How does payroll software work? Features and benefits

Employing other people often helps to cut down on your own workload, but without the right tools, your to-do list can quickly build up. There’s a lot to deal with — managing payroll, National Insurance Contributions (NICs), and workplace pensions can start to feel overwhelming. And that’s before we start talking about compliance.

With the right payroll software, you’ve got a platform to handle all that complex number crunching. You’ll also be able to keep errors and miscalculations to a minimum when preparing for the new tax year.

In this article, we’ll teach you what payroll software is, how it works, as well as the benefits of payroll software and how it can help run payroll easily and accurately. Discover more about the importance of using payroll software with QuickBooks today.

How payroll software works: In summary

• Payroll software acts as a "source of truth," tracking records and calculating wages alongside Income Tax and National Insurance contributions (NICs). This removes spreadsheet errors, encrypts sensitive data, and manages workplace pension auto-enrolment.

• While running a payroll system is not mandatory, it is vital for meeting RTI reporting rules. Payroll software compiles the necessary files—such as Full Payment Submissions (FPS)—to be sent to HMRC on or before payday.

• Finding the right platform involves checking features and integration features. Free tools suit smaller teams but lack pension tracking, while cloud platforms provide automated updates, remote access, and employee self-service portals.

What is payroll software and what does it do?

Payroll software (or a payroll management system) is a digital system used to calculate employee pay, deduct the correct amount of Income Tax and National Insurance, and auto-enrol employees in workplace pensions. It also helps you to prepare the files needed for Real Time Information (RTI) updates, without the manual record-keeping on your part.

Functionally, payroll software helps you pay your staff the right amount, at the right time, with the right digital paper trail. It reduces your workload and helps with pay accuracy, which can be crucial for holding onto your staff in the longer term and avoiding any financial penalties. Payroll software is an important part of payroll accounting – especially as your business grows.

How payroll software works

It can help to learn how payroll software works and the ways it’s designed to support you everyday. Let’s break it down:

• Onboarding: Payroll software can act as a ‘universal source of truth’ and store employee details, salaries (or hourly rate), and their PAYE employee reference number. It can then use that information across other functions, removing the need for manual re-entry.

• Processing: Payroll software systems can automatically run calculations based on hours, bonuses, or student loans. That means less input for you. 

• Reporting: Prepare Full Payment Submissions (FPS) on or before pay day. These are not done automatically, but with all the data to hand, you can reduce the risk of errors and enjoy a streamlined system that delivers the information you need. 

Do I need payroll software?

While it’s not mandatory, anyone with employees — or who pays themselves as an employee — can benefit from using payroll software.

It’s possible to run payroll manually, but it can cost you in terms of time, energy, and compliance, as you work through a maze of deductions for each employee. This is easier with fewer employees, but basic tools still miss out on workplace pension management and other functions.

Since HMRC introduced Real Time Information (RTI) reporting, employers must submit PAYE information through compatible software every time they pay their employees. This Full Payment Submission must be sent on or before the day the employee is paid through HMRC online services, highlight the importance of accurate, efficient payroll software.

QUICK TIP: Before you submit any information to HMRC, you need to register for a Government Gateway account and enrol for PAYE for Employers. 

Discover some of the benefits payroll software provides:

Key benefits of using payroll software

There are several benefits payroll software can provide to a business. From staying compliant with government regulations to improving accuracy and saving time, we have compiled a list of key advantages a payroll management system can provide.

Save processing time

One of the key benefits of using payroll accounting software, such as QuickBooks, is the time it saves. Take intensive calculations out of the process, leaving your payroll administrator to oversee rather than get bogged down. 

Income tax deductions and National Insurance Contributions (NICs) will all be worked out for you. It can also track absences, expenses, bonuses, holiday pay, overtime, pensions, and (of course) hourly pay or salaries.

And with the advent of open banking and psd2, payments are faster than ever (and more secure). This also helps free up time for staff to focus on other priorities. 

Reduced errors and improved accuracy

As with all aspects of your business, manual data entry increases the risk of human error and potentially costly mistakes. Under-deductions, late payments, miscalculations – they’re all part and parcel of possible mistakes from doing things by hand.

We’ve all done it: hit the space bar mid-spreadsheet on Excel and deleted a formula without even noticing. When all the number crunching is handled by your payroll software, that risk can be reduced, giving you more confidence in the reliability of your data.

With payroll software, you’ll have the chance to be more on top of your record keeping. This should make it it’s much easier to meet your deadlines and make those payments to HMRC in plenty of time, especially with a built-in reminder.

Help with compliance

Staying up to date with current tax rates and responsibilities can feel like a constant game of catch-up. Thankfully, payroll software can track the latest regulations automatically, dealing with issues from GDPR to Workplace Pensions (auto-enrolment) as well.

Regulatory compliance doesn’t just impact tax legislation, but minimum wage rates and automatic filings such as RTIs too. This helps you to avoid penalties and ensure your employees are properly paid.

Employee satisfaction

Keeping staff morale high is an important part of running a business, no matter how big or small. A reliable, transparent payroll management system is more likely to ensure everyone is paid correctly, and on time, every time.

Some payroll software offers employees access to their own portal, also known as employee self-service. This gives them some access to the system through their own log-in, so they can check details, view their payment history, and even book time off.

Automated payslips

Employers are required to give each employee a payslip detailing their pay and deductions. Doing this manually increases the risk of errors in areas like PAYE, while automation means the payroll management system can run payslips without manual intervention. This means sending out secure and compliant payslips straight to your employees month in, month out. 

Make sure the payroll software you choose lets you produce smart, customisable, secure, and compliant payslips that can be printed or emailed, as well as P60s and payroll reports.

Learn more about what makes a payslip.

More powerful reporting

Automatic tracking, recording and reporting is offered as part of many payroll software options. These features can make the year-end far less stressful for you or your payroll manager – gone are the days of paperwork mountains and incomplete data.

Reports you might require include:

• Full Payment Submissions (FPS). Get the reports you need for submission on or before each pay day to report employee deductions and pay.

• Employer Payment Summary (EPS). Report statutory payment like maternity or sick pay

• Year-End Forms.

• General Ledger

• Pension Report.

• Payroll Summary. 

Lower risk of fines

Running payroll puts a lot of responsibility on employers. Human error in payroll can result in fines, so payroll software may help to reduce the risk of penalties by ensuring you get payroll done right on the first try. 

By automating key payroll functions such as tax calculations, creating a single source of truth for employee payroll data, and ensuring GDPR-compliant data handling, you can avoid incurring extra costs for honest mistakes.

Data security

Payroll management systems like QuickBooks offer a secure place for sensitive, confidential data. This could be employees’ wages, NI numbers, or other personal information they may have. 

Look out for features like advanced end-to-end encryption and protection against cyberattacks – this doesn’t just give your employees peace of mind; it also protects you against potential compliance issues.

Additionally, some critical security measures include:

• Role-based Access Controls. Role-based access controls ensure only authorised personnel can access sensitive data.

• Multifactor Authentication. MFA provides two-step authentication, meaning anyone logging into the payroll system will need a secondary device to prove their identity.

• Automated & Secure Data Backups. Regular, encrypted data backups can protect your data from system failures or ransomware hacks. 

Business insights

Using payroll software benefits your business by helping you see the bigger picture. By automatically collating data into up-to-the-minute reports, you can make decisions in real time. 

With business insights, you can see:

• How much individual employees cost long-term

• Track trends like their productivity or attendance

• Identify any improvements and plan when planning strategies or budgeting for your business.

Learn more about leveraging data for your business.

Expert support

Choosing payroll software means picking a partner that can help you. Payroll software often comes with dedicated customer service, allowing you to talk to an expert if you’re unsure of something. This can benefit your business if you don’t have a dedicated payroll person in-house or need help getting to grips with the payroll system.

With the proper guidance, you’re never stuck for long. With help only a few clicks away, you can learn more about your payroll software features and get the most of it.

Find out what payroll looks like Before and After QuickBooks

Types of payroll software systems

There is a range of different types of payroll software, each offering different services to its clients. The most common types of payroll software you’ll find are:

• Cloud-based systems. These types of payroll software systems are accessible anywhere and typically roll out updates and new features automatically. This means they keep up with changes in legislation, and data input by several payroll team members is securely stored in the cloud. 

• Desktop systems. With a desktop payroll software system, data is stored on local devices, and it may require manual updates. This can make them less secure and more likely to be outdated unless you keep on top of newer versions yourself. 

• Free/basic tools. Basic free-to-use tools can be a handy choice for very small teams, but they lack advanced features like automated pension assessments. They may quickly get out-scaled as teams begin to grow or demands become more complex. 

What payroll software features do you need?

Choosing the right option and determining what features of payroll software are important to you depends entirely on your business's needs. Many businesses will benefit from:

• Automatic calculations for Income Tax, NICs, and statutory pay.

• Direct generation of secure, digital payslips and P60s (employee self-service).

• Expense management, to add approved expense reimbursements.

• Workplace Pension (auto enrolment) integrations (e.g., NEST).

• Seamless accounting integration to track your business accounts simultaneously.

• Relevant automation solutions.

There are always more functions you can benefit from, so it’s worth properly researching the features of a payroll software solution before you commit. 

Considerations around payroll software

As with any choice concerning your business, you need to carefully explore your options and select the payroll software that offers the most benefit to your business. Some areas you may want to consider include:

Features

As noted above, different systems can do a range of different things. You should think carefully about the features of any payroll software you need – and avoid paying for those that won’t benefit you. Try to consider the main areas of friction that you come up against (or may come against in the future) to ensure you’re only paying for the important functions.

Cost-effectiveness

Different systems have different payment structures, and choosing the right one could save you money in the long term. If you run payroll multiple times a month, for instance, a monthly fee will likely work out cheaper than paying each time you run payroll.

Different types of payroll software providers may offer a range of payment methods, so consider your frequency before committing.

Integration

Which other systems does your business use? To get the most out of your payroll management software, you should look for a system that can integrate with the ones you use to keep track of things like attendance, hours worked, and time off. The more unified your core systems are, the less time you spend inputting data, and the fewer errors there are.

Learn more about payroll integrations.

Access

In general, employees should generally be able to view their own pay slips, tax forms and other information. However, you should also consider whether you want them to be able to do things through the payroll system such as edit their personal details or request time off.

Additionally, you should consider what information your HR team or managers are able to access and set privileges accordingly.

Changeover date

While transitioning to a new payroll software system is thought to be more straightforward at the start of a new tax year, it can be surprisingly simple to transition mid-year as well. As long as you can export your historic year-to-date figures properly (and the software has the means to import that), you can minimise any disruption in changeover.

How can large businesses benefit from a payroll system?

If you have fewer than 10 employees, you can use HMRC-recognised free payroll software to report PAYE information online in RTI, but this may not help with Workplace Pensions. 

Larger businesses, or those looking for additional functionality, will need to use paid-for software that’s recognised by HMRC. To get the most out of your payroll software, choose a system like QuickBooks that can support:

• Payments and deductions including NIC, pension contributions, student loans, and statutory payments (sick, maternity, paternity, adoption, and shared parental) - please note statutory adoption pay and shared parental payments are only supported by our advanced payroll software.

• Workplace Pension (auto enrolment) schemes such as Smart Pension, NEST, and People’s Pensions, assessing employees, creating communications, and managing contributions

• A variety of payment runs, such as weekly or monthly

• Error corrections, including editing multiple employees and pay periods at one time

• Full integration with other systems, like your business accounts, to help reveal business insights. It’s the only way to ensure maximum time management, reliability, and accuracy.

QUICK TIP: Make sure the software you choose offers a step-by-step guide to getting set up and offers good support if you’re unsure about anything.

How QuickBooks can help with payroll software

QuickBooks offers a choice of secure payroll accounting solutions, such as QuickBooks Online Payroll*, which supports smaller, simpler payrolls. That way, you can choose a payroll software solution fit for your business (and its aspirations).

• Automate payroll calculations

• Benefit from pension auto-enrolment

• Seamlessly integrate payroll data with accounting

• Get built-in time tracking and employee self-service portals

• Benefit from AI-powered insights and more

It makes sense to simplify your payroll, and you’ll be glad of this when it comes to year-end. And with more time on your hands, you can concentrate on what really matters - growing your business.

How payroll software works FAQs

Is payroll software easy to use?

Payroll software can vary, but QuickBooks is an up-to-date solution designed to be intuitive and user-friendly, making it relatively easy to use. They’ll typically help streamline processes and provide advantages like saving time and ensuring better accuracy. 

Do I need to understand accounting to use payroll software?

Having a basic understanding of accounting is helpful, but payroll software is often user-friendly enough to be used by people with minimal accounting knowledge. What’s more a good payroll software platform will usually provide step-by-step guidance and have a customer service team on hand to help with any queries you might have.

Is payroll software a better option than outsourcing? 

Choosing whether to use payroll software or to outsource an accounting professional depends on the complexity and size of your business. Software is a cost-effective solution for companies with straightforward needs, while external sourcing may work for complex admin or a highly bespoke requirement.

How much does payroll software cost?

The total cost of payroll software can depend on several things, and to understand how much payroll costs, it’s best to understand what features can impact the price:

• Provider – each provider will have their own prices.

• Features – more advanced features can cost more.

• Price plans – there are different types of price plans, such as monthly, per employee, or per pay run. All of these are likely to impact the total cost over time.

It’s best to research options and make comparisons so you can choose the best one for your business and its payroll needs. 

Are there any drawbacks to payroll software?

Some of the hurdles involved in switching over to payroll software could be perceived as drawbacks. These include:

• Upfront software subscription costs, especially early in a business's life.

• Software learning curves that create friction before you’re fluent with the system of your choice.

• An active internet connection for cloud-based tools may be more difficult, depending on your location.

Many of these are temporary or short-term issues that can be overcome and are minor compared to the many benefits that payroll software can bring.

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