Do you need a payroll system?

For businesses with employees, an efficient payroll system is essential. It helps ensure you comply with legal obligations and deduct the right amount of income tax and National Insurance (NI). But do you need an electronic payroll system?

If you only have a handful of employees, it is possible to do your payroll manually, using a spreadsheet. The only cost is your time.

However, this can distract you from running your business, and you will have to do your own calculations. In addition, using an electronic payroll system makes it easier to transfer your data when you do your Employer Annual Return — which you are required to file online.

Electronic payroll system pros and cons

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), advises firms to use an electronic payroll system, regardless of staff numbers.

“There are many rates and allowance changes, so using an electronic system can save you time and help you avoid errors,” he says. “When employees have pension contributions or student loan repayments, it gets even more complicated. You’d be mad to do all those calculations manually when there is software available.

“However, the risks of using electronic systems are data loss through crashes, viruses, and payroll errors if new tax rules aren’t properly implemented,” he warns.

If you want to switch from a paper to an electronic payroll system, it could be time consuming as you must insert each employee’s name, address, tax details, date of birth and salary.

“The data you’re in-putting must be accurate so it can be difficult, but good payroll software will alert you if it looks odd,” explains Roy-Chowdhury. “Transferring to an electronic system will save you time later on.”

Pick a payroll system

Payroll software will process your information and tell you what the deductions are. Whichever electronic payroll system you choose, make sure it is accredited by HMRC, and that it calculates income tax, NI and taxable benefits.

Payroll software providers that offer software for small firms include Sage, Intuit and Iris.

Sage Instant Payroll for up to ten employees costs from £8.75 per month. Intuit QuickBooks Pro + Payroll costs from £21 per month. Some services charge a fee for each extra employee.

“A lot of software providers will give you a free trial,” points out Roy-Chowdhury. “Ask your accountant or other small businesses which they use.”

Some basic payroll software packages are free for businesses with up to ten employees, such as Iris Payroll Basics.

Out-of-the-box software is usually sufficient. “You shouldn’t need custom software unless you have an unusual business model — for example, if you have seasonal workers,” Roy-Chowdhury explains.

Payroll system management

Many businesses outsource their payroll to save time in-house. If you outsource it to a dedicated payroll bureau, a typical cost is £1.50 per employee per month, but you will still have to provide spreadsheets.

Alternatively, you could outsource to an accountant for a slightly higher cost, or upgrade your existing package with your accountant, to do the work for you.

“The cost depends how many employees you have,” advises Roy-Chowdhury. “If you add up the time it costs you to do your own admin and calculations, it is usually worth outsourcing. If you use an accountant, they will hold all your PAYE records, and you just tell them if someone new starts.

“Electronic systems make more sense, because when you come to file your Employer Annual Return the software package deals with the forms for HMRC for you,” he concludes.

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