Payroll software

Good payroll software does more than just calculate wages and print payslips. It enables you to submit important payroll data to HM Revenue & Customs (HMRC) and meet your pension obligations. It also makes it easier to monitor employment costs and keep track of individual employees.

Is it for you?

The advantages

Initial costs

Making a purchase

Testing a system


Getting help

1. Is it for you?

If you run payroll in-house, you should use payroll software.

You must submit payroll data electronically to HMRC with each pay run

  • You can only send Real Time Information (RTI) data to HMRC using compatible software
  • Businesses with fewer than ten employees can use HMRC's Basic PAYE Tools to run payroll.

Payroll functions are often available as part of your accounting software

  • Using payroll and accounting software from the same company should allow payroll data to import into your accounts.
  • It may cost extra to add payroll functions.

Payroll software is particularly useful if your payroll changes frequently

It can help if:

  • you often hire employees on short-term contracts;
  • employee pay is made up of several elements;
  • you make deductions, such as pension contributions.

You may need to analyse your employment costs

  • Some payroll software will make it easier to allocate employment costs to cost centres.

The software must be kept up to date with PAYE and National Insurance legislation

  • Most payroll packages are updated regularly to take account of tax and legislation changes.
  • You usually have to pay a standard monthly fee to receive these updates.
  • Software will ensure your payroll data is compliant and submitted correctly. But it cannot advise you on the best course of action. You may still wish to consult your accountant on payroll matters.

You could outsource your payroll instead of using payroll software

  • Many companies specialise in payroll.
  • Your accountant may also be able to run payroll for you.
  • It usually costs more to outsource than to pay for payroll software, and may offer less flexibility than running it yourself.

2. The advantages

Once you've set it up, payroll software can run payroll quickly and accurately.

The software automates repetitive tasks

  • You can pay people weekly or monthly.
  • Payslips are produced automatically and can usually be sent via secure email.
  • Some software packages allow you to arrange direct payments through BACS.
  • The payroll software will calculate tax and National Insurance automatically.
  • You can easily make additional deductions from each employee's wages such as pension contributions, membership fees or student loan repayments.
  • The software should automatically calculate certain additional payments, such as tax credits, statutory sick pay, statutory maternity and paternity pay, holiday pay and back pay.
  • Some packages log holiday and sick days to track absence for you.

The software helps you stay compliant with payroll rules and procedures

  • These include the RTI reporting requirements and pension auto-enrolment rules.

You should be able to share data between different software applications

  • In particular, you can share data with your accounting systems.
  • This minimises the number of times you have to enter the data and reduces the chance of errors.
  • You can combine data generated by different parts of your business.
    For example, use your payroll information to address letters and mailings automatically.

You can analyse staff costs in more depth

  • The software should include a suite of standard reports. For example, a report to show National Insurance contributions.
  • More sophisticated software provides you with detailed management information. Most payroll software enables you to run queries and generate reports.

3. Initial costs

These days, payroll software is easier to use than ever. Many modern packages will walk you through the process of setting up and running payroll for the first time.

However, it is important to consider continuing costs for training, support and maintenance. You will almost always have to pay monthly or annually to keep your software updated.

Cloud payroll software is accessed over the internet

  • All your data is stored safely by the software provider, so you can sign in and use it from anywhere.
  • Cloud software offers great flexibility and you usually pay per user per month, spreading your costs.
  • The payroll packages that are easiest to use tend to be cloud-based, so it's usually the best option for small companies.
  • Cloud packages cost from £5 per month, although the cost is likely to depend on how many employees you have.

Desktop payroll software is installed on your computer

  • In general, you can only use it on that computer and all your data is stored there.
  • The popularity of desktop software has fallen since cloud payroll became commonplace. However, using it does mean that all payroll data is kept within your business.
  • Desktop payroll software costs from around £80 per year.

You may need to budget extra to convert your payroll data from another format

  • Most packages can import employee details saved as an Excel spreadsheet.
  • You may need to enter other data manually, or ask your supplier if they have a conversion service available.
  • You will need to check the data, even if the conversion was done automatically.

Your employees may require training

  • Some payroll packages are good at explaining what you need to do.
  • However, payroll is a complex area and it's important you understand the relevant legislation.
  • A three-day course, covering the whole subject of payroll, costs from £800.

Continuing costs

The costs of maintaining and supporting payroll software can be relatively insignificant when you consider the benefits the software can bring to your company.

Typically, you will have to pay for ongoing updates and support

  • This may be a monthly or annual fee.

Maintenance and support services normally cover both accounting and IT problems

  • You may need telephone and on-site support, depending on your in-house IT.
  • Payroll is a vital part of your business, so make sure your contract guarantees a reasonable response time.

4. Making a purchase

Take time to consider carefully which payroll software is right for you.

Decide your business objectives

  • Assemble a team of interested parties - not forgetting the end users - to set specific, quantified objectives.
  • Ask the team to identify current problems and future requirements.

Various professional organisations can provide you with lists of suppliers

Recommendations are a good way to find payroll suppliers

  • You can also search online, read articles and advertisements, or go to trade shows.

Shortlist suppliers by asking them qualifying questions

  • How many customers use their payroll systems? A large number of users generally indicates better support.
  • Do they supply businesses like yours? Ask if you can question these businesses about their experiences.
  • Does the supplier allow software developers to create add-ons? This can be useful if you need to expand your payroll system in the future.

Ask selected suppliers how their products can meet your needs

  • Does the system have to be modified to meet your specific needs?
  • What additional features are there? Look for the specific features you need.
  • Do they have other suggestions as to how their systems can benefit your company? These may indicate how well they understand your business.

Check your accounting software

  • If you already use accounting software, it will probably offer payroll functions too. You may have to pay extra to access these.
  • Using the same software for your accounts and payroll usually makes it easier to import payroll data.

5. Testing a system

The cost of implementing a payroll system is related to how easy it is to use. Ask for a demonstration or sign up for a free trial.

How easy is it to input an employee's details when they join or leave?

  • Does the software prompt you for all relevant tax and NI information?
  • Does the software determine how much holiday pay or back pay the employee is entitled to?
  • How easy is it to input details of additional deductions, such as pension contributions?
  • Can you set up templates? For example, a template for temporary employees.

Can the software handle PAYE RTI reports?

  • All businesses are required to submit RTI data to HMRC.

How does the program calculate net pay?

  • Can you input different rates of pay?
  • Can you calculate bonuses and commissions automatically?

How easy is it to change an employee's pay details?

  • Can you make global changes that will affect every employee?
  • Can you correct an error for one employee without affecting others?
  • Does it matter in what order you input any changes?

How easy is it to make one-off payments or changes?

  • Can you tell the software when to apply particular rates of pay? For example, periodic payments, such as year-end bonuses.

How easy is it to run reports and queries?

  • Will you be able to do this yourself, or will you need additional support?

How flexible is the system?

  • Are there any limits on the number of deductions or employees that the system can handle?
  • Can the software handle different hourly rates for the same employee?
  • Can the software handle foreign currencies and different tax systems?
  • Can you customise the way the program looks and operates?
  • Can you send payslips by email or allow employees to sign in and view payslips or log absence?

How will the system handle new legislative requirements?

  • Does it include a feature to handle pensions auto-enrolment?
  • If there's a monthly or annual fee, does it include updates in line with legislative updates?

6. Pitfalls

Integrating different pieces of software can be complicated

  • Integration should be handled by someone with expert knowledge.
  • Not all systems are compatible.
  • Integrating several pieces of software makes tracking errors harder.

Payroll software uses sensitive data about employees and what they get paid

  • Make sure only authorised personnel have access to payroll details.
  • Information about your staff must be stored in compliance with the Data Protection Act.
  • Periodically check payroll details to prevent fraud.
  • Remember that documents you print, like payslips, must remain confidential.

You are required to archive your payroll records for at least three years

  • Storing them electronically makes them easier to access. Ensure your payroll software provides for this.
  • Protect against data loss by backing the information up.

7. Getting help

Always involve your accountant when deciding what system to opt for

  • Using the same system as your accountant can save you time and money.
  • However, remember that good payroll software can reduce reliance on your accountant, so they may have a vested interest in not recommending the most appropriate package.
  • Additionally, they may prefer you to use software that makes their life easier. But you need software that's right for your company.

Some accountants are software resellers

  • Larger accountancy firms may have an IT department dedicated to accounts and payroll software.
  • Again, they may have a vested interest in selling certain software. Seek independent advice if you're unsure.
  • Many resellers can customise software to meet your exact needs. For smaller businesses, the costs of customisation will usually outweigh the benefits.

Consultants can help you determine the priorities for your payroll system

  • Choose a consultant who has experience of your type and size of business.
  • A consultant may also be able to suggest other ways a payroll system can help.


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