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Managing payroll for small businesses: Regulations and best practices

Running a small business often means taking on multiple roles.

One of these roles, and perhaps one of the most important, is ensuring that your payroll management is efficient and compliant with the latest regulations.


Understanding the payroll system

The payroll process is managed through HM Revenue and Customs (HMRC) and its real-time information (RTI) system.

RTI requires employers to submit information about tax and other deductions every time an employee is paid.

This has made the payroll process more transparent and accurate but also more complex.

Ensuring the accuracy of your payroll is crucial for your business.

Firstly, it ensures compliance with laws and tax regulations, helping to avoid costly penalties and legal issues.

Secondly, accurate payroll reflects respect and fair treatment towards employees, who count on their salary for their livelihood.

A well-managed, timely and accurate payroll fosters trust and transparency, boosting employee morale and improving communication channels.

Conversely, any discrepancies or delays in payroll can lead to misunderstandings, mistrust and even legal implications.

Errors in payroll can be time-consuming and costly to correct, taking resources away from other important business tasks. Therefore, getting payroll correct the first time is a matter of legal, ethical and financial importance.

Key payroll regulations

Small businesses must comply with several key regulations when managing payroll:

  • Real-time information (RTI) – As mentioned above, through RTI, employers are required to submit payroll data to HMRC every time they pay their employees.
  • National Insurance Contributions (NICs) – All employees must deduct NICs from their employee’s wages. The exact amount depends on the employee’s earnings and their specific NIC ‘letter category’.
  • Income Tax – This is deducted under the Pay As You Earn (PAYE) system which is essentially a method of paying Income Tax and NIC. Your employees’ tax code will tell you how much to deduct.
  • Workplace Pensions – Under the auto-enrolment scheme, most UK employers are required to automatically enrol eligible staff into a pension scheme and contribute towards it.
  • Statutory pay – Employers must be prepared to calculate and provide statutory pay, such as Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Paternity Pay and Statutory Adoption Pay (SAP).
  • National Minimum Wage and National Living Wage – Businesses must ensure they are paying their employees at least the National Minimum Wage or the National Living Wage, depending on the employee’s age and if they are an apprentice.

Best practices for managing payroll

With the complexities that come with managing payroll, here are some best practices to ensure efficiency and compliance:

  • Consider payroll software – There is a wide range of payroll software options available that can help automate and streamline the payroll process. These tools can calculate pay and deductions, generate payslips and report to HMRC automatically.
  • Stay updated – Laws and regulations often change. Stay up to date with the latest changes to ensure your business remains compliant. HMRC’s website is a great resource for this.
  • Keep good records – Maintain accurate records of your employees, their pay, tax deducted and more, for at least three years. This is not just good business practice but is a legal requirement.
  • Employee classification – Ensure you correctly classify your employees (e.g. full-time, part-time, contractor). Different rules and rates apply to different types of workers.
  • Consistency – Pay your employees consistently, both in terms of amount and timing. This helps maintain morale and allows for more accurate budgeting and forecasting.
  • Outsource payroll services – If managing payroll in-house is too time-consuming or complex, consider outsourcing. A good payroll services provider will handle all your payroll needs, ensuring accuracy and compliance.

Managing payroll for a small business is a crucial task that requires diligence and attention to detail.

By understanding the key regulations and adopting the best practices, you can streamline the process, avoid penalties and focus more on growing your business.

Are you looking for payroll advice? Get in touch today.