How to do payroll yourself: A complete guide

One of the more challenging times for companies in a given month is the days leading up to payday. After all, employees need to be paid on time.

It’s therefore crucial that payroll is done correctly. Training your in-house team to manage payroll is an important step in this process. Read on to discover our guide on how to do payroll yourself, which includes details on legal requirements and compliance, common payroll calculations, tips for payroll management and more.

We’ll also explore the TransferGo Business Account, a single, simple-to-use multi-currency account that lets you send, receive and manage money from all around the world—perfect if you’re paying suppliers based abroad.

Getting started with DIY payroll

The first step in payroll processing is understanding the process and its benefits. The idea of DIY payroll might cause an initial headache but there are many benefits to doing payroll yourself. Let’s explore.

Benefits of doing payroll yourself

1. Reduced costs: Saving money is one of the main benefits of personalised payroll processing. Any money you would have used to pay for a third-party company now stays in-house.

2. Full control: Another perk is flexibility and control. When you do payroll yourself, you can change an employee’s salary and other compensations without necessarily changing the entire company’s payroll calculations.

3. Understanding of payroll processes: When you do DIY payroll, you’ll also be able to make sure that you’re adhering to payroll compliance rules. You’ll understand all payroll taxes and can make sure they’re paid on time and correctly.

4. Improved financial management: Finally, doing your own payroll enables you to fully understand your business cash flow. You’ll have full insights into how PAYE systems work, ultimately giving you more control and ownership of your full business operations.

Essential tools and software

We live in a world that’s quickly switching to automation and there are plenty of tools helping us with the process. The same applies to DIY payroll.

Thanks to different tools, strategies and software, you no longer have to rely on pen, paper and memory. When payday approaches, all you need to do is input the required data and everybody gets paid.

These tools work for both big and small business payroll matters: calculations, taxes, deductions and compliance, as well as National Insurance contributions.

Some examples of helpful tools and payroll software that can be helpful in the UK space include Xero, Quickbooks, and Sage Payroll. These tools can help with everything from integration properties to business scalability.

Setting up your payroll system

Once you have the tools you need, it’s time to set up your payroll system. Here’s a general guide.

1. Register with HMRC

HMRC, which stands for HM Revenue & Customs, is the United Kingdom’s payment and customs governing body. If you want to have your DIY payroll system compliant with the UK government, it’s mandatory you register with them.

They help ensure the PAYE system within your company is set up for efficient and fair income tax deductions as well as National Insurance contributions that pay into systems like national health, education and security.

The registration is entirely online and takes just five days. All you need to do is go to the HMRC website and register; HMRC will then issue you with a PAYE reference number than you can use to record all of your staff’s compensations. Make sure to allow enough time to avoid any delays in sending out your first payroll.

2. Set up an Employee Identification System

For everyone working under you, assign a unique ID. This helps you with tracking their earnings, deductions and any other payroll processing matters.

Creating a payroll schedule

The next step in creating your payroll process is to set a schedule. When everybody knows the exact date and duration of their pay, anxiety reduces across the board.

It also enables everyone to plan accordingly when it comes to their expenses. The four main schedules are daily, weekly, bi-weekly and monthly. Simply choose what works best for you and your employees.

A step-by-step payroll process guide

Now, let’s get to the crux of it all: the step-by-step payroll processing guide.

Step 1: Calculate gross pay

Gross pay is the amount one gets before any cuts like taxes, deductions, insurance and student loan repayments. You can calculate these according to your chosen schedule. For example, the amount for a daily worker will be smaller than the amount for an employee receiving monthly pay.

Step 2: Manage tax deductions

This is where your HMRC registration comes into effect. Through the PAYE system, every employee pays their taxes at a certain percentage of their salary. 

As part of the standard Personal Allowance, employees do not have to pay tax on the first £12,570 they earn in a year. Here’s a guide to the HMRC tax rates and bands after that:

• 20% on income between £12,570 and £50,270
• 40% on income between £50,271 to £125,140
• An additional rate of 45% on income over £125,140

Step 3: Process National Insurance (NI)

National Insurance contributions are the UK’s second-biggest tax and are paid by employees, employers and the self-employed. The NIC system is distributed into classes: Classes 1, 2, 3 and 4. Most employees pay Class 1 contributions.

Step 4: Handle other deductions

Additional deductions include things like pensions, student loan payments and court orders. Other deductions like child or spousal support may also apply for some employees.

Legal requirements and compliance

As a company, always ensure you always stick to the rules—pay fairly, deduct correctly and stay compliant. This prevents your business from having to pay penalties or go to court. It also protects the reputation of your company.

Here are some of the legal requirements to keep in mind.

Adhere to HMRC regulations

The in-house HR team should always be informed about any HMRC changes when it comes to PAYE, NIC and other regulations. Check the HMRC website regularly and make sure your payroll manager stays abreast of any necessary changes and updates.

Organise record keeping

Businesses are required to keep records going back at least 6 years from the end of the last company financial year they relate to. These records should be detailed with employee payments, tax returns and deductions. They also help to simpify any necessary auditing processes.

Adhere to filing deadlines

No matter what schedule you use—daily, weekly, bi-weekly, or monthly—timely filing is mandatory. The HMRC rules state that all the filing should be done by the 19th of the following tax month. This will ensure you stay clear of any penalties tied to late payments.

Common payroll calculations

Another important part of payroll processing is understanding the common payroll calculations. Here are some of the most common.

Overtime pay

If an employee works extra hours outside the stipulated hours, they must be fully compensated. Here’s where overtime payments that were agreed upon earlier are used to calculate the final pay. To keep it consistent, agree on a specific rate and keep your records up to date.

Holiday pay

The UK legislation has a ruling that employees are entitled to an annual 5.6 weeks of paid vacation, which is usually equivalent to 28 days. So, whenever an employee takes a holiday, record it and indicate it under holiday pay.

Sick pay

The UK government, under the Statutory Sick Pay (SSP), states that an employee gets paid as usual for up to 28 weeks should they be sick. This, however, can be a complicated matter. So, always refer to HMRC whenever possible.

Bonuses 

If your employees have managed to surpass your set quota, you may decide to award them with bonuses. These can be gift cards, paid holiday or an additional monetary compensation on top of their usual pay.

Year-end payroll tasks

Finally, let’s explore the required year-end payroll tasks. Here are some of the forms, reports and documents you’ll need to produce each financial year.

P60 forms 

A P60 provides employees with a statement of all compensations and deductions from the previous tax year, including tax and NIC. P60 forms should be provided to employees at the end of each tax year, no later than 31st May.

Year-end tax reports 

Next up, you need to send HMRC every detail on payroll. These reports must be accurate encompassing any money you spend on paying your employees.

Employee documentation 

The final set of documents is your employee records. Here, you include payroll records, P60s and every document with your employee’s details. You must ensure you comply with all UK data protection regulations which also includes GDPR (General Data Protection Regulation).

Troubleshooting common payroll issues

So, how do you do payroll yourself in the UK? As we’ve explored above, it can be a detailed, lengthy and sometimes complex process. And it doesn’t come without issues.

Here are some of the most common issues and some potential solutions.

• Inaccurate tax codes: If an employee uses an inaccurate tax code; it may lead to an under or overpayment. If this happens, reach out to the HMRC for advice as soon as possible.
• Payroll differences: Make sure to record all details accurately and always double-check and verify employee information and calculations. If you spot something incorrect, fix it and notify HMRC.
• Missed deadlines for filing: Another huge error is missed deadlines. Thankfully, there’s an easy way around this thanks to automated tools. Simply set yourself up to receive alerts as soon as any deadlines are approaching.

Tips for payroll management

To stay on top of payroll management, follow our helpful tips below.

• If you can automate any payroll processes, do so. This will help you streamline all operations and minimise any human errors that may arise when it comes to payroll.
• Ensure you record everything accurately and double-check all details. This includes all details like employee names and addresses, as well as tax codes and bonus pay.
• Stay compliant with all set rules and ensure you stay on top of any changes enforced. This means staying abreast of updates from HMRC and any governmental institutions your business is affiliated with. 
• Record any changes to your business or employee pay as they happen. This includes changes in salary in the event of a promotion or change in management.
• Make sure your in-house HR manager is fully trained on all tools required for successful payroll processing.
• Safely store all records in a secure, digital format.

TransferGo Business Account

Now that you know how to do payroll yourself (UK), you might want to think about making sure all other components of your business are as steamlined and well organised as possible. One of the tools that can transform the way your reimagine your business operations is the TransferGo Business Account.

This single, simple-to-use, multi-currency business account lets you send, receive and manage money from all around the world, helping you steamline your cash flow and saving you time and money. You can hold balances in GBP, EUR, RON, PLN and more, lock in industry-leading rates and enjoy total peace of mind thanks to high-grade security protocols that keep your money safe.

What’s more, opening a TransferGo Business Account is completely free. There are zero fees on major routes and transfer margins are as low as 0.35%.

Ready to sign up? Open your free TransferGo Business Account today.