Hiring and onboarding an employee for the first time is a huge milestone for any business. Whether you’re a sole trader looking to swap self-employed life for that of an employer, or a new business with an immediate need for staff, you’ll want to make sure things run smoothly. One of the most important tasks is setting up payroll for your business and registering your employees. Finesse Resources, a leading payroll specialist based in Greater Manchester, has put together a step-by-step guide that will take you through the entire process.
1. Register as an employer
A crucial first step is becoming an officially recognised employer in the eyes of HMRC (Her Majesty’s Revenue and Customs). This will grant you access to the PAYE (Pay As You Earn) system which is used by businesses in the UK to calculate and manage Income Tax and National Insurance Contributions (NICs) for their workforce.
To kickstart this process, you must officially register with HMRC, signalling to the government that you’re in the process of hiring staff and that your company will be overseeing the disbursement of their salaries and tax-related matters. This registration is a prerequisite before you can register an employee. It’s important to note that you cannot register more than two months in advance of hiring your initial employee, and the issuance of your PAYE number can take up to five working days.
2. Enrol your first employee
After successfully registering as an employer, your next task is to enrol your employee by providing their details to HMRC. These details include:
- Full name
- Employment start date
- National Insurance number
- Benefits and pension status
- Student Loans details
If your new team member possesses a recent P45 document, you can source most of the necessary information from it. However, in cases where a P45 isn’t available for any reason, you’ll need to request the required information directly from the employee.
You’ll also need to assign a unique payroll ID number to the employee. You can create and store a unique ID for each new addition to your workforce using payroll software or by outsourcing to a payroll specialist – more on this later.
3. Getting to grips with PAYE
As long as your employee will earn more than the National Insurance Lower Earnings Limit (LEL), you have a legal obligation as an employer to apply PAYE to their payments. The limit is subject to annual change with inflation but as of 2023 is set at £120 a week (£520 a month or £6,240 a year). It’s still important to keep records of their wage payments even if they earn below this threshold.
The PAYE system is used to process the necessary deductions from the employee’s pay automatically so that the amount they receive in their wage slip is the amount they are entitled to. To use the PAYE system, you’ll need to create a log-in for PAYE Online. Deductions processed by PAYE include:
- Income tax
- National Insurance Contributions (NICs)
- Student loan repayments
- Pension contributions
- Repayment of loans made to employees
4. Setting up payroll software
If you decide against outsourcing your payroll to a specialist, you’ll need to set up payroll software to report to HM Revenue and Customs (HMRC). The software helps streamline the process and reduces the risk of errors or data security breaches that can occur when managing payroll manually with spreadsheets or written records.
- Manage payroll yourself using manual means, such as spreadsheets and written records
- Utilise specialist payroll software
- Hire an in-house payroll manager
- Work with a payroll specialist to whom you can outsource the responsibility
When choosing payroll software, it’s important to make sure it is on HMRC’s officially recognised list of suppliers.
5. Running payroll
Now that you’re all set up, you can start to perform the monthly tasks involved in running payroll. This is the stage where many employers will decide to consider outsourcing to a specialist payroll provider. You can read more about this at the bottom of this article.
Record employee pay
Every month, you must maintain a record of your employees’ earnings and ensure these records are submitted accurately. This applies to all employees, regardless of whether they earn more than the Lower Earnings Limit (LEL). Remember, it’s not just their regular salary you need to document – all forms of payments, including statutory sick pay, should be included in your records.
For a comprehensive list of payments that should be documented, refer to the guidelines set out by HMRC. This list encompasses various types of payments, such as bonuses, commissions, holiday pay, statutory payments and parental pay, to name a few.
Make the necessary deductions
Deductions such as student loan repayments and pension scheme payments must be made. If you’re using payroll software, this will be actioned automatically.
Work out National Insurance Contributions
It’s your job as an employer to calculate which band of National Insurance Contributions (NICs) your employee falls into. If an individual earns more than £184 a week, they will automatically pay Class 1 NICs through PAYE. NICs are calculated based on the employee’s pre-tax, pre-deduction earnings, but they’re only calculated on the amount that exceeds the NIC threshold. The specific NI rate depends on the employee’s NI category letter.
Read the Finesse Resources guide to 2023/2024 National Insurance Contributions in the UK to learn more.
Each time you pay your employees, you must provide them with payroll documentation in the form of a payslip. There are strict regulations detailing what information must be included on the payslip, including:
- Gross pay
- Total amount deducted
- Net pay
- How the payment was made
- Income tax deductions
- Student loan deductions
- Any pension contributions
It’s up to you whether you provide them with physical paper copies or go paperless. If you are using payroll software, there will be a function to automatically generate payslips each time you run your payroll.
Lastly, at the end of your monthly process, you’ll need to submit a payroll report to HMRC. This report, known as a Full Payment Submission (FPS) report, must be sent every month, even if you only pay HMRC every quarter. Failing to do so can lead to financial penalties. Most FPS submissions can be automated through payroll software or your payroll specialist, provided you’ve shared your PAYE reference with them. This ensures that your submissions are consistently accurate and on time.
At the end of each tax year and before your employees’ final payday of the year, you’ll need to submit a final FPS. You may also need to send an Employer Payment Summary (EPS) to HMRC if:
- You failed to notify HMRC that your last FPS was the final submission of the year
- You did not pay any employees during the last payment period of the year
- You submitted your last FPS early and didn’t pay anyone during the last month(s) of the tax year.
6. Paying HMRC
HMRC has an online portal that allows you to:
- View statements of how much you owe to HMRC
- Claim reductions on certain statutory payments
- Make payments to HMRC
Statements and any additional information will become available on the online portal on the 6th of each month. Alternatively, you can use your payroll software to generate reports to see what you owe and what needs paying. Likewise, a payroll specialist will be able to provide you with regular reports
A quick and easy alternative: Outsource your payroll
There’s no getting around the fact that managing payroll yourself can be time-consuming and complicated for those without experience. Specialist Payroll Providers exist for this very reason and are used by businesses of all sizes to manage their payroll functions efficiently. Here are a few reasons why outsourcing payroll is a smart move:
- Keeps costs down
2. Frees up time
3. Improves efficiency
- Improves data security
- Enhanced employee satisfaction
- Less stress for the business owner
If you’re considering leaving payroll to the professionals, get in touch with our CIPP-accredited experts at Finesse Resources today.