Payroll for small businesses – what you need to know
Posted on 26th May 2023
Payroll is one of the things you’ll need to think about when you run a small business. It’s important to pay your employees the right amount and on time. Here are some things you need to know.
Are you a limited company or sole trader?
Each business type has different payroll rules and regulations. If you run a limited company, you’ll need to work out your employees’ salaries and deductions and pay Income Tax and Employee National Insurance Contributions (NICs) to HMRC. You might also need to pay Employer NICs.
As a sole trader, you’ll pay your employees’ salaries and deductions, Income Tax, your own Class 2 and Class 4 NICs and possibly also Employer NICs.
Registering for payroll
You must register with HMRC as a Pay As You Earn (PAYE) employer. You can do this free online. Once your registration is complete, you will receive a PAYE reference number. You’ll need this for your payroll forms and correspondence with HMRC.
Salaries and deductions
Once you have registered, you’ll need to work out each employee’s taxable pay. This is their salary less any allowable deductions, such as pension contributions or childcare vouchers. Then you’ll need to calculate the Income Tax and NIC payments you must make.
Paperwork for HMRC
Of course, you’ll need to submit the right paperwork. There are monthly and annual forms. The Full Payment Submission (FPS) reports your employees’ salaries, deductions, and NICs. There’s also an Employers Annual Return (P35) form for all of your employees’ earnings and NICs for the year.
Calculating NICs
National Insurance contributions payments are made by employees, employers and self-employed people. They are based on earnings or self-employed profits and build entitlements to certain benefits. Payments made through the PAYE scheme automatically deduct NICs.
NICs are based on an employee’s salary and their earnings during the tax year. Employees and employers pay Class 1 NICs and self-employed people pay Class 2 and Class 4 NICs. Class 3 NICs are voluntary payments for anyone who has gaps in their payment records. Employer’s NICs are in addition to employee’s NICs.
Payroll compliance
Businesses of all sizes must meet proper payroll requirements to:
keep accurate records of employee salaries and deductions
pay employees on time
file PAYE returns on time
register as an employer with HMRC.
Your payroll records must be up to date, including employee information, pay and deductions.
Payroll services for small businesses
If you don’t want to run your own payroll you can outsource it. Ask for quotes from several companies and check reviews from their customers.
Based on our experience of running payroll services, here are some things you should ask:
how much experience your provider has of processing payroll for small businesses
the company’s reputation for providing high-quality customer service
the range of services offered such as preparing payslips, filing monthly returns, and paying taxes and NICs
whether it’s easy for you to submit your payroll data and keep track of your payments
whether the company offers a package of services tailored to your needs.
Getting good advice and help with your payroll will make running your business much easier.
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