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If you’re about to start employing people you might be wondering how to do payroll yourself as a UK business owner. While many alternative solutions exist - such as outsourcing payroll or using payroll software, using payroll manual calculations is still possible, and can keep your costs down. However, as an employer you’ll have obligations to your employee and to organisations like HMRC, which are important to understand before you start running payroll.
This guide covers the basics of how to do payroll for a small business yourself, plus we’ll introduce Wise Business as a good option for managing your money in GBP and 40+ other currencies, with low fees¹ and lots of business friendly perks.
If you’re considering running payroll yourself it’s important to make sure you understand clearly all your obligations - to your employee and to the UK government² for example. This guide walks you through the basics of how to do payroll manually - but it’s not a substitute for proper professional guidance. Make sure you get all the help and advice you need before you start running payroll, so everything goes smoothly.
Here’s a quick walk through the key steps to run payroll yourself:
1. Register as an employer with HMRC
Before you employ anyone you’ll need to let HMRC know you’re planning to do so³. You can do this up to 8 weeks before you pay anyone for the first time. It takes up to 15 days to get your employer PAYE reference number - so make sure you leave enough time for all the paperwork to be completed so you can run payroll without issues.
2. Decide on pay dates
Once your employee starts you’ll need to agree with them when payments will be made. This is usually on or around the end of the month for salaried employees being paid 12 times a year - but you can agree alternative arrangements, such as payment on a 4 weekly cycle, if you prefer. Bear in mind that the tax month for HMRC runs from the 6th of the month to the 5th of the next month.
3. Calculate gross wages
Once it is time to run payroll you’ll need to calculate your employee’s gross wages. If you’re paying hourly, this will be the total number of hours worked in the given period, multiplied by the number of hours. Remember to include overtime or any other agreed pay like commission, bonuses or holiday pay.
4. Calculate required tax deductions
You’ll be able to use HMRC’s payroll tools to check your payroll calculations manually⁴. This includes checking the tax and National Insurance contributions you must withhold and pay to HMRC as an employer.
5. Make other paycheck deductions
Depending on the situation there may also be other deductions to consider, such as student loan repayments, or a pension contribution. Whether or not these apply depend on the specifics of the person you’ve employed. Bear in mind that some deductions are made pre tax, while others may need to be calculated after you’ve withheld HMRC taxes and National Insurance.
Make sure you’re clear on how the calculations need to work in your specific situation - take professional advice if you’re unsure.
6. Send or hand out pay slips
Pay slips must contain certain information by law. In the UK this means you must provide a payslip to each employee which contains information like - gross pay, pay after deductions, total amount of deductions withheld and the number of hours worked. You can provide these pay slips in hard copy or you can send them digitally if you’d prefer.
7. Inform HMRC of the deductions you’ve made
You’ll need to inform HMRC of what you’ve paid employees, and what deductions you’ve withheld. You can also review what you now owe HMRC, and make adjustments - for example if you’ve paid someone statutory sick pay. You’ll then pass the deductions you’ve withheld to HMRC monthly, usually by the 22nd of the month.
You can learn more about running payroll for your UK business with PAYE guidance⁵ from HMRC, and more general HMRC payroll advice⁶, which is all available online.
Wise Business offers powerful time and money saving tools for UK business owners running local and international payroll.
Open a Wise Business multi-currency account to hold 40+ currencies, send payments to 70+ countries, and get paid with local bank details for 9 currencies.
You can use your Wise account to run payroll in GBP or 40+ other supported currencies - and the Wise batch payments tool enables companies running manual payroll to send up to 1,000 payments in one go.
That can save you time - and because all Wise currency conversion uses the mid-market exchange rate and low fees, you could save money too.
Use Wise Business to run international payroll and see how much you can save.
As we’ve seen, when you manually calculate payroll for your employees, you’ll need to pay attention to the legal calculation requirements, as well as noting the information that you must include in your employees payslip.
The basic steps are set out below, but make sure you get advice if you’re unsure about the way to calculate payroll for your particular business. Getting it wrong will leave you with unhappy employees - and you could also be breaking the law.
Gross pay is the full amount you need to pay an employee, before you withhold taxes and other voluntary or mandatory contributions. The way you calculate gross pay depends on whether you have an hourly paid or salaried employee.
With an employee who earns a fixed salary you’ll take their gross annual salary and divide it by the number of pay periods in a year (usually 12 if you’re paying monthly). For an employee earning an hourly rate you multiply their hourly rate by the number of hours worked in the pay period. You’ll also need to add in any other agreed payments - like bonus, commission or holiday pay at this stage to get the full gross pay amount for your employee.
The exact deductions you need to withhold depend on the employee’s situation, including their income and tax code.
Here are the most common deductions you’ll need to know about as an employer in the UK:
- Income tax
- National Insurance contributions
- Student loan repayments
Net pay calculation
Next you’ll have to calculate the net pay you’ll need to pay your employee. To do this you’ll start with the gross pay you’ve calculated already and remove the deductions you need to withhold.
This leaves a net pay figure which must be shown on the payslip and which you’ll pay into your employee’s bank account on payday. The funds you’ve withheld for tax and National Insurance for example must then be paid promptly to HMRC so you remain compliant with law.
|You can also learn more about payroll for UK businesses here|
Using manual payroll isn’t your only option. You could also use payroll software to calculate payroll automatically, or hand over the work to an outsourced agency or partner. Here are a few pros and cons of running manual payroll to help you decide if it’s right for your business.
|Manual payroll pros ✅||Manual payroll cons ❌|
So there you have it - your guide to running payroll manually for UK businesses. If you’re a new employer, running manual payroll can be attractive as it is a flexible and cost saving option. However, there’s a lot to learn, and it’s not an area you want to get wrong.
If you end up paying employees incorrectly you’ll reduce their trust and engagement - and you could also be on the wrong side of the law if you fail to deduct and pass on all the proper taxes and contributions.
Before you decide which payroll option is right for you, take professional advice to help you weigh up the different available methods - and don’t forget also to look at Wise Business for easy, low cost ways to run international payroll from the UK in 40+ currencies.
Sources used in the article:
- HMRC - running payroll
- HMRC - register as an employer
- HMRC - check payroll calculations manually
- HMRC - PAYE guidance
- HMRC - payroll guidance
Sources last checked September 16, 2023
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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