Introduction
This guide is aimed at start-ups who are either considering or about to take on their first employees. While it's a slightly longer read, it's designed to furnish founders with the critical knowledge they need to transition into the role of an employer effectively.
In this guide for start-ups, we'll cover the following essential topics:
1. Background to Running Payroll in the UK
2. Compliance with HMRC Payroll Requirements
3. Pensions and Auto-Enrolment
4. What You Need to Get Started and Manage Payroll
5. Payroll SaaS Solutions / Cloud Payroll
Throughout this guide, you will learn how to effectively manage your payroll and ensure:
- Payroll Compliance
- Accurate HMRC and NIC (National Insurance Contributions) Filings and Payments
- Minimal Payroll Mistakes
- Implementation of Good General Payroll Practices
Now, let's equip you with the knowledge you need to run successful payroll:
1. Background to Running Payroll in the UK
As a UK start-up looking to add your first employees, there are several crucial aspects you need to be aware of to ensure your compliance and smooth operation. Let's break down these key points:
PAYE Payroll
When you become an employer, it becomes your responsibility to set up PAYE (Pay As You Earn). In simple terms, this means that you will collect taxes from your employees on behalf of HMRC (Her Majesty's Revenue and Customs).
Registering with HMRC as an Employer
You should register with HMRC as an employer as soon as you are certain that you'll be hiring someone. We recommend doing this when you are actively looking to fill your first job vacancy. For detailed instructions on how to register with HMRC, you can refer to our previous blog post, which provides a step-by-step guide: https://www.aigence.io/post/how-and-when-to-register-for-paye
Minimum Wage Compliance
You need to ensure that you are paying your employees at least the national minimum wage, as outlined in the National Minimum Wage Act of 1998. Details of the current rates for various bands (under 18’s, 18-20 and over 21) can be found on the UK Gov website https://www.gov.uk/national-minimum-wage-rates
Pension Auto-Enrolment:
As an employer, you will likely need to automatically enrol your employees in a pension scheme. This is another regulatory obligation aimed at helping your employees save for their retirement. While it may appear complex, we will provide you with a comprehensive guide to navigate this process effectively later in this blog, but if you want to jump into the details now check out this blog https://www.aigence.io/post/pensions-and-auto-enrolment
Navigating the intricacies of UK payroll may seem daunting, but with the right guidance and information, you can confidently establish your payroll system and meet your legal obligations. In the following sections of this guide, we will provide you with comprehensive insights and practical advice to assist you on this journey.
2. Compliance with HMRC Payroll Requirements
As an employer in the UK, maintaining compliance with HMRC payroll requirements is an absolute must. Whether you manage your payroll in-house or outsource it to a third party, the ultimate responsibility for ensuring compliance rests with you.
Here's what you need to know to stay on the right side of HMRC:
Accurate Deductions
PAYE Income Tax and NI payroll deductions must be calculated correctly, your payroll software will take care of this. And good software will help you avoid simple typos like missing (or adding!) zero to someone’s salary. You also need to make sure that your employees are on the correct tax codes, again a good payroll solution will be updated directly by HMRC immediately considering any tax code changes. For information on the latest tax rates in the UK check out https://www.gov.uk/income-tax-rates
Onboarding New Employees
Achieving accurate payroll for new employees during their first payroll period is really important, as errors can be disheartening and damage morale. A seamless and fully integrated onboarding process is essential to ensure that new hires are swiftly incorporated into the payroll system, with all necessary information accurately recorded. By prioritising a well-structured onboarding process, employers can instil confidence in their new employees and demonstrate their commitment to a smooth and error-free experience from day one.
Timely Submissions
To remain in compliance, you must submit the correct payroll information to HMRC on a timely basis. Failure to do so can result in penalties and complications. Regular and accurate submissions are key to meeting this requirement. HMRC operates RTI (Real Time Information) and requires an FPS (Full Payment Submission) every time you run payroll, HMRC approved software will take care of this for you automatically.
Maintaining Records
There are specific records that you must maintain as an employer. These records include payslips, records of employee earnings, tax deductions, and NIC contributions. Keeping meticulous records is not only a legal obligation but also essential for effective payroll management. Again, your software solution should take all this pain away.
Penalties and Consequences
Non-compliance with HMRC payroll requirements can have serious consequences. Penalties may be imposed, and in some cases, it can lead to investigations and prosecution. To protect your start-up, it's crucial to adhere to the rules and regulations set forth by HMRC.
Payment Deadlines
HMRC requires employers to make these Income Tax payments by the 22nd of the following tax month. It's important to note that the payment is considered made when HMRC receives the funds, so be sure to factor in adequate processing and transfer time.
Be aware that there are penalties for late payments, which are outlined on the UK government website.
https://www.gov.uk/guidance/what-happens-if-you-dont-pay-paye-and-national-insurance-on-time
Legal Requirement for Pay Slips
It is a legal requirement to provide employees with pay slips that detail these deductions and contributions. The pay slip must accurately reflect the Income Tax and NICs deductions, ensuring transparency and compliance.
Special Rules for Company Directors
If you are a company director who is also an employee of your company, you will pay Class 1 National Insurance contributions as part of your PAYE payroll. The rules for company directors are similar to those for other employees, but it's essential to be aware of these nuances. Further information is available on the UK government website. https://www.gov.uk/employee-directors
3. Pensions and Auto-enrolment
All businesses with eligible staff members are mandated to operate a workplace pension scheme, closely regulated and protected by The Pensions Regulator. Automatic enrolment necessitates that nearly all employees are enrolled in the workplace pension scheme, with contributions from both employees and employers. As of 2024, the mandatory minimum contributions stand at 8%, with 5% contributed by the employee and 3% by the employer. However, both parties have the option to contribute more.
Eligibility for auto-enrolment is contingent on several factors, such as age and earnings, as stipulated by HMRC criteria. While employees can voluntarily opt out, they must initially be added to the scheme and subsequently removed upon request. Employers are prohibited from encouraging opt-outs or discriminating against employees for participating. From the employer's perspective, pension contributions are an integral part of employment costs, calculated and processed through payroll, akin to Employer NI contributions.
Employers often use a "salary sacrifice" scheme to boost employees' pension pots. In this arrangement, both employee and employer contribute, and the employer's National Insurance savings are added to the pension fund. While this enhances the pension, it also reduces the employee's salary for purposes such as mortgage applications. Additionally, pension scheme re-enrolment is required every three years, ensuring that eligible employees are given the opportunity to participate. Completing a 'declaration of compliance' with auto-enrolment regulations is essential for demonstrating legal compliance, with a re-declaration required every three years to maintain compliance.
For more info check out our blog post https://www.aigence.io/post/pensions-and-auto-enrolment
4. What you need to get started running PAYE payroll
So, you have identified your first employee and you are ready to make an offer (you preemptively registered with HMRC as an employer a couple of weeks ago). You prepare your new employees employment contract and accompanying offer letter and send them out. Now you complete a ‘right to work in the UK check’. What’s next, to run payroll you will need their NI number and if they have one a P45. A P45 will ensure they start on the right tax code and their tax and NI deduction will be right from the very first pay run. With these details to hand you can enter them in your payroll software and you are ready to run payroll! If you’ve made the enlightened decision to use Aigence you will be able to utilise the end-to-end onboarding process which will add your employee directly to the system to avoid dull data entry, the risk of errors and ensure they are set up for payroll from day one.
5. Cloud and SaaS Payroll Solutions
Tracking Leave, Sick Pay, and Other Statutory Payments From the outset, implementing a fully integrated leave tracking system is a wise decision. It not only assures employees that their holiday entitlement is accurately calculated but also offers businesses a comprehensive view of leave management. An efficient leave tracking system, often facilitated by robust payroll software, ensures that statutory payments such as sick pay and other entitlements are administered correctly, enhancing both employee satisfaction and the overall management of payroll processes.
What to Look for in Payroll Software: When considering payroll software, there are key features and capabilities that can make a significant difference in simplifying payroll administration and ensuring accuracy. Payroll software should aim to alleviate administrative burdens, minimise errors, and enhance efficiency. For a detailed list of essential features to look for in a cloud-based payroll solution, we recommend referring to our blog post on Cloud Payroll https://www.aigence.io/post/cloud-payroll-what-features-should-you-evaluate-in-the-latest-cloud-payroll-solutions. This comprehensive guide will provide you with insights into the functionalities that can transform your payroll management process and streamline your business operations
In the Spirit of Full Disclosure: Now, let's be honest, we're a tad biased when it comes to our own solution, but in the name of transparency and openness we're putting it out there. There are indeed various payroll software options available in the market, we encourage you to explore Aigence for your payroll needs. We believe that our fully automated payroll solution is a compelling choice for start-ups, offering a streamlined and efficient approach compared to alternative options. We are confident that you will find Aigence to be an impressive and valuable tool for simplifying your payroll processes and enhancing accuracy.
HMRC Real Time Information (RTI)
Robust payroll software goes the extra mile by seamlessly handling HMRC compliance, ensuring that your filings are completed accurately and in real time. This capability not only simplifies your administrative tasks but also guarantees that your payroll operations are in line with HMRC's requirements.
Self-Service
Embracing self-service in payroll management is the way forward. Employees seek the peace of mind that their pay is meticulously calculated, and they desire the autonomy to inquire about any aspect of their compensation package. Whether it's adjusting pension contributions or other benefits, employees should have the flexibility to make changes when they need to, without the hassle of sending emails or making formal requests. Furthermore, crucial information such as pension contributions from the previous year should be readily accessible to employees, putting essential data right at their fingertips for a smoother and more empowered payroll experience.
Comprehensive Reporting for Peace of Mind
A robust payroll system should offer comprehensive reporting capabilities that empower you to access information in the most useful format for your needs. Whether you require real-time insights to ensure current compliance or historical data to track past performance, your system should provide the tools necessary to extract and analyse the information you need. This flexibility not only reassures you of your current compliance but also allows you to evaluate your historical payroll records, providing valuable insights for your peace of mind.
Paying Staff: The How-To
When it comes to paying your staff, the most common and widely used method is through BACS, which stands for Bankers' Automated Clearing System. BACS operates on a three-day processing cycle, so if you intend to pay your staff, for example, on the 28th of the month, you must initiate the payments at least three working days prior to that date to ensure timely processing. Alternatively, there is the option of Faster Payments, which allows for same-day payments when initiated. This is often the method of choice for payments made through online banking platforms. Integrating a payments provider with your payroll solution can significantly simplify the payment process, reducing the potential for errors and streamlining the entire payroll operation, making it a headache-free experience.
Quick Recap: Next Steps for Running Your First Payroll
As you prepare to run your first payroll, here's a quick recap of the essential steps to get you started on the right track:
- Register with HMRC: Ensure you are officially registered with HMRC as an employer. For detailed guidance on this, you can follow the instructions provided on their website.
- Select Payroll Software: Choose suitable payroll software for your needs. While there are various options available, we recommend considering a fully automated solution like Aigence for a streamlined and error-free payroll experience.
- Employee Setup: Set up your employees within the chosen payroll software. Configure the software to align with the specific requirements and structure of your organisation.
- Prepare for Payroll: Get ready to run your first payroll. Ensure all necessary employee data is accurately entered into the software, and you are well-prepared to initiate the payroll process.
By following these steps and leveraging the right tools, you'll be well-equipped to embark on your payroll journey with confidence and efficiency.
Conclusion
Payroll doesn't have to be a daunting task. In fact, with the right payroll solution, it can be a smooth and stress-free process. A reliable payroll system can be your trusted ally, reducing administrative burdens, enhancing accuracy, and providing peace of mind by ensuring compliance with all relevant regulations. So, rather than losing sleep over payroll, consider investing in a great payroll solution that empowers you to relax, knowing that your payroll operations are in capable hands.