Setting up Payroll for the first time

Setting up payroll correctly in any business once you have employees will be a top priority, especially if you are a small business owner.

If your payroll is not properly set up and managed, your employees will not be paid – or will not be paid on time – your suppliers may not be paid when they should be, and employee morale will suffer.

To avoid the issues mentioned above, an efficient payroll system must be set up either internally (in-house) using HMRC-approved cloud payroll software or through outsourcing to a payroll company or provider, such as an accountant or payroll service in Islamabad.

Why should payroll be handled in-house?

Have you recently hired your first employees? It's time to organise your payroll.

For cost and flexibility reasons, some small business owners may choose to set up payroll in-house.

• Other reasons for doing payroll in-house include:
• Increased financial control
• Payroll errors can be detected quickly.
• Increased security and protection against data breaches, as well as integration with other business systems.

"With an in-house account team, running payroll does not take long – the majority of the work is in the preparation that goes into getting payroll ready, such as calculating hours, absences, and bonuses for a mix of salaried and hourly paid staff."

"Because payroll processing is the quickest part of the process, outsourcing it makes little sense."

"With a team of over 90 people, there are bound to be late submissions, changes, and errors, and payroll allows us to make last-minute payroll adjustments and corrections, which could be awkward with an external provider."

Creating a payroll system for your company

You'll need payroll software to report to HMRC if you decide to run or set up payroll yourself. It will assist you in the following ways:

• Keep track of your employees' information.
• Determine your employees' pay and deductions.
• Payroll information should be reported to HMRC.
• Determine how much you must pay. HMRC
• Determine statutory pay, such as sick leave or maternity leave.

If you are setting up payroll in-house, you must also do the following:

1. Register with HMRC as an employer.

When you start hiring employees or using subcontractors, you must do this. Even if you only employ yourself as the sole director of a limited company, you must still register with HMRC.

Obtaining your employer's PAYE reference number can take up to five days. You cannot register for more than two months before beginning to pay people.

If your company begins hiring on or after 6 April – the start of the new tax year – you will receive your employer PAYE reference number by 17 May.

2. Obtain a PAYE Online login.

When a new employer registers as an employer online, they usually receive a login.

If you don't have one because you registered in a different way, you'll need to enrol separately in PAYE Online.

3. Provide HMRC with information about your employees.

When you hire a new employee, you must notify HMRC.

In addition, you'll need to:

• Check to see if the new employee is required to be paid through PAYE.
• Obtain employee information in order to determine their tax code – if you don't have their P45, use HMRC's starter checklist.
• Find out if they have any outstanding student loans.

Once you have this information, you can use it to set up your new employee in your payroll software.

Finally, you can use a Full Payment Submission to register your employee with HMRC (FPS).

4. Compile and maintain records

You must keep records of how much you pay your employees and how much you deduct, as well as the following:

• Employee absences due to illness or leave
• Notices under the Tax Code
• Expenses or benefits that are deductible.

You must keep these records for three years after the end of the tax year to which they pertain. HMRC may audit your records from time to time to ensure accuracy and that you are paying the correct amount of tax.

These records can be kept on paper, digitally, or as part of a software programme. If you fail to keep complete records, HMRC may levy a penalty of up to £3,000.

5. Keep track of your pay, make deductions, and report to HMRC.

You must complete a number of tasks as part of your payroll during each tax month, which runs from the 6th of one month to the 5th of the next.

If you haven't paid any employees in a tax month, you must notify HMRC.

Every time you pay an employee, you must use payroll software to:

• Keep track of their pay.
• Calculate their pay deductions (such as tax and National Insurance)
• Calculate the employer's National Insurance contribution that you will be required to pay based on their earnings.
• Make pay stubs for each employee.
• In a Full Payment Submission, they must report their pay and deductions to HMRC (FPS).

6. Pay the tax and National Insurance you owe to HMRC.

Every month, you must pay HMRC the tax and National Insurance owed as reported on your FPS for the previous tax month, less any reductions from any Employer Payment Summary (EPS) you sent before the 19th of the current tax month.

Your payroll software will calculate how much tax and National Insurance you owe on each employee's earnings, including an employer's National Insurance contribution.

7. Finish annual reports and tasks in preparation for the next tax year.

You must report to HMRC on the previous tax year (which ends on 5 April), issue P60s to your employees, and plan for the new tax year, which begins on 6 April.

You must include your employees' pay, any payroll benefits, and FPS deductions in your annual report.

To prepare for the next tax year, you must update employee payroll records beginning on April 6, update payroll software, provide your employees with a P60, and report employee expenses and benefits.

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