The Small Business Guide to Payroll

The importance of a flawless payroll system when running a business cannot be underestimated. Those working in payroll, whether within a small enterprise or as part of a specialist payroll company, must possess particular knowledge ranging from tax to pensions to succeed in their role.

Andre Robberts, UK and Ireland’s Division Vice President of Sales for ADP, (a specialist payroll service) said: “Payroll is a complex function and smaller businesses may struggle to meet the demands imposed. In a small business environment, payroll is often managed by one person who also juggles HR, recruitment and other employee lifecycle processes.” 

Your capabilities as a small business

If you work within a small team, you may want to consider outsourcing your payroll to a specialist service provider. These services can deal with all aspects of payroll for a fee. Other paid options can include cloud accounting (such as Xero, Quickbooks or Sage) or hiring an accountant.

If your business can manage payroll services in-house, or you would prefer to do it yourself, be mindful of what payroll entails, and what is expected from you.

Mr Robberts said: “The challenge for small businesses is to ensure they have the right services, technology, and broader offerings in place, that meet the needs of employees and the broader organisation.

New technology is changing the landscape. Organisations need to consider these factors and ensure they remain up to date with their payroll processes and the technology used. This will become even more important as HMRC pushes to create a digitally advanced tax system. Small businesses must be aware of how to use this system appropriately to ensure they remain compliant with regulation.”

Payroll should be dealt with carefully as mistakes concerning tax or National Insurance can result in a penalty from HMRC and may cause distress amongst your employees.

So, what are some things to consider when tackling payroll, yourself?

Minimum Wage, Overtime, Shift Pay and Pay Increases

Changes to your employee’s pay can happen for several reasons, so be aware of what could change and what your obligations are.

  • Minimum Wage: The average pay for total hours worked must not fall below the National Minimum Wage. You can find the full list of pay rates here.
  • Overtime:  An employee’s employment contract should include details of any overtime pay rates and how you have worked it out. Working longer hours may mean the employee is entitled to extra pay, known as overtime, but only if this is stipulated in their contract. Known as the Working Time Directive, legally, employees cannot work more than 48 hours a week over 17 weeks.
  • Shift work: Some employees may agree to work undesirable hours (for example, shift work or overnight work). Legally this agreement must be in writing and signed by the employee.
  • Pay Increases: There is no legal obligation for workplaces to give employees a pay increase. However, it is common practice to extend this offer upon good performance, or after a certain amount of time has passed. It is a good incentive for employees and can keep turnover numbers low, helping you to keep costs down when it comes to recruitment (which we wrote about here).

You will need to be aware of the employee’s contractual obligations, and the legal obligations of your business as the employer. In the event of a disagreement over pay from the employee, it is important to rectify any problems that may arise quickly and fairly. 

HMRC, Tax and National Insurance (NI)

National Insurance and tax are important elements of payroll. Calculating tax allowances, deductibles, and submitting documents to HMRC must be done correctly to avoid the risk of being penalised. So, what do you need to know when dealing with HMRC?

  • Payment to your employees includes: salary or wages, tips, bonuses, statutory sick or maternity pay. For most employees, you will need to deduct tax and National Insurance (NI) from their pay. Other deductions may include student loan repayments or pension contributions.
  • If you are handling payroll yourself, you will need to report your employees’ payments and deductions to HMRC on or before each payday. If you expect to pay less than £1,500 on salaries a month, you can arrange to report to HMRC quarterly.
  • If an employee is making less than £112 a week, you do not need to register an employee with Pay as you Earn (PAYE), but you will need to keep a record of all pay going out to employees.
  • You will need to send another report to claim any reduction on what you owe for HMRC, for example, Statutory Pay.

If you are handling payroll via a software program, it will have a functionality to work out how much tax and National Insurance you owe. You can find out more here.


Automatic enrolment will become compulsory by 2018, and it is your duty to provide a workplace pension for your staff.

So, who in your company will qualify? 

You must enrol and make an employer’s contribution for all staff who:

  • Are aged between 22 and the State Pension age
  • Earn at least £10,000 a year
  • Work in the UK

There are many options to choose from, so shop around for the best pension scheme that will work well with your business plan. 

Holiday, Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP)

It is a legal requirement for employers to pay out Holiday, Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP). Employees who are eligible must follow certain criteria, and it is up to the employer to honour this.

Holiday Pay or Annual Leave

Every employee is entitled to holiday pay. Employers must understand the following.

  • Every employee is entitled to 5.6 weeks paid holiday per year.
  • You are not required to give Bank or public holidays as paid leave. You can choose whether you would like to include bank holidays as part of a worker’s statutory annual leave, at your own discretion.
  • Employers can allow additional leave if they wish, and do not have to adhere to all the rules that apply to statutory leave to the additional time off.
  • Employees working irregular hours, ie. shift pay or term-time work, will need to calculate their leave differently to those working part or full time.

To calculate how much annual paid leave an employee is entitled to, multiply 5.6 by the number of days an employee works per week. For example, 5.6 x 5 (days a week) = 28 days for annual leave. For those who have employees with irregular hours, you can calculate their holiday entitlement here.

Statutory Sick Pay (SSP)

For your employees to be eligible for SSP they would need to:

  • Be classed as an employee and have done some work for you
  • Have been ill for at least 4 days in a row (including non-working days).
  • Earn at least £112 (before tax) per week.

Statutory Maternity Pay (SMP)

To be eligible for SMP an employee must:

  • Earn on average at least £112 a week.
  • Give the correct notice in accordance with their employment contract.
  • Provide proof of pregnancy.
  • Have been employed continuously for at least 26 weeks up to the 'qualifying week' - the 15th week before the expected week of childbirth.

Points of contact and services that are available to use for small businesses

We have only covered the basics here, but Payroll entails a comprehensive list of services. Mistakes can prove costly for your business. It is best to stay updated on new laws and regulation. This is crucial, as rules are always subject to change.

You can find a full list of what you should know here.

Other resources that can be of use to small businesses can be found below.

Written on in Business Insights