What Is Payroll? A Simple Guide for Business Owners

If you employ staff, you need to run payroll. It’s not optional. It’s a legal requirement.

But what actually is payroll? What does it involve? And how do you make sure you’re doing it properly?

Let’s break it down in simple terms.

What Is Payroll?

Payroll is the process of calculating and paying your employees for the work they’ve done. It covers working out their wages, deducting tax and National Insurance, paying pension contributions, and reporting everything to HMRC.

In short, payroll makes sure your team gets paid correctly, the right tax is deducted, and your business stays compliant with UK law.

When people talk about “running payroll”, they usually mean completing this whole process on a weekly or monthly basis.

What Does Payroll Include?

To run payroll properly, you need accurate employee information. This includes their full name, address, National Insurance number, tax code, and agreed salary or hourly rate. Without this, your payroll calculations won’t be correct.

You also need to calculate gross pay and net pay. Gross pay is the total amount an employee earns before deductions. Net pay is what they actually receive in their bank account after tax and other deductions have been taken off.

Pay can include more than just basic wages. It may involve overtime, bonuses, commission, holiday pay, or statutory payments like sick pay or maternity pay. If someone joins partway through the month, their pay is usually calculated on a pro-rata basis. You must also make sure their hourly rate never falls below the National Minimum Wage or National Living Wage.

Payroll Deductions and Payroll Taxes

A key part of payroll is handling deductions correctly. From an employee’s gross pay, you must deduct PAYE Income Tax and employee National Insurance. If they’re enrolled in a workplace pension, pension contributions must also be deducted. In some cases, there may be student loan repayments or court orders to consider.

On top of this, your business must pay employer National Insurance and employer pension contributions. These are known as payroll taxes. They are a real cost to your business and must be paid to HMRC on time.

Getting payroll taxes wrong can lead to penalties, so accuracy matters.

Reporting Payroll to HMRC

Each time you run payroll, you must report pay and deductions to HMRC under the Real Time Information (RTI) system. This includes who you’ve paid, how much you’ve paid them, and how much tax and National Insurance has been deducted.

This information must be submitted electronically on or before payday. Even if employees are paid correctly, late reporting can still result in fines.

How to Run Payroll

There are a few ways to manage payroll.

Some businesses attempt to do payroll by hand. While this may seem cheaper, it is time-consuming and increases the risk of mistakes.

Most small businesses use payroll software. This automatically calculates wages, works out tax and National Insurance, submits RTI to HMRC, and generates payslips. Modern payroll systems also keep digital records, which helps with compliance and reduces admin time.

Another option is outsourcing payroll to an accountant or payroll bureau. This can be a smart move if your payroll is becoming complex or you want peace of mind that everything is being handled correctly.

Why Payroll Compliance Matters

Payroll isn’t just about paying staff. It’s part of your legal responsibility as an employer.

You must operate PAYE correctly, auto-enrol eligible employees into a workplace pension, keep payroll records for at least three years, and ensure minimum wage rules are followed. Holiday pay and statutory leave must also be calculated properly.

If you miss PAYE deadlines, underpay staff, or fail to meet pension duties, HMRC and The Pensions Regulator can issue penalties. For small businesses, these fines can add up quickly.

Good payroll processes protect both your business and your employees.

What Is a Payroll Tax Holiday?

Occasionally, the government may temporarily reduce certain payroll taxes to support businesses and workers during difficult economic periods. This is sometimes referred to as a payroll tax holiday.

The idea is to increase employees’ take-home pay or reduce employer costs for a limited time. However, these measures are temporary. Once they end, payroll systems must be updated to reflect the normal rates again.

Payroll Isn’t Just Admin

Payroll affects your cash flow, your compliance, and your employee trust. If wages are late or incorrect, morale drops quickly. If tax is handled incorrectly, you risk penalties.

That’s why having a clear payroll process matters. Automating where possible, keeping records up to date, and reviewing payroll reports before submission can prevent most common issues.

If you’re unsure whether your payroll system is compliant or efficient, speaking to a professional such as prosper accountancy can give you clarity and peace of mind.

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