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How do I pay my employee’s?

13 September 2012 by Crystal HR & Payroll Ltd


This step-by-step guide assumes that you’re starting a new business. You will have a number of employees and you need to set up a payroll function.

Step 1: The issues

 Consider the size and scope of your payroll. Decide on:

  • how many employees you intend to employ;
  • whether employees will be full-time, part-time, temporary or permanent;
  • whether you will pay them on a weekly, fortnightly, four-weekly or monthly basis;
  • whether they’ll be paid an hourly rate or an annual salary;
  • whether you’ll pay by BACs, cheque or – more unlikely – in cash;
  • any other payments such as pensions, bonuses or overtime; and
  • any taxable benefits you’ll provide.

Step 2: In-house or agency? 

Running a payroll is complex, even for a small business. You need a robust, reliable system to deal with the many elements of a payroll, including:

  • PAYE;
  • national insurance contributions;
  • tax credits;
  • holiday pay;
  • statutory maternity, adoption and paternity pay;
  • sickness entitlements; and
  • benefits such as pensions, expenses and car allowances.

Even small businesses benefit from using a commercial payroll software package, approved by HMRC, which will do the calculations automatically, saving time and reducing errors. But you must make sure you choose an appropriate system and that the people who use it are well trained.

Alternatively, you could decide to use an external payroll agency, which will run your payroll for you, for a fee.

When you have decided who will run your payroll, contact HM Revenue and Customs (HMRC) to register as an employer. You can do this by telephone on 0300 200 3200 or by using the registration tool on the HMRC website You can register up to four weeks before your first pay day.

Remember that it’s now mandatory for many PAYE forms to be submitted to HMRC online.

Step 3: Admin procedures 

Whether your payroll is in-house or outsourced, the people running it will need to know about your operating practices, including:

  • your payment cycle;
  • your rules and policies regarding payment during absences, sick pay, holiday pay and overtime rates; and
  • who can authorise payments.

They’ll also need to know about changes to the regular payroll run. Establish proper admin procedures for notifying payroll about:

  • new starters;
  • leavers;
  • changes to pay rates or personal details;
  • overtime worked;
  • periods of absence; and
  • any deductions to be made from pay.

Make sure you have a record of who authorised what and when. Even if you outsource your payroll to an agency, you will still have to set up a system for supplying the agency with accurate, authorised pay data to strict deadlines.

Step 4: Check legal obligations 

Check that you have complied with all your legal obligations. You must:

  • work out the PAYE tax and your employer’s and employees’ national insurance contributions (NICs);
  • ensure that you give employees an itemised pay statement, showing gross pay, statutory deductions, net pay and voluntary deductions;
  • pay HMRC monthly the amounts due for PAYE tax and employer’s and employees’ NICs by the due date to avoid a penalty for late payment;
  • notify HMRC if an employee leaves or a new employee starts;
  • keep records of wages, payments and benefits; and
  • complete employer annual returns and send them to HMRC by the due date to avoid a penalty. Note that almost all employers now have to file the return online. 

Step 5: Need to do

  • Consider the size and scope of your payroll.
  • Decide if processing will be in-house or via a payroll agency.
  • Register with HMRC.
  • Establish administrative procedures for authorising payments and notifying payroll.
  • Comply with all legal obligations.

Key messages

Paying even a small number of employees can be complex. It requires knowledge of PAYE, NICs and relevant legal requirements. Using payroll software saves time and cuts down on mistakes. Failure to follow HMRC guidelines can result in penalties. Using a payroll agency may prove a wise investment in the long run.

Get in touch with us to see how you can benefit from our outsourced services