A payroll process is the structured set of steps employers follow to ensure employees are paid accurately, on time and in line with current HMRC guidance. The UK payroll process covers calculating wages, applying the correct tax codes, making statutory deductions and reporting payroll data to HM Revenue & Customs (HMRC) through the PAYE system.
The payroll process also includes the fulfilment of all report filing requirements relating to employee payments and any changes in employee status. The process is the same, no matter how regularly employees are paid.
Understanding what a payroll process is
Even if an employer only has one employee they will need to follow a payroll process to ensure all payments and deductions are made correctly. The following are some of the most fundamental parts of a payroll process:
Pay As You Earn
When a new employee joins a company, employers must apply the correct tax code and obtain the employee’s national insurance number. This information is provided on the P45 from the previous employer or the Starter declaration if a P45 is not available. Once the employee is set up, the employer can pay them and work out the taxes and deductions that must be made each time.
Managing payroll taxes and other deductions
The first payroll tax deduction is national insurance. Employers have to pay this on their own behalf and on behalf of their employees once their earnings cross the set threshold.
Income tax is another deduction that must be made. Employees earning above a certain level will have income taxes deducted via the payroll process. There are different tax bands that apply according to each employee’s earnings.
Part of the payroll process will also include employers making other deductions for things like pension contributions, child maintenance and student loans. Statutory payments (statutory sick pay, statutory maternity pay, statutory paternity pay and statutory adoption pay) are also processed via the payroll.
When employers are recovering those payments, they can do it by reclaiming the amount through a corresponding reduction of their monthly payroll tax payment to HMRC.
What Is Real-Time Information (RTI)?
Real-Time Information (RTI) is the system used for reporting payroll information online to HMRC. Payroll data must be reported via what is known as the Full Payment Submission to detail all payments and deductions made. It needs to be sent before or on the same day that employees are paid.
Employers must:
- Submit a Full Payment Submission (FPS) on or before payday
- Include all employees, regardless of earnings
- Submit an Employer Payment Summary (EPS) where applicable
Failure to meet RTI deadlines may result in penalties, so accurate and timely reporting is essential.
While most employers these days will make all of their payments online, it doesn’t have to be done that way. Employers need to make sure that the most recent pay deductions are sent to HMRC by the 19th of every month if paying by post, and by the 22nd if paying electronically.
Providing a payslip
Employers must provide a payslip every time an employee is paid. Payslips must show:
- Gross and net pay
- All deductions
- Hours worked (where pay varies)
Payslips can be issued digitally or in paper format.
Benefits of Effective Payrolling
Effective payrolling is crucial for the smooth operation of any business. It ensures that employees are paid accurately and on time, which is vital for maintaining morale and productivity. Utilising payroll software can streamline this process significantly, providing a host of benefits.
Firstly, accurate payrolling helps to maintain employee trust and satisfaction. Employees who are paid correctly and promptly are more likely to feel valued and motivated, leading to increased productivity and loyalty.
Secondly, effective payrolling ensures compliance with various legal requirements. Failing to comply can result in hefty fines and legal issues. Payroll software can automate compliance checks, ensuring that all deductions and payments are made according to the latest laws and regulations.
Thirdly, efficient payroll processing can save time and reduce administrative burdens. Manual payroll calculations are time-consuming and prone to errors. Automated payroll systems can handle complex calculations quickly and accurately, freeing up time for HR and finance teams to focus on more strategic tasks.
Moreover, good payroll management helps in maintaining accurate financial records.
Additionally, effective payrolling contributes to better cash flow management. By knowing exactly how much will be spent on salaries and associated costs, businesses can plan their finances more effectively. This is particularly important for small businesses where cash flow can be tight.
Another significant benefit is data security. Payroll software often includes robust security features to protect sensitive employee information. This helps prevent data breaches and ensure that confidential information remains secure.
Finally, integrating payroll with other business systems, such as accounting and bank account management, can streamline operations and improve overall efficiency. Automated transfers to employee bank accounts reduce the risk of errors and ensure timely payments.
How can employers make the payroll process easier to do?
Managing payroll is complex due to:
- Employee starters and leavers
- Changes in legislation
- Variable pay, overtime, and leave
- Ongoing compliance requirements
Many employers simplify the UK payroll process by:
- Using cloud-based payroll software
- Integrating payroll with HR and accounting systems
- Choosing outsourced payroll services for expert support
Outsourcing payroll can be especially beneficial for growing businesses or those with complex pay structures.
Would you like to make your payroll process more straightforward?
We hope we have helped you to understand more clearly what is a payroll process and the various steps that are required to run it. It is really important to get every element of the payroll process correct. Otherwise, you could end up making errors that can be upsetting to your employees, time consuming to fix and can even result in penalties.
If you’d like to explore how payroll software can help you run your payroll more smoothly, then please do contact us for a discussion about how we can help. And if you feel that you’d like to chat through how a partially or fully outsourced payroll solution might work in your company, then we’d be very happy to explain more.
Final Thoughts
A well-managed payroll process is fundamental to running a compliant and successful business. It ensures employees are paid correctly, supports morale, and helps employers meet their legal obligations.
By using modern payroll software or trusted outsourced payroll services, businesses can streamline payroll operations, improve accuracy, and remain compliant as regulations continue to evolve.