If you employ staff, you are responsible for collecting Income tax and National Insurance from them on behalf of the government. This is done through Pay As You Earn (PAYE) deductions taken from their wages, salary or commission. As many small businesses do, you can outsource this payroll function or keep it in-house.
While many small companies still do manage their payroll manually, this is time-consuming and prone to error. So, the best solution for most SMEs is to automate the process using specifically designed payroll software for small business.
Not too long ago, this would have been unaffordable. But now, given the wide range of cost-effective products on the market, including pay by the month cloud payroll software, it's a realistic option.
Setting up the best payroll software for your business
If you are employing people for the first time, you will need to first register with Her Majesty's Revenue and Customs (HMRC) as an employer beforehand and complete certain tasks to set up payroll.
With any kind of payroll software, you will first need to enter into the system each person's employment details. This includes their tax code, which determines how much PAYE and National Insurance you need to deduct.
You can get most if not all this information from their P45. HMRC's starter checklist details the information you need to get from new employees.
Then, just update an employee's record with all changes to wages or salary paid and any holiday pay or other entitlement, and the payroll software does all the necessary tax and NI calculations.
Keeping payroll information safe
While it's important to keep comprehensive records for HMRC, you must ensure you follow new General Data Protection Regulations (GDPR). These come into force from May 2018 and govern how organisations collect, store and use personal data, not just for payroll, but also accounting, marketing, sales and customer service purposes.
If you would like to learn about the impact of GDPR on payroll you can read our recent article here: GDPR compliance for small business.
In brief, under GDPR you can hold only the minimum necessary details about someone. This information has to be accurate and kept confidential. When you collect it, you have to tell them why you need it and what you are going to do with it.
You must also be prepared to show this information to the individual concerned should they ask to see it. If you are using online payroll software, your service provider also needs to be GDPR compliant.
Choosing the best payroll software for small business
Which is the best small business payroll software for you will depend on factors such as your company's size, the level of technical support you need, the accounting package you currently use and whether your staff are salaried, paid by the hour, or receive a commission.
However, these are some of the important functions and common features you should look out for.
- Real Time Information (RTI). To give an accurate, up- to-the-minute picture of tax paid and other deductions, the government introduced RTI. HMRC expects everyone to use only payroll software that is RTI compliant.
- If you pay bonuses, commission and overtime, look for a system that can easily be customised to your business needs. If your payroll rarely changes, software that offers automated rules and scheduling will enable you to run the same processes every week or month with very little input.
- With most people paid through BACS, you will want payroll software that can handle this, or you will have to set up a separate system to do so.
- Be aware that not all systems will print out payslips, or send an Employer Payment Summary (EPS) report or Earlier Year Update (EYU) to HMRC. Again, all useful to have.
- UK businesses are now required to automatically enrol employees into a pension scheme and make payroll deductions accordingly. So choosing software that can auto-enrol new employees and manage pension payments and records will be another time saver.
- If you need to access the payroll system from a smartphone or tablet, then consider software that works across multiple devices. But check if there is any loss of functionality when working on a smaller screen.
- Having multi-user access is useful if you want staff to be able to download previous payslips or look up their pay history, for instance.
- There is always a learning curve implementing any new software, so you may want to consider the level of technical and on-going support available from the vendor.
Best payroll software UK 2018
So, which should you go for? Here's a quick assessment of some of the best and most user friendly ones.
All have been approved by HMRC to ensure they accurately calculate tax and NI, offer auto enrolment and are RTI compliant. You can find the full list of HMRC approved payroll solutions here.
KashFlow - Best small business payroll software UK
The payroll package can be used on it's own or integrates with KashFlow's own online accounting software, making it easy to transfer payment details between the two. A self-service feature means employees can access payslips and their individual data from anywhere and at any time.
Payroll core starting at £6 or combined with accounting at £19 per month.
SageOne Payroll - Simple Payroll for small business UK
A comprehensive web-based solution from one of the leading accounting software firms. It integrates easily with Sage's other systems for faster financial management.
Try it free for 30 days, then £3 per month per employee if you have fewer than 5 employees.
BrightPay - Customizable Payroll for small business UK
BrightPay positions itself as 'a breath of fresh air' for those tired of other payroll products. It has a good-looking interface, is easy to use and offers free support.
Free version for firms with 3 employees and fewer. £99 per year for unlimited employees.
MoneySoft - Best payroll software for medium-sized business UK
MoneySoft's Payroll Manager is a comprehensive and RTI compliant payroll software, designed to be easy to use so data entry is intuitive and straightforward.
£65 per year up to 20 employees
QuickBooks - Leading online accounting software
A good option if you are already running the QuickBooks accounting package. Good integrations and comprehensive. Covers all of the bases.
30-day free trial. £1 per employee per month with a QuickBooks subscription
Xero - Comprehensive accounting software
Has many good features and is easy to customise. The Xero Me mobile app offers a self-service option employees can use to view their payslips, submit timesheets or apply for leave.
30-day free trial. Starter accounting package (very limited) includes payroll, £10 per month
Basic PAYE Tools - Best free payroll software for small businesses.
This is HMRC's own software. Good for firms with 1 or 2 employees who want the most cost-effective solution. It performs most payroll tasks but can't produce payslips.
Changing payroll systems
Some packages will obviously be a better fit for your business than others, so it makes sense to take advantage of a free trial to try out different ones and what each has to offer.
If you already run payroll software and change to another package, you may not be able to use the same Payroll IDs on the new system. If you try to, then you may end up with duplicated records and wrongly calculated PAYE.
Your business could be in serious trouble if you aren't paying the right amount of tax. You can find more information on changing payroll software systems on the HMRC website.
Payroll is an essential task for every employer, so making sure you have the right system in place will benefit your business. For example, having the right payroll expenses included as part of the business budget can help determine if there will be enough to cover wages in the coming months.
You may want to talk to your accountants before deciding on one in particular. Given their experience, they should be able to advise you on the payroll package that will work best for your business and even help you set it up. Getting that right in the first place will save a lot of headaches later.
