How To Manage Payroll The Right Way

Payroll management is a critical aspect of running a successful business. 

Ensuring that your employees are paid accurately and on time is not only essential for their satisfaction but can also greatly impact the growth and productivity of your company. 

We will delve into the world of payroll management and provide you with valuable insights and practical tips on how to manage payroll — the right way.

Payroll management.

What is payroll and why is it important for a business?

Payroll is the process of calculating and distributing wages or salaries. It involves tasks such as calculating gross earnings, deducting taxes and other withholdings, and ensuring timely and accurate payments to employees. 

Payroll management is crucial for several reasons. It’s important for businesses because it ensures legal compliance, keeps employees satisfied, helps manage benefits, and provides financial data for decision-making. Efficient and accurate payroll processing is crucial for the smooth operation and success of any organisation.

What is PAYE?

PAYE stands for Pay As You Earn, which is the system used by employers in the UK to deduct income tax and National Insurance contributions from employees’ salaries. 

Under the PAYE system, employers calculate and withhold the appropriate amount of tax and National Insurance from each employee’s earnings and pay it to HM Revenue and Customs (HMRC) on their behalf. PAYE ensures that employees’ taxes are deducted throughout the year, rather than having a large tax bill at the end of the tax year. It helps simplify the tax process for employees and ensures regular contributions to the government’s tax revenue.

How to set up payroll for your business

Setting up payroll for your business involves several steps. It’s important to understand and follow these steps carefully to ensure accurate and timely payment of your employees. 

  1. Obtain an employee PAYE reference number. Register your business with HM Revenue and Customs (HMRC) to receive a unique reference number required for payroll processing. 
  2. Set up a payroll system. You can outsource to a business accounting firm that will handle the calculations, deductions, and record-keeping. 
  3. Gather employee information. Collect essential details from your employees, including their National Insurance numbers, tax codes, and employment contracts. 
  4. Determine payroll frequency. Decide on the payroll frequency, whether it’s weekly, bi-weekly, or monthly, and establish the payment dates. 
  5. Calculate deductions. Use the HMRC guidelines and tax codes to calculate income tax and deduction National Insurance contributions from employees’ wages. 
  6. Process pension contributions. If applicable, enrol eligible employees in a workplace pension scheme and manage their pension contributions. 
  7. Keep accurate records. Maintain comprehensive payroll records, including employee information, earnings, deductions, and tax-related documents. It’s crucial for HMRC compliance. 
  8. Submit Real-Time Information (RTI) to HMRC. Report payroll information to HMRC on or before each payday using RTI submissions, which include details like employee earnings and deductions. 
  9. Time to make the payments. Ensure employees are paid accurately and on time, including their net wages and any applicable bonuses or overtime.

It’s important to note that this is the process of payroll simplified, and it can be quite complex and will be unique to the structure of your business. Seeking advice from a professional accountant is recommended to ensure proper payroll management setup and adherence to legal requirements. 

Payroll management.

Employee classifications and statuses

Properly classifying your workers for payroll is of utmost importance. Correctly categorising them allows you to accurately calculate and withhold payroll taxes, determine appropriate payment methods, and comply with employment laws. 


An employee refers to an individual who works for an employer under a contract of employment. 

The relationship between the employee and the employer is one of mutual obligations, where the employer has control over the employee’s work and provides regular work assignments.

Self-employed worker

A self-employed worker refers to an individual who works for themselves and runs their own business. 

They are responsible for managing their own taxes and National Insurance contributions (NIC). Self-employed workers have more flexibility and control over their work, but they also have additional tax obligations to fulfil.


An independent contractor refers to a self-employed individual or a business entity that provides services to clients on a contractual basis. 

Contractors are typically engaged for specific projects or assignments and are not entitled to the same employment benefits as employees. How an independent contractor is paid should have been agreed upon at the start of the contract. 

They are responsible for their own financial affairs, including invoicing clients, paying their own taxes and NICs, and keeping records of their business income and expenses. 

Temporary worker

A temporary worker refers to an individual who is engaged on a short-term basis to perform specific tasks or cover temporary staffing needs within an organisation. 

Temporary workers are often employed through temporary work agencies or staffing firms. Temporary workers are treated as employees for the duration of their engagement and they are subject to the same tax and NIC rules.

Payroll budgeting

Managing payroll expenses is a critical aspect of running a business, and effective budgeting plays a crucial role in ensuring financial stability. Payroll budgeting involves forecasting and allocating funds for employee wages, benefits, and related expenses. It helps businesses plan and control their payroll costs while ensuring they can meet their financial obligations. 

One important tip for payroll budgeting is to accurately forecast staffing needs based on business demands. By analysing historical data, market trends, and projected growth, businesses can estimate the number of employees required and budget accordingly. 

It’s also essential to consider factors like salary increases, bonuses, benefits, and payroll taxes when setting the budget. With this information, you can see if certain expenses need to be cut or if you have enough flexibility to hire new talent. Regularly reviewing and adjusting the payroll budget throughout the year allows businesses to respond to any changes or unexpected events.

Accounting services near me.

Online T&A systems

Online time and attendance (T&A) systems have revolutionised the payroll process for businesses of all sizes. These systems offer a range of benefits and efficiency gains that simplify payroll management. 

One of the significant advantages of online T&A systems is accurate time tracking. Employees can easily log their hours worked, breaks, and time off, eliminating the need for manual timecards or paper-based systems prone to errors. This accurate time data directly translates into precise payroll calculations, reducing the risk of overpayment or underpayment. 

Business accountants can access real-time attendance data, review and approve timesheets, and generate accurate payroll reports with just a few clicks. This level of automation not only increases efficiency but also reduces administrative burden and frees up valuable time for other critical tasks. 

Furthermore, online T&A systems provide enhanced visibility and transparency for both employees and employers. Employers can track attendance trends, identify patterns, and make data-driven decisions to optimise workforce management.

Using accounting services

Using business accounting services for payroll management offers numerous benefits for your company. 

Firstly, it saves you time and effort by outsourcing the complex and time-consuming tasks of payroll processing and bookkeeping to professionals. This allows you to focus on core business activities and strategic growth. A business accountant would ensure accurate and timely payroll calculations, tax withholdings, and deductions — reducing the risk of errors and compliance issues. 

By outsourcing an expert from a business accounting firm, you’ll always be up-to-date with changing regulations and ensure your business remains compliant. By entrusting payroll management to experienced professionals, you can streamline operations, improve efficiency, and maintain employee satisfaction by ensuring accurate and timely compensation. 

Are you looking for support in payroll management? Wilkinson Accounting Solutions is a business accounting firm with professionals that are highly experienced in payroll processing and bookkeeping. With clients all across the UK, contact us today for accounting aid you can count on.

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