Do you need a payroll system?

Last reviewed 15 April 2024 by Fiona Prior.

Payroll files

**Note: prices correct on 09/01/24 (limited time offers may be available)**

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 have 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.

Need payroll software? We can help!

We have taken the guesswork out of buying payroll software. See our top picks.

Best all rounder

Sage Business Cloud Payroll | From £10 per month (5 employees) upwards | Easy-to-use and ideal for existing Sage Accounting users | Go to website

Best for micro start ups

MyPAYE | From £1 per month per employee | Pay-as-you-go pricing and integrations with leading accounting software | Go to website

Best for growth businesses

Pento | From £149 per month | Modern design and great customer support for simple, flexible automation| Go to website

What are the benefits of payroll software?


Manually processing your monthly payroll is time consuming, especially as your business grows. Although you will need to set up your payroll software initially, every calculation and payment thereafter will be done automatically. You simply need to maintain employee records and input holidays and absences as they happen.

Cost effective

Payroll software is surprisingly budget-friendly. Most payroll software solutions are available for a relatively small monthly fee making it affordable for even the most cash-strapped small businesses. It will certainly be a lot cheaper than hiring a payroll manager or outsourcing your payroll to someone else.

Minimises errors

Payroll mistakes such as miscalculating tax or underpaying your employees can have damaging consequences for your business. While mistakes can still happen, payroll software makes them much less likely to happen. When they do, it is usually relatively quick and easy to fix them. Incorrect data can be corrected and updated at the click of a button.

Keeps employees happy

Employees that are paid accurately and on time will be happier than staff who have to wait to be paid. Remember, employees are entitled to a payslip. Payroll software can automate this process and some payroll solutions allow employees to log into their own account where they can see all the payslips they've ever received as well as update their details. This added visibility will also remove the need for staff to approach the business owners to request payroll related documents.

Protects your business

Relying on manually payroll records and data is risky. Records could be lost, destroyed, or stolen, leaving your business open to fraud. Payroll software keeps payroll data safe and secure by encrypting the data and stores it securely, giving you peace of mind.

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,. 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. Switching to 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."

What is payroll software?

Payroll software helps businesses manage the payroll payments they must make to employees. This includes not only salaries but also things like bonuses and holiday pay. Other tasks payroll software can help you with include:

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. The software will also calculate overtime and bonus payments, deduct wage garnishments, and generate payslips. Most payroll systems also allow employees to access and download their payslips.

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.


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."

Read our review of the best UK payroll software.

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