Setting Up and Managing Your Payroll System

An efficient payroll system is essential to ensure your employees are paid on time and their salaries are correctly calculated.

This guide explains:

  • An employer’s payroll responsibilities
  • The records you need to keep
  • Legal issues relating to payroll
  • Payment methods
  • Payroll system options

An employer’s payroll responsibilities

Payroll is simply any system an employer uses to work out their employees’ salaries and make the correct deductions from their pay. An employer is obliged by law to adjust wages to account for:

  • Tax.
  • National Insurance contributions.

Along with certain other items depending on the employee, such as:

  • Pension contributions.
  • Student loan repayments.
  • Sickness benefit.
  • Maternity pay.

Deductions are worked out using complex tax tables provided by HM Revenue & Customs.

The payroll records an employer must keep

Employers are required to:

  • Notify HM Revenue & Customs each time a new employee starts or leaves work, using form P45 (or P46 if your employee doesn’t have a P45).
  • Work out and deduct PAYE income tax and National Insurance Contributions (plus any other relevant deductions) for each employee every pay day, and record them on form P11 (Deductions Working Sheet).
  • Keep a detailed record of the total payments you make to HM Revenue & Customs for each pay period on a P32 (Employer’s Payment Record).
  • Pay the deducted amounts to the HM Revenue & Customs.
  • Submit full pay and deduction details to HM Revenue & Customs at the end of the tax year (April 5) using forms P14 and P35.
  • Give each employee a record of their pay and deductions at the end of the tax year using a P60.

Failure to complete these tasks could result in a fine.

You can now use the internet to send tax returns to HM Revenue & Customs, and by 2010 it will be compulsory to file returns electronically. Further information is available from HM Revenue & Customs’ Electronic Business Unit.

Apply online for a HM Revenue & Customs New employers’ starter pack –

Legal issues relating to payroll

Employers must keep all payroll documentation for at least three years after the tax year to which it relates.

  • You need to be aware that any data pertaining to individuals is covered by the Data Protection Act [1998] (DPA). To find out whether you need to have a DPA registration, contact the Information Commissioner (tel: 01625 545745). Find out more about your data protection responsibilities on the Information Commissioner’s office website –
  • Under the Employment Rights Act [1996], employers must give every employee a contract of employment. In addition, every employee has the right to be told how their pay has been calculated. This is usually done by means of a payslip detailing gross salary, deductions and net salary.
  • If you employ five or more employees, including owner-directors, you will have to offer a stakeholder pension scheme to your staff.
  • See also Employment law: a checklist for employers

Payment methods

There are various methods for paying employees, including cash, cheque or by electronic transfer directly into the employee’s bank account.

  • Cash can be labour-intensive to organise and is a security threat.
  • Cheque payments are more secure, though employees have to wait several days for the cheque to clear.
  • Electronic transfer is a quick and secure option. Talk to your bank for advice on setting this up.

Payroll system options

Some employers prefer to outsource their payroll system using payroll service companies.

Payroll software

There are many good payroll software programs available, which can take some of the stress out of the process. Payroll software can:

  • Save you time.
  • Produce payslips automatically.
  • Avoid complicated calculations involving tax and NI tables.
  • Automatically generate the information required for your end-of-year returns.

Shop around for the best software for your company. Make sure the program:

  • Complies with HM Revenue & Customs Payroll Standards accreditation.
  • Will be regularly updated by the supplier to comply with the latest changes in legislation and in tax and National Insurance rates.
  • Allows you to input people joining and leaving the company easily.
  • Can handle end-of-year reports.
  • Allows you to change employee’s pay details and calculate such items as one-off payments or bonuses.

Any payroll software will require an annual licence fee to be paid to keep it up to date, and also special stationery may need to be used, which could cost extra.

Payroll service companies

These companies provide fully-qualified payroll managers to administer to the needs of your business. The main advantages are:

  • You don’t need to be a payroll expert, as much of the burden is taken away from you.
  • Such companies usually have all of the automatic links required with the banks and HM Revenue & Customs (for the submission of end-of-year returns).
  • All statutory obligations will be taken care of as and when they change.
  • Security-sealed payslips and comprehensive management reports are supplied.

Remember, however, that even if somebody else is running the payroll function for you, the application of the PAYE and NICS system remains your legal responsibility.

Payroll bureaux

There are several payroll bureaux that give you the control of running your own payroll system without needing to have the technical infrastructure and logistics in place. However, you’ll need comprehensive payroll knowledge, and many of these systems are driven by a coding structure that requires a certain amount of prior training.

Useful contacts

  • HM Revenue & Customs Employer’s Helpline – 0845 714 3143 –
  • HM Revenue & Customs Employer’s New Employer’s Helpline – 0845 607 0143
  • HMRC Employer’s Online Services Helpdesk – 0845 605 5999
  • Tax Credits Helpline – 0845 300 3900
  • Business Link – 0845 600 9006 –
  • The Institute for the Management of Information Systems – 0700 002 3456 – – runs a payroll software accreditation scheme, in line with HM Revenue & Customs standards.
  • Information Commissioner – 01625 545 745 –

This business advice article published in association with Lloyds TSB.

Whether you are looking to start-up a business account or want to move your existing business account Lloyds TSB can offer you all the Business Banking support you need

While all reasonable care has been taken to ensure that the information in this website is accurate, no liability is accepted by Lloyds TSB for any loss or damage caused to any person relying on any statement or omission in the content of this website. The content of this website is provided for information only and should not be relied on as offering advice for any set of circumstances and specific advice should always be sought in each instance

Setting Up and Managing Your Payroll System


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