How to Set Up Payroll for Small Businesses

How to Set Up Payroll for Small Businesses

Quick Summary: How to Set Up Payroll in the UK

Setting up payroll for your small business ensures HMRC compliance, accurate staff payments, and digital tax alignment. Here's what you need to do:

1. Register as an employer with HMRC to receive your PAYE references
   
    
2. Choose payroll software that's RTI and MTD compatible
   
    
3. Collect and manage employee data securely and digitally
   
    
4. Submit real-time FPS/EPS reports each pay period
   
    
5. Stay compliant with auto-enrolment and PAYE deadlines

Using expert payroll support can save time, avoid costly errors, and integrate seamlessly with your business finances. This guide covers everything you need to know.

Why Is Payroll Essential for Small Businesses?

Risk of Poor Payroll Management

• HMRC fines due to missing or inaccurate payroll data
• Employee dissatisfaction from incorrect or late pay
• Cash flow disruptions if tax or NIC payments are incorrect

Growth Advantages of Proper Payroll

• Enables regular, compliant salary and statutory benefit payments
• Simplifies pension auto-enrolment

• Integrates smoothly with digital financial systems, aligning with MTD goals

  

Core Steps to Set Up Payroll

Register as an Employer with HMRC

• Mandatory when you employ staff or pay yourself as a company director
• You’ll receive key references: an employer PAYE reference and an Accounts Office reference

Choose Payroll Software or Service

Look for these must-have features:

• RTI compliance (FPS and EPS submission support)
• MTD integration to ensure digital-ready financial systems
• Pension auto-enrolment capability

Best Payroll Solutions

These platforms automatically calculate tax and NICs, run RTI submissions, and ensure accuracy.

Create Your PAYE Scheme

• Submit FPS on or before payday with accurate gross pay and deductions
• Use EPS to report “nil” payments, claim statutory pay, and pensions
• PAYE and NICs deadlines fall on the 22nd of each tax month

Collect and Secure Employee Data

Maintain records of:

• NI number, name, address, date of birth
• Tax codes (P45/P46), bank details, salary particulars
• Pension data, student loan deductions, and statutory pay details
• Keep all records digitally for at least three years after the tax year ends

Run Your First Payroll

• Define pay schedule (e.g., monthly or weekly)
• Calculate gross pay minus income tax, NICs, and pension contributions
• Submit FPS and pay government dues on time
  
   

How Making Tax Digital (MTD) Impacts Payroll

Understanding MTD

MTD currently applies to VAT and will soon extend to income tax. It encourages digital record-keeping and integrates payroll data into your broader tax workflow.  Its important to be clear though it’s about future proofing but MTD does not yet apply directly to payroll.

Value of a Making Tax Digital Accountant

• Ensures software is genuinely MTD-compliant
• Avoids compliance errors and penalties
• Creates a unified digital flow from payroll to full business accounts
   

Real-Time Information (RTI): What You Should Know

What is RTI?

RTI [Real-Time Information] is HMRC’s system for employers to report payroll information on or before payday.

RTI requires employers to report payroll data to HMRC each payday, marking a shift from the old annual returns system.

Key RTI submissions:

• FPS: Mandatory on or before payday, detailing pay, deductions, student loan, pension, and statutory pay
• EPS: Used for non-standard months like "no pay" periods or for reporting employer allowances

Importance of RTI

• Ensures tax/NICs are always up-to-date
• Connects with benefits like Universal Credit
• Helps detect and correct errors in real time, avoiding year-end surprises

Common RTI Issues & Solutions

• Inaccurate employee details (missing NI number, incorrect tax code) can cause rejections.
• Late or incorrect submissions may lead to month-by-month penalties

• Best practice: submit FPS in line with payroll and EPS if applicable
   

  

Benefits of Outsourced Payroll Services

Why Small Businesses Outsource

• Unlocks HMRC compliance expertise, reducing errors
• Saves time on admin and allows focus on core business
• Covers all filings, pension setup, payslips, and queries

Yorkshire Firms Leading the Way

An accountant for small business in Yorkshire can

• Provide tailored payroll services for small businesses
• Handle PAYE, NICs, pensions, and integration with MTD systems
• Deliver expert guidance on workflows, deadlines, and reporting

Making the Most of Payroll Data for Better Business Insights

Payroll generates more than just payslips, offering strategic data that enables you to understand your financial health, workforce trends, and operational efficiency. Here's how to use it:

What Payroll Data Can Tell You

• Employee costs breakdown: See where most of your budget is spent (e.g. salaries, overtime, NICs).
• Overtime trends: Monitor when and where overtime occurs most frequently, so you can plan staffing more effectively.
• Absence and leave management: Track how leave affects payroll and business operations.
• Salary increases: Observe cost changes over periods for budgeting purposes.

How to Use Payroll Reports Effectively

1. Generate monthly payroll reports including total wages, deductions, and employer costs.
2. Compare periods (e.g. Month‑on‑Month or Quarterly) to spot trends.
3. Calculate labour cost per employee or per department to budget more accurately.
4. Link payroll with financial software to produce dashboards on labour cost as a percentage of revenue

Business Benefits of Payroll Analytics

• Better budget forecasting and cash flow planning.
• Identifying high overtime or understaffed departments to guide hiring.
• Making data-driven decisions about raises and headcount.
• Supporting compliance by flagging unusually high deductions or anomalies.

How Payroll Outsourcing Adds Value

• Outsourced payroll services often include the generation of custom reports.
• An accountant for small business in Yorkshire can help interpret data and align payroll insights with business strategy.

• You get regular summaries and insights, saving time and ensuring you act on trends promptly.

   

Common Challenges & How to Avoid Them

• Workforce growth adds complexity to payroll administration
• RTI errors can result in repeated monthly penalties
• Outdated payroll systems may not reflect current tax rules
• Undertrained staff risk making submission mistakes

Pro Tips:

• Use MTD-ready payroll software
• Automate as many processes as possible
• Train or outsource to professionals
• Perform regular audits to ensure data accuracy
   

What Happens If You File Late?

Penalties can escalate rapidly if you miss deadlines.

Late Filing Penalties

Interest & Enforcement

• Unpaid penalties accumulate interest.
• HMRC can enforce debt collection or dissolve companies after long-term non-compliance

Avoiding Penalties

1. Use cloud tools for reminders.
2. Budget monthly for PAYE/NICs/Tax
3. Appeal if delays are due to genuine issues
4. Use a trusted accountant to manage compliance

Payroll Done Right

Setting up compliant, accurate payroll from day one is essential. With RTI, PAYE, pension auto-enrolment, and upcoming Making Tax Digital changes, now is the time to invest in robust payroll systems.

Whether using software or outsourcing, partnering with experts, especially those specialising in payroll services for small businesses and accounting for small businesses in Yorkshire Tax Accountants provide regulatory compliance, staff confidence, and digital readiness.  Speak to our team here https://yorkshiretaxaccountants.co.uk/contact-us .

FAQs

1. Do I need payroll if I pay myself as a director only?

Yes, company directors are considered employees under PAYE and are required to make RTI submissions.

2. How often should I run payroll?

Monthly is common, but align frequency with cash flow and staffing needs.

3. Can I run payroll manually?

Yes, but payroll software helps reduce errors and ensures compliance with regulations.

4. What is RTI, and when should I submit?

RTI includes FPS (payday submission) and EPS (where applicable) on a monthly basis.

5. Does MTD affect payroll?

Currently, only VAT applies, but income tax may soon be included; software compatibility is key.