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How to set up payroll for a small business...

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How to set up payroll for a small business...

Learning how to set up payroll for a small business is one of THE most crucial things to do as a small business owner. Your payroll system will determine the gross and net pay of all your organisations personnel, including directors, after taking into account deductions for taxes, pensions, healthcare, and other expenses. This is the basic principles of PAYE (Pay-As-You-Earn). The amount of income tax, employers' and workers' National Insurance Contributions that must be set aside for payment to HMRC will be calculated by payroll software.

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You must understand and handle payroll correctly if you have employees or want to pay yourself a salary. So let’s take a look at the basics of payroll and what you need to do to set up payroll for your small business…

First things first:

You (or your accountant) must register your business with HMRC as an employer before you can begin paying staff. Businesses pay their employees through payroll. It is intended to cover the payment of any related taxes to HMRC as well as the wages of the employees and the financial records of the pay. Payroll, in its simplest form, is the complete procedure that manages an employee's salary and taxes. The UK government programme known as PAYE (Pay As You Earn), which is run by HMRC, handles the actual physical payment of wages and taxes.

Do I need to set up payroll to pay myself and others?

Payroll setup is necessary if you have any employees. If you don't, your business will be hit with costly fines and penalties, so as soon as you hire someone, you need to take care of payroll. Typically, there are only 3 steps involved.

  • Registration with HMRC as an employer
  • Register each employee with HMRC in a Full Payment Submission(FPS). You'll need information like their full name, address, tax ID number, date of birth, start date, salary, and student loan information of your employee for this. Also required is their P45.
  • Create your PAYE system, then start the payroll procedure.

What are the monthly payroll responsibilities of an employer:

Although payroll setup is rather straightforward, there are actions you must take each month to ensure that you pay your employees and taxes in a timely manner. From the sixth day of one month to the fifth day of the following is a tax month. Your company must take certain steps each tax month to ensure that your payroll is accurate and compliant. Payroll software can be used to complete these tasks. If you don't already have payroll software, you can look into the HMRC-approved options <<here>> and select one.

No matter if they are paid hourly wages or salaries, keep track of everyone's earnings >>

  • Make sure to account for National Insurance and Income Tax deductions from their pay.
  • Determine how much National Insurance you will be required to pay as an employer.
  • Create pay slips for your staff.
  • Use an FSP to submit all pay and deductions to the HMRC (Full Payment Submission).
  • You'll receive a balance of what you owe the HMRC in your online account within two days after finishing the process. Unless you pay less than £1,500 a month, in which case you can request to pay in quarterly instalments instead, this payment is due by the 22nd of every month.

It's critical that you get this information accurate and on time because any submissions that are submitted late or incorrectly may result in a penalty charge.

Does having employees make payroll necessary?

Payroll isn't just for businesses with workers; lone personnel can also use it if they're registered as a limited company. Payroll isn't just for companies with employees, though. Depending on how you work, paying yourself a wage via PAYE through payroll may be a more attractive choice for sole business proprietors. To pay oneself through the PAYE system, you must be set up as a limited company, though.

To accomplish this, you must register your business with the HMRC as an Employer and, if you haven't done so before, register for self-assessment. Then, as the only employee of your business, you can pay yourself using the payroll system.

You can pay your wages using dividends, which distribute the share of profits to all shareholders, if you don't wish to use the PAYE system. Since you wouldn't have to pay National Insurance Contributions with this strategy, you might eventually make more money. Dividend payments, however, depend on how profitable your business is. You won't receive any dividends if your company has a terrible month. Additionally, because all profits are taken out and dispersed as dividends, dividends prevent you from reinvesting money back into the business.

Can sole traders utilise payroll?

No, sole traders cannot use PAYE to pay themselves a regular salary. There is no legal separation between your firm and you as a sole trader. While the income tax and social security will be based on the earnings that your firm makes, the wages that you pay yourself come from personal business profits. It's advised that sole proprietors set aside a particular sum each year to ensure that their tax contributions are adequately covered.

Are you required to manage payroll on your own?

We are aware that managing a small business requires a lot of work. Payroll can be outsourced to other businesses or organisations to handle on your behalf if you lack the space or expertise to manage it yourself.

In reality, the most frequently outsourced small business function in the UK is payroll, which is done by 39% of small businesses, according to research from the Chartered Institute of Personnel and Development (CIPD) and if that is something you’d prefer for your own business we can help - The cost will depend on how often you run your payroll, how many employees you have, and how complex your payroll structure is. For a small UK business with monthly payroll and with no more than ten staff, payroll usually costs around £4-£10 per month per employee, we can source accountant quotes tailored to your business needs.


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