Aug 6, 2023

2023 Guide: How to Set Up Your First Payroll Process in the UK

Setting up payroll for the first time can be daunting for first-time business owners. In the UK alone, there were 32.4 million people on payroll in December 2021. Just before the pandemic, the number was even higher at 33 million in February 2020.

Since then, payrolled employment has only increased, with the most recent reports from HMRC and the Office for National Statistics showing that since February 2020, the number of payrolled employees has gone up by 1.8%. This means it’s now at 33.5 million people, which means that doing it properly is more important than ever.

The first time you set up payroll is the most challenging, as you are still learning the ins and outs of how to do it effectively. Once you settle into a rhythm, you will find that payroll becomes easier. If you’d like, you can choose a payroll provider to take care of it for you or set up payroll yourself.

This article discusses both options for setting up payroll and provides insight into how to set up payroll for the first time.

How to Find a Payroll Company

If you would like to outsource your payroll to a third party, there are a few things that you should keep in mind. This section will discuss what qualities and standards to look for in a payroll service provider and what questions to ask them.

What to Look for in a Payroll Provider

Things to think about when choosing a payroll provider are:

The needs of your company. Choose your payroll model based on the needs of your business. If you’re a global company or have multiple human capital management needs, you may want Payroll Comprehensive Outsourcing Services. If not, Managed Services are likely a good fit.
Efficient and effective implementation. Choose a payroll service provider that has a history of quickly and effectively implementing payroll for businesses. They should be adept at working with your staff to ensure a smooth transition and provide support while your employees still learn how the setup works.
Data security and privacy. Any payroll provider worth their salt will have security practices in place to ensure that they won’t lose access to your data due to a data breach. They’ll need robust resilience policies in place to keep you from suffering a major loss that will cost you more money in the long run.
Making data analytics a part of payroll. Find a vendor who will enable you to check your data analytics and provide insight to your company. Use a company that provides a centralised data set and can provide you with custom analytics. They should also have industry-wide data for benchmarking and predictive analysis.
Streamlining operations. The aim of using a payroll service is to make your life easier, so it’s important to find one to do that. They should spot where you can reduce costs, improve efficiency and improve the engagement of your employees.

Questions You Can Ask a Payroll Company

Here are some questions to ask a payroll service provider before you commit to outsourcing your payroll to them:

Is your payroll software available in the cloud?
Does it provide process automation and other advanced functionalities?
Does your payroll software have advanced security features?
Does it integrate with HCM software?
Will it help my business continue to grow and scale?
Will it work with my company’s digital transformation efforts?
Will you provide support as we adjust to the new software platform?
Is it HMRC approved?

If you find a payroll services provider that can do the above, you will be well on your way to success. If not, it’s time to start again from square one and find another service provider.

Setting Up Payroll for Your Business

Are you planning to set up payroll yourself? In this section, you’ll find out which steps to take the first time you set up payroll for your business.

How to Register as an Employer

First, you’ll need to register with HMRC. If you click the link provided, you’ll be led to the www.gov.uk site to register as an employer. There are two options there: the first is for limited companies with one to nine directors. If you’re another type of business, click the “Next” link under that heading.

Don’t register yourself (the company director) as an employer - the employer name you list should be that of your company. You shouldn’t register too far in advance or too late - so a good rule of thumb is to register one month before your first employee payday.

Once you’ve answered the questions, you’ll be given a 12-digit government gateway number and be asked to log in. You should see PAYE information, but if you don’t, you’ll need to enrol in PAYE to gain online access to the information.

Once you’ve registered, getting your PAYE online login information will take some time. Once you’ve got your employer PAYE reference and an accounts office reference. (Those two numbers will not be the same.)

Choose Your Preferred Payroll Software

Think about the payroll features you want for your software and make sure it reports PAYE information online. Here are some things to ask yourself:

Do I need to produce payslips?
Do I want software that makes pension payments?
Should my software record pension deductions?
Should my software be able to pay people with different methods (temp work and full-time, weekly and monthly pay)?
Do I want it to generate an Employer Payment Summary report or Earlier Year Update to HMRC?

If you’d like an HMRC-approved software option, there are several for you to choose from.

If you switch to another software option during the year, you must take specific steps to avoid incorrect calculations or record duplications.

Automate payroll for all your permanent, part-time and casual workers

Payroll shouldn’t give you headaches. So we designed it to be easy. With just a few clicks, your team gets paid. You can even run it on autopilot.

Take Care of Your Records

Here is what you’ll need to keep records of:

Payments and deductions
Taxable expenses and benefits
Reports to HMRC
Employee leave and sickness absences
Tax code notices
Payroll Giving Scheme documents
Agency contract forms
Employee authorisation forms

Your records must be accurately maintained for three years. If your records are lost, stolen, or destroyed, you must report them to HMRC immediately. You must also do your best to recreate them - but HRMC may be able to help if you’re not sure how much you paid employees.

Give Employee Info to HMRC

Provide existing and new employee information to HMRC. Here are some things you should do:

Gather information so you can pay them through PAYE
Get information to determine their tax code
Find out if they’re repaying a student loan
Set them up in your payroll software
Register them in HMRC

You’ll also need to ensure that they have the right to work in the UK and follow other necessary steps to get them set up as employees.

Update HMRC Before the First Payday

On or before the first payday, you’ll need to record your employees’ salary/wages, calculate deductions (tax and National Insurance), and calculate the National Insurance contribution that you’ll need to pay on their earnings.

You’ll need to produce payslips for employees (use another software if your payroll platform doesn’t have this option) and report pay and deductions to HMRC in a Full Payment Submission.

(Note: if you pay an employee less than £123 a week, you will only need to record and report their pay unless they have other situations that would require you to follow the above steps.)

Pay Your Taxes

Every month, you must pay taxes and National Insurance on the income you report on your Full Payment Submission (FPS), minus the reductions on any Employer Payment Summary (EPS) that you sent before the 19th in the current tax month.

You must pay what you owe by the 22nd of the month (and if you’re paying by post, you should pay by the 19th to avoid being penalised). If you pay less than £1,500 a month, you may be eligible to pay quarterly instead of monthly. To find out more, contact the payment helpline.

You have several different options when it comes to making your PAYE payment:

Direct debit
As a payment through your online bank account
By debit or corporate credit card online
By cheque through the post (remember to send it early)
Through an online or telephone bank transfer
At your bank

Keep in mind that late or incomplete payments may result in penalties.

Complete Annual Reports for Next Year

Before starting the next tax year (6 April), you’ll also want to complete your annual reports. Here are some of the things you’ll need to do:

Report to HMRC and provide forms to employees. Report on the previous tax year (which ends on 5 April) and provide your employees with a P60 by 31 May.
Send your final payroll report. On or before your employees’ payday, provide your final PFS. If your payroll has a “Final Submission for the Year” field, click “Yes” or type it in. You may need to send the final report in an EPS instead of an FPS if you fall into a particular category.
Update your payroll records. Starting on 6 April, you’ll need to update your payroll records by ensuring that you’ve used the correct tax code for each employee. HMRC will send a P9T form or P9X form for employees if necessary. You’ll also need to work out the tax code for new employees.
Update your payroll software if it’s not a cloud solution. Before or beginning on 6 April, you must update your software. This is a crucial step, as doing so will give you the latest rates and thresholds for income tax, National Insurance, and student loan repayment information. You should also download and install the latest version of Basic PAYE Tools if you use an older software version.
Report expenses and benefits. If your payroll software enables you to report your expenses and benefits by 6 July, it’s the most convenient way to do it. If not, you’ll have to report it another way. You’ll also need to pay Class 1A National Insurance.

There’s an Easier Way: Introducing Moonworkers

Would you like to set up payroll in the most convenient way possible? You can do that with Moonworkers. Here are some of the things you can do:

Easy payroll automation. Our payroll platform is HMRC-approved and always in sync with HR. You can effortlessly set up payroll to create a standardised workflow.
Auto-enrolment.You can import pension schemes and automatically enrol employees, allowing them to manage their contributions in a stress-free manner.
Shift work enabled. Moonworkers integrates a rota planner, making shift workers' pay, deductions, and holiday pay as easy as any other employee.
Tax year calculations. You won’t have to manually update and calculate your tax codes anymore. Instead, enjoy a three-click year-end tax calculation experience.
Pay contractors through Stripe. If you pay contractors in addition to your full-time employees, you’ll love our Stripe integration that makes it easy to approve timesheets and make weekly payments with just a 10% security deposit.
Stellar support. Unlike any other payroll software, payroll and HR experts compose Moonworkers’ support team, always available to help you solve specific problems.

Would you like Moonworkers to save you from the drudgery of setting up payroll for your business? Let’s talk! Schedule a Zoom call to find out more about how we can help you.