Do you need a payroll system?

Payroll files

An efficient payroll system is essential if your business employs people. It helps ensure you comply with your legal obligations and deduct the right amount of income tax and National Insurance (NI). But how do you find the right payroll system?

While some businesses used to run payroll manually, the introduction of HM Revenue & Customs' (HMRC) Real Time Information (RTI) scheme made this virtually impossible. RTI requires you to submit information to HMRC every time you run payroll. This data must be sent electronically, via an RTI compatible payroll system.

Additionally, many businesses are now having to juggle the complication of pension contributions under auto-enrolment.

If you have fewer than nine employees, you can use HMRC's free payroll system, the HMRC Basic Payroll Tool. The only cost is your time.

However, this payroll system will not be suitable if you take on more employees. You will need to transfer your employee data to an electronic payroll system or outsource your payroll if your business grows.

Almost all payroll systems include features to handle RTI and auto-enrolment. They can also complete key payroll forms and send these - along with the relevant information - to HMRC.

Because the payroll system handles all calculations for you, you're less likely to encounter errors or get hit by penalties for filing information late.

Payroll system pros and cons

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), thinks it's important to find the right payroll system, regardless of staff numbers.

"There are many rates and allowance changes, so using an electronic system can save you time and help you avoid errors," he says.

"When employees have pension contributions or student loan repayments, it gets even more complicated. Payroll systems can simplify all those calculations.

"However, the risks of using electronic systems are data loss through crashes, viruses, and payroll errors if new tax rules aren't properly implemented," he warns.

Roy-Chowdhury also recommends taking time to identify the most appropriate system from day one “Switching payroll systems at a later date will be time consuming.

"The data you're inputting must be accurate so it can be difficult, but good payroll software will alert you if anything looks odd," explains Roy-Chowdhury.

Pick a payroll system

Payroll software will process your information and tell you what the deductions are. Whichever electronic payroll system you choose, make sure it is recognised by HMRC, and that it calculates income tax, NI and taxable benefits.

Payroll software providers that offer software for small firms include Sage, Quickbooks and Iris.

Most providers also offer online solutions which can be more flexible. Data is held in the cloud allowing you to access it from any location with an internet connection.

Online software is often available for a low, monthly fee avoiding large up-front costs.

Some payroll system providers charge a fee for each extra employee. Others charge a monthly or annual cost.

"A lot of software providers will give you a free trial," points out Roy-Chowdhury. "Ask your accountant or other small businesses which they use."

Payroll system management

Many businesses outsource their payroll to save time. If you outsource it to a dedicated payroll bureau, a typical cost is £1.50 per employee per month, but you will still have to provide the payroll details.

Alternatively, you could outsource to an accountant for a slightly higher cost, or upgrade your existing package with your accountant to do the work for you.

"The cost depends how many employees you have," advises Roy-Chowdhury. "If you add up the time it costs you to do your own admin and calculations, it is usually worth outsourcing.

"If you use an accountant, they will hold all your PAYE records, and you just tell them if someone new starts.

"Recognised electronic payroll systems make more sense, because the software package deals with all the information required by HMRC for you," he concludes.

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