Setting up a payroll system can feel overwhelming, particularly for first-timers, due to the complexity of tax regulations, compliance requirements, and calculations involved. But worry not. In this blog, we have devised a detailed step-by-step guide to help you set up payroll for your limited company. From registering as an employer with HMRC, choosing the right payroll software, collecting and recording employee details to managing payroll deadlines and compliance, we’ve got you covered.
So, whether you are a new business owner, an aspiring entrepreneur, or someone interested in understanding the realm of payroll management, this blog is your go-to guide. Read on to discover the simple steps and best practices for setting up payroll for a limited company.
What is a Payroll Setup?
Payroll setup involves a series of essential steps that enable businesses to accurately and systematically manage their payroll system. It involves managing payment schedules, computing employee wages, making tax deductions, and ensuring employees are paid timely and accurately.
Payroll setup utilises various components like income tax, national insurance, tax codes, etc., to facilitate a smooth payroll process. Implementing an efficient payroll system is crucial, not just for complying with legalities but also for maintaining high employee morale.
How to Set Up Payroll for a Limited Company in 6 Steps?
Setting up a payroll system for a limited company involves multiple stages. First up, you need to register as an employer with HMRC. The next step revolves around choosing the right payroll software suitable for your business needs. With a system in place, you now have to collect and record your employees’ details accurately. Subsequently, it is crucial to efficiently record and report your employees’ pay with all the deductions and contributions. Lastly, you must manage payroll deadlines and ensure all compliance rules are met. Let’s dive deeper into these steps.
Step 01: Registering as an Employer with HMRC
Your journey to setting up a payroll system begins with registering as an employer with HM Revenue and Customs (HMRC). This allows them to set up your company with the PAYE system, through which income tax and national insurance contributions (NIC) can be collected from your employees.
Always remember that you need to register before the first payday and not more than two months before you start paying people. After successful registration, you will receive a PAYE Reference and Accounts Office Reference number essential to run your payroll.
Obtaining PAYE Online Login
Upon becoming an employer, you should get a login for PAYE online. Most new employers get this when they register as an employer online. If not, you may enrol separately for it.
Your PAYE Online login lets you access vital online services like sending PAYE returns to HMRC. It also lets you view your employees’ tax, national insurance, and other payroll details.
If your payroll software doesn’t submit returns automatically, you can use HMRC’s Basic PAYE tools. Above all, the online service gives a real-time view of your employer PAYE Reference number, Accounts Office Reference number, and PAYE bill.
Step 02: Choosing Payroll Software
Choosing the right payroll software for your limited company is an integral part of the setup process. A good payroll software should allow you to prepare and store employees’ payment data. This data would be crucial for sharing with your employees and HMRC.
The market offers plenty of free and paid options recognised by HMRC. However, your choice should align well with the features required by your business.
Factors to Consider for Payroll Software Selection
When choosing the right payroll software, you aim for smooth operations and improved work efficiency. Hence, consider the following factors before making a decision:
- Compatibility with business size: Different software cater to different sizes of businesses. While some are perfect for small companies, others can handle a high volume of data suitable for larger companies.
- Scalability: Always opt for software that can handle growing employee numbers as your company expands.
- Features and functionalities: Check if the software meets your payroll needs, including producing pay slips, recording pension deductions, or generating financial reports.
- Ease of use: The software interface should be user-friendly and intuitive, minimising the learning curve for you and your team.
- Budget: Consider the cost of the software and check if it fits your budget. You must also evaluate whether a monthly subscription or a one-time licensing fee suits you better.
Step 03: Collect and Record Employee Details
Once your payroll software is in place, the next thing you need to do is collect and record your employees’ details. Information to collect includes employees’ pay, deductions from their payments, and HMRC reports related to pay and deductions.
Recording these details is essential even if you’re exempt from registering as an employer. This data forms the foundation of your payroll system and is crucial for the accurate computation of wages, taxes, and other computations.
Ensuring Data Protection and Compliance
Recording employee information demands careful attention to data protection rules. When you store employees’ personal details, such as their addresses, nationality, or emergency contacts, you must comply with the data protection regulations set forth by the General Data Protection Regulation (GDPR). Transparent communication about how their details will be used and secured and who they’ll be shared with is necessary.
Moreover, your employees have the right to access and check their details, request deletion of their information, or deny their data from being used in certain ways. Breaching these rules can lead to severe penalties, so ensure your compliance.
Reporting New Hires to HMRC
Upon hiring a new employee, it’s critical to inform HMRC. First, you need to determine the salary, ensuring it at least meets either the National Living Wage or the National Minimum Wage. Next, verify their legal eligibility to work in the UK. After considering these factors, you can notify HMRC about your new employee. Here are a few key details required:
| Information Required | Description |
| The employee’s salary | If they earn more than £123 a week, they’ll need to be paid through PAYE |
| Their tax code | Found on their P45 (issued by their previous employer) |
| Student Loan repayments | Also found on their P45 |
Use this information to set up your new employees in your payroll system and register them with HMRC using a Full Payment Submission.
Step 04: Recording and Reporting Employees’ Pay
After successfully recording the employees’ details, the next step is to record and report your employees’ pay accurately. This includes their pay before any deductions (gross pay), deductions such as tax and National Insurance, and their final pay after deductions (net pay).
Processing payslips for your employees before their payday is another important aspect. All this crucial information must be reported to HMRC timely through a Full Payment Submission (FPS).
What is Full Payment Submission (FPS)?
The Full Payment Submission should be submitted to HMRC on or before your company’s regular payday, including details of everyone that you pay, even those who earn less than £123 a week. In this submission, you’ll provide various information, including the employee’s details like their name, address, NI number, and payroll ID, as well as their taxable pay and deductions.
Once you’ve submitted this information to HMRC, your HMRC online account will show you how much tax and NI you owe and allow you to claim any deductions.
What is an Employer Payment Summary (EPS)?
Along with the FPS, an Employer Payment Summary (EPS) must be submitted if you need to claim statutory parental payments, apprenticeship levies, or Construction Industry Scheme (CIS) deductions. If you haven’t paid any of your employees in a tax month, you must also send an EPS instead of an FPS. The due date for the EPS report submission is the 19th of the following tax month.
This report not only displays your claims but also showcases any outstanding balance.
Step 05: Administering Payroll Deductions and Contributions
In managing the payroll, another integral step involves administering payroll deductions and contributions. As an employer, you are responsible for calculating and deducting numerous expenses such as Income Tax and National Insurance contributions, as well as any potential additional deductions like Student Loan repayments, pension contributions, or Payroll Giving (charity donations). Let’s dig deeper into these aspects.
Student Loan Repayments
Some employees might require student loan repayments. Use your payroll software to record if your employees need to make such repayments.
Student loan repayment can differ according to the plan type:
- Plan 1 – 9% of income above £1,834 a month
- Plan 2 – 9% of income above £2,274 a month
- Plan 4 – 9% of income above £2,305 a month
- Plan 5 -9% of income above £2,083 a month
- Postgraduate loans – 6% of income above £1,750 a month.
In all plans, the deductions start when your employees earn above the mentioned thresholds.
Workplace Pensions
As an employer, you must provide, pay into, and make pension deductions for a workplace pension scheme for eligible employees. Every employer is required to set up and contribute to a workplace pension scheme for their staff, a process known as automatic enrolment.
The contribution percentage levels usually depend on the type of workplace pension scheme. Calculate pension deductions after deducting National Insurance. Typically, pension deductions are made before calculating tax – confirm this process with your workplace pension provider.
Statutory Payments and Benefits
Under statutory payments, your employees are entitled to receive payments like statutory sick pay (SSP) or statutory maternity/paternity pay. These payments should be recorded in your payroll software as taxed like normal pay.
Additionally, taxable benefits like uniforms or company cars given to employees are to be reported separately at the end of the tax year.
Also, read our blog on Average Cost of Payroll Services for Small Businesses 2024
Step 06: Managing Payroll Deadlines and Compliance
To effectively manage payroll deadlines and ensure compliance, implement reliable payroll software that facilitates timely submissions. Stay informed about national insurance, tax year changes, and statutory pay rates like sick pay and minimum wage. Regularly update employee payroll records, including tax codes, student loan repayments, and workplace pension deductions.
Monitor key dates, such as the end of the tax year and first paydays, meticulously. Adhere to HMRC regulations closely to avoid penalties for late filings, ensuring smooth payroll operations.
Payment Deadlines for PAYE Bills
Your PAYE bills must reach HMRC by specific dates, depending on whether your paydays are monthly or you pay staff quarterly.
| Pay Frequency | Bill Due Date |
| Monthly paydays | Due by the 22nd of the following month |
| Quarterly paydays | Due by the 22nd after the end of the quarter |
For example, for quarterly pay, if the quarter is from 1st January to 1st April, the bill payment is due by 22nd April.
Late Reporting Penalties
The ramifications of late reporting are severe, as HMRC can issue a late filing notice and even charge you with a penalty. It can affect:
- Your operational finances as you might have to pay a hefty fine
- Your employee’s Universal Credit payments in case there are incorrect payroll reports
- Your PAYE scheme status as HMRC may close your PAYE scheme if there’s no report or payment in 120 days for new employers.
These points underline the importance of managing payroll deadlines and maintaining compliance effectively.
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Contact our team today to simplify your payroll setup and management.
Final Thoughts
Setting up a payroll for your limited company might initially seem like an uphill task. However, with an understanding of the basics and a structured step-by-step approach, it’s quite manageable. From registering with HMRC to choosing the right payroll software, correctly collecting employee data, and diligently managing payroll deductions and contributions, each step comes with its unique challenges. But by following our detailed guide and ensuring timely submissions, you will be on your way to successfully setting up and managing your company’s payroll.
Overall, effective payroll setup and management are critical to the smooth running of your business. We hope this comprehensive guide gives you the knowledge and confidence you need to create a hassle-free payroll system for your limited company.
Frequently Asked Questions
Do I need an accountant to set up payroll?
You don’t necessarily need an accountant to set up payroll. Many small business owners manage payroll themselves, especially in the early stages. However, as the company grows and the tax situation becomes more complex, hiring an accountant or outsourcing payroll can be beneficial.
Can you set up payroll yourself?
Yes, you can set up payroll using payroll software, provided you are comfortable with managing data accurately and know the regulatory requirements. You can easily navigate the setup process using comprehensive guides like this one.
What are the records and other payments to be aware of?
Ensure you keep proper records of employees’ pay, deductions, and statutory payments. Understanding specific payments like minimum wage requirements, student loan repayments, and workplace pensions is crucial. Also, maintain accurate records of tax code notices and taxable expenses or benefits.
Why should businesses outsource their payroll?
Outsourcing payroll can save time and reduce the risk of errors or penalties associated with late or incorrect filings. It also allows businesses to focus on core operations while ensuring that payroll is handled by professionals and up-to-date with the latest regulations and compliance requirements.
