised of any pertinent changes.
If you want to keep up to date with these changes, check gov.uk/browse/business regularly to see how updated legislation may impact payroll processing.
Going to payroll seminars, attending industry conferences and watching relevant webinars will also help boost your knowledge of payroll legislation if you’re keen to learn more.
It is also important to stay up to date with changes to minimum wage and how they may impact current staff wages.
The three stages of payroll processing: A step-by-step guide
Properly managing payroll from day one will streamline your business’s financial and administrative records. Efficient payroll processes ensure employees are paid the right amount, on time, as well as saving you and your team valuable time and money.
If you follow these three key steps, you’ll find it much easier to organise, manage and report on payroll processing.
1. Organise your payroll activities
Building a well-organised payroll processing structure reduces the risk of error and boosts efficiency.
Create a payroll policy
First, it’s important to establish a set of clear payroll policies that the rest of your organisation and HMRC can refer to if necessary.
These policies may include documentation on rules regarding:
- Attendance and timekeeping. Make sure you clearly outline the procedure regarding time clocks or timesheets and how employees must use them in order to accurately report their time worked.
- Paid leave. Explain if you offer paid leave beyond the statutory annual leave that the government entitles to employees. If so, make sure to clearly communicate how employees can request time off, such as how far in advance they must put in a request and the approval process.
- Benefits. Outline if you offer any additional employee benefits in kind (BIK) that are tax-deductible. This is especially important information for employees that need to file a Self Assessment tax return.
- Overtime. Let employees know if overtime is permitted and, if so, how it is calculated. Also describe the approval process for working overtime as well as any consequences to working unauthorized additional hours, such as taking a shift from another employee without approval.
- Breaks and meal periods. Outline if a lunch break is paid for, and if any other short breaks are considered paid or unpaid. Do employees need to clock out for lunch or longer break periods? Get specific to avoid any misunderstandings.
- Payroll deductions. State the various types of deductions that will be withheld from their wages and how the final net pay will look different than the original gross pay because of this.
Remember to periodically check these policies against current payroll legislation and make any necessary changes.
Choose a payroll schedule
Your payroll schedule determines when employees will receive payment. Depending on your business’s structure you may find one schedule more suited than another.
You can choose from four different pay schedules:
Most businesses choose either biweekly or monthly payment schedules. But if you have a small team of staff, are working with short term contracts, or struggle with cash flow, you may find weekly pay schedules easier to manage.
Your payroll schedule should also include key dates for tax payments. Make a note of key payment dates so you are always prepared.
The next step is to gather payroll data inputs from different departments across your business. Accurate data collection is critical to preventing mistakes further down the line and ensuring a seamless payroll process.
To get started, you’ll need data from the following divisions:
- HR team – salary agreements and eligibility for benefits
- Employees – tax codes, National Insurance numbers, P45 form (if they have one)
- Attendance systems – data from timesheets, attendance, and leave systems
- Finance – deductions for tax and other contributions
If your business doesn’t have all of these departments yet, you should set up a clear and simple system for tracking these details.
Storing all of this information in one accessible and central digital location will make it much easier for you and other team members to access data when they need to.
Using payroll software that has leave and attendance management features will make it easier to track the data.
When you’ve gathered all the relevant information, you need to check that the data is correct. Small errors may cause issues in your payroll processing further down the line.
Before you move to the next step you should:
- Ensure data is presented in the correct format. Keep all your numbers in the same currency and format. If you round up or down to the nearest 10p for example, it’s important to be consistent with all of the numbers.
- Verify that the list only features active employees and has no record of inactive employees.
2. Process payroll
Once you’ve verified all your data, it’s time to process payroll. When it comes to processing payroll you have several options:
- Processing payroll manually in-house
- Outsourcing payroll to a payroll service
- Hiring an accountant
- Using payroll software
Payroll software offers a great middle-ground for businesses looking to save time without breaking the bank.
It’s affordable, easy to use on your own, and reduces the risk of human error.
Top Tip: If you’re already using a payroll provider (or software) you may find that as your business evolves you need to change your system. Learn more about when the best time to switch is and how to make the switch seamless in our guide to how to switch payroll providers 🔍
Calculate gross pay
Gross pay is the total amount you owe an employee based on the conditions of their contract. It also includes pay for work done on public holidays and overtime pay. Remember, employees don’t take home their gross pay––you must make deductions before they receive payment.
Payroll software can calculate gross and net pay for you––saving you time and hassle.
Deductions are what you take out of an employee’s gross pay to arrive at their net pay. Deductions may be legally required, such as tax payments, or they could be voluntary like a pension fund.
When you make deductions from an employee’s pay, you’re responsible for ensuring it goes to the right place whether that’s HMRC or a pension fund.
Depending on the type of deduction, it may be made before tax is taken out of your employee’s pay while others are made afterwards.
Here are some examples of pre-tax deductions.
Your employee’s National Insurance contribution is based on their category letter. Businesses must also contribute to their employees’ National Insurance from their business expense account.
Eligible employees are those who:
- Earn at least £10,000 per year
- Are aged between 22 and the State Pension age
- Usually work in the UK (this includes people who are based in the UK but travel abroad for work)
Deduct your employee’s pension based on your workplace pension scheme. Always make pension deductions following National Insurance deductions.
Again you’ll need to contribute to your employee’s pension from your business expense account. The contribution rate is 3% of your employee’s qualified earnings.
Student loan repayments
Calculate employee-related taxes
Before paying employees their salary, you also need to deduct taxes from their earnings. You’ll probably need to hold onto these taxes for a while before you pay them to the government. To keep your business finances organised, it’s a good idea to set up a separate bank account for them.
Provided they earn above the tax-free personal allowance (£12,500), all your employees will be taxed on their earnings. The income tax rate varies depending on which earning bracket your employees’ salaries fall into.
Taxes on benefits
Employees must also pay tax on company benefits which might include private use of a company car, season ticket loans, health insurance, or living accommodation.
Calculate employee-related post-tax deductions
Employees may also have further deductions to come out after-tax like child maintenance payments.
The Child Maintenance Service may ask you for information about your employee and their pay so they can calculate the correct amount of child support.
Make sure you make regular payments and that you inform them of any problems with taking payment from a paying parent’s wages.
Other examples of post-tax deductions include disability insurance, life insurance, and charitable contributions.
Calculate their NET pay and make payment
Removing taxes and deductions from your employees’ gross pay leaves you with their net pay––the amount you must pay them in each pay cycle.
You should then pay them with a previously agreed method, whether that’s by direct deposit, a paper cheque, or any of the other government approved payment methods.
3. After processing payroll
Once you’ve paid your employees, you need to ensure everything related to that pay cycle is stored and reported correctly.
Store payroll records
Accurate payroll record-keeping is essential just in case you receive follow-up questions from government agencies.
You can choose to keep these records either digitally or in paper form. For easier access, we recommend storing them digitally.
You’ll need to keep accurate records on:
- Taxes and deductions
- Salaries or wages and time worked
- Where and when money was paid for employee pay
- Holidays and paid leave
- Employer contributions
These records must then be safely stored for three years even if the employee no longer works for your organisation.
Take a look at government guidelines on collecting and keeping records.
Make necessary corrections
Sometimes mistakes happen in employee payments. Perhaps there’s a discrepancy in an employee’s NET pay and what they expected to receive. Accurate records help you review any possible errors and ensure your employees have received the correct salary.
An efficient payroll process is key for getting employees paid on time. By organising and streamlining your payroll process, you’ll ensure that you’re complying with HMRC legislation as well as saving your business time.
Ready to cut expenses, streamline payments and have peace of mind? Tide Payroll is the simple way to pay your team. Just add your employees’ details, choose your pay run date and our software will take care of the rest (coming soon).
Photo by Tima Miroshnichenko, published on Pexels
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