What is Payroll? A Complete Guide for the UK

Paola Faben Oliveira

In the dynamic landscape of business, growth often brings the need for a helping hand. As your UK-based company expands, you'll find yourself hiring new talents to keep up with the demand. And with new employees comes the crucial aspect of payroll – the process of ensuring they receive their hard-earned wages.

In this complete guide, we will delve into the significance of payroll for UK businesses, including topics such as payroll taxes, how to do payroll and the payroll process.

Moreover, suppose your business extends its operations overseas. In that case, we'll introduce you to the Wise Business multi-currency account, a valuable tool for efficiently handling payroll in other currencies beyond GBP.

💡Learn more about Wise Business

So, let's embark on this journey to understand everything about processing payroll and how it plays a vital role in the success of your organisation.

What is payroll?

Payroll is more than just a list of employees and the wages they earn. It forms the backbone of any business that employs people in the UK.

At its core, payroll refers to:

The process of calculating and disbursing employees' wages, but its significance goes beyond just paying salaries.

It plays a crucial role in the smooth functioning of an organisation and ensures compliance with legal obligations. Key aspects of payroll include the following:

  • Calculating employee earnings.
  • Deducting taxes and National Insurance contributions.¹
  • Reporting pay details to HMRC.
  • And most importantly, ensuring timely and accurate payments to employees.

Whether you manage payroll in-house, outsource it to a specialised firm, or leverage payroll software, the process requires meticulous attention to detail and adherence to various rules and regulations.

Payroll expenses are a major consideration for businesses, and proper management allows deductions that can lower taxable income. As your business grows and employs more staff, understanding and implementing an efficient payroll system, become vital for running your organisation lawfully and maintaining employee satisfaction.

How does payroll work?

Processing payroll involves a series of vital steps to ensure employees receive their rightful earnings accurately and on time. Each tax month, which runs from the 6th of one month to the 5th of the next, the following tasks are performed:

Step 1: Keep Employees' Records
In the first step, you'll need to document employees' salaries, statutory sick pay, and holiday pay. Accurate records of compensation and benefits are essential for payroll calculation.

Step 2: Calculate Deductions
Next, calculate all the deductions. Payroll software typically automates this process, ensuring precise deductions for taxes, national insurance, and student loan payments. Employers must also calculate their national insurance contribution on earnings exceeding £242 per week.

Step 3: Produce Payslips
Generating payslips for each employee is a crucial part of the payroll process. Most payroll software or service providers facilitate this task efficiently.

Step 4: Report to HMRC
Compliance with legal requirements involves reporting employees' pay and deductions to HMRC. This report is known as a Full Payment Submission

Breaking it down:

You can simplify the payroll process by breaking it down into manageable steps. Keeping comprehensive records of employee information, salary details, and benefit contributions, is foundational.

In addition, tracking time accurately, especially for hourly employees, is essential for calculating gross wages. Payroll software or calculators help determine gross pay based on hourly rates and work hours.

After establishing gross wages, deductions come into play.

  • First, pretax deductions, such as retirement plans and health insurance contributions, are considered.
  • Next, payroll taxes, like income taxes, are deducted. Voluntary deductions, such as life insurance plans or union dues, are also factored in. The remaining amount is the employee's net pay, which they receive via direct deposit or paper check, along with an itemised pay stub.
  • Lastly, as an employer, you are responsible for filing and depositing the deducted taxes with the relevant authorities, typically quarterly. Timely filing and payment are key to avoiding fines and penalties.

Following these steps ensures a smooth and accurate payroll process, and your business complies with legal obligations.

How to do payroll?

Running payroll for your company involves deciding the most suitable method that aligns with your specific needs and context. There are three primary approaches to managing payroll, each with its own merits and considerations:

Manual payroll

Doing payroll manually is the most time-consuming option, but it can be the least expensive. This method requires you to manually handle all payroll tasks, including calculating taxes and deductions.

In addition, you'll need to refer to HMRC tax tables or calculators for PAYE tax and National Insurance contributions. It also involves meticulous record-keeping to ensure accuracy and compliance.

Best for:
Small businesses with limited resources and a relatively small number of employees.

Pros ✅Cons ❌
  • Cost-effective as it doesn't require outsourcing or software expenses.
  • Full control over the payroll process, allowing for immediate adjustments.
  • Time-consuming
  • Prone to errors.
  • Increased responsibility for timely filing and depositing taxes.

Wise Business Batch Payments:

Wise Business batch payments can be a valuable tool for companies using manual payroll across currencies. It streamlines cross-border payments, ensuring efficiency and cost-effectiveness. You can make up to 1,000 payouts to 160+ countries in one go uploading a single CSV file.

Get started with Wise Business 🚀

Payroll service provider

Outsourcing payroll to a service provider can be the least time-consuming option, but it comes at a higher cost.

A payroll accountant or professional employer organisation³ typically handles the entire payroll process, from calculations to wage distribution. This option offers flexibility as service providers offer different levels of involvement.

Best for:
Businesses that lack the capacity to manage payroll in-house and seek a fully managed payroll solution.

Pros ✅Cons ❌
  • Saves time and effort by delegating payroll responsibilities.
  • Expertise and support from the service provider for HMRC compliance and accurate payments.
  • Higher costs compared to manual payroll or software usage.
  • Less control over the payroll process.

Payroll software

Using payroll software strikes a balance between doing payroll manually and outsourcing. The software automates calculations for wages and taxes, eliminating the need to reference tax withholding tables.

Full-service payroll software can handle tax filing and deposits on your behalf.

Best for:
Companies seeking an efficient and cost-effective solution with greater control over the process.

Pros ✅Cons ❌
  • Inexpensive and user-friendly.
  • Automated calculations lessen the risk of errors.
  • Some software handles tax filing and depositing, saving time.
  • An initial investment may be required for software purchase.
  • Limited support compared to outsourcing.

Wise Business API:

For companies using payroll software with an open API, Wise Business API can be a game changer. It connects the power of Wise Business multi-currency account to your business tools, automating all sorts of payments, including payroll.

With Wise Business API you can send automatic payments to over 160 countries in 40 currencies at ease. TalentDesk is one of Wise's customers that uses the API to automate payments and save time on manual admin.

Read the case study: Discover how TalentDesk uses Wise to pay contractors abroad

Deciding on the most suitable method depends on your company's size, budget, and preference for control over payroll management. Whether you opt for manual payroll, a payroll service provider, or payroll software, each approach can efficiently meet your payroll needs when chosen thoughtfully.

What is payroll tax?

As an employer in the UK, understanding payroll tax is essential, as it involves taxes related to an employee's gross pay. By law, every employee is required to pay income tax and National Insurance based on their total earnings and individual circumstances.

As the employer, you are responsible for ensuring that the correct amount of tax and Natiaonal Insurance rates are deducted from each employee's salary during the payroll process. Also, ensuring that it is promptly paid to HMRC each month.²

The process of handling payroll tax involves careful calculations to ensure accurate deductions from employees' gross pay. The amount deducted can vary depending on factors such as an employee's tax code⁴, tax bands, and any relevant allowances or deductions they may be eligible for. HMRC provides detailed guidance on tax codes and other aspects of payroll tax through its official website.

In summary, payroll is a vital process for UK businesses, encompassing various aspects like payroll taxes, processing, and management. Careful attention to detail is essential, whether you do it manually, through a service provider, or using payroll software. As an employer, you must accurately calculate and deduct taxes and National Insurance, ensuring compliance with HMRC regulations.

Wise Business multi-currency account and API provide valuable tools for handling payroll efficiently, especially for businesses with international operations. Understanding and implementing a robust payroll system is fundamental to running a successful and lawful organisation while ensuring employee satisfaction and financial stability.

Get started with Wise Business 🚀

Sources used:

  1. National Insurance: introduction: Overview - GOV.UK
  2. Running payroll: Sending an FPS after payday - GOV.UK
  3. Thomson Reuters | Practical Law | PEO
  4. Understanding your employees' tax codes: Overview - GOV.UK

Sources last checked August 16, 2023.

*Please see terms of use and product availability for your region or visit Wise fees and pricing for the most up to date pricing and fee information.

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.

We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.

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