What is payroll - the basics explained

Learn the basics of what payroll is in this concise summary. Find out how to pay employees correctly using PAYE, and deduct tax and NIC.

4 min read

Taking on your first employee is a big step for any small business. It immediately boosts your delivery capacity and potential for profit.

For many small businesses, the PAYE process can seem a daunting task. But however mundane it might sound, it’s a legal requirement.

The good news is that payroll can be a straightforward process if you follow the guidelines and make use of the tools that are out there to help you.

So what do you need to know about payroll?

It’s best to start as you mean to go on, and get it right first time.

Apart from paying your employees the correct amount, you’ll also need to ensure you make the appropriate statutory deductions from their salary. Theese need to be paid direct to the government.

These common questions address the basics of paying an employee for the first time. If you need to know more, don’t worry, we’ve also indicated where you can find lots more help.

What is PAYE?

PAYE (Pay As You Earn) is the system that HMRC uses to collect Income Tax and National Insurance Contributions (NICs) from employees’ pay, as they earn it.

How does PAYE affect me, the employer?

As an employer, it’s your responsibility to deduct tax and NICs on behalf of the Government from your employees’ salary. You must do this for each pay period, usually monthly, and pay this to HMRC. If your employees earn above a certain threshold, you will also have to pay Employer’s Class 1 NICs. Then, you need to supply each employee with a pay slip which outlines all these PAYE deductions.

How do I know how much to deduct in tax and NICs?

When your employee joins, request both their tax code and National Insurance number. Using this information, along with their earnings to date, you can then calculate how much tax and NI to deduct.

That sounds complicated!

You can make these calculations manually using information from HRMC. And that is quite complicated. But, rather than work it all out for yourself, you can use software such as QuickBooks online payroll. This greatly reduces the administrative burden, as the software calculates deductions and automatically generates payslips. This is a much more efficient way of doing it and reduces errors. It’s actually recommended by HMRC.

How do I pay the tax and NIC deductions to HMRC?

Usually (but not always) you’ll need to register as an employer with HMRC before making PAYE payments. You can check here whether you need to register.

In terms of how payments are made, this can be done by post but HMRC strongly recommends that payments are made electronically. This way is much more secure and you can be sure when your payment arrives. Obviously it saves you traipsing to the post office too. You can find guidance on how to pay here.

How often do I need to run payroll?

You have to send the most recent pay deductions to HMRC:

  • By the 22nd of each month if you pay electronically

  • By the 19th of each month if you pay by cheque through the post

In a minority of cases you may be able to pay quarterly or annually but you should check this carefully.

What forms do I need for PAYE?

There are a number of payroll forms you’ll need. Some of these are about operating PAYE correctly, and others are for telling HMRC about your employees and their pay details. There are 4 sorts of forms:

  • Employee forms

  • Start of the tax year forms

  • Payroll administration forms

  • Expenses and benefits forms

You need to submit these forms to HRMC at various points throughout the business year and employee life cycle. You can find out more about these forms here and how to download them.

HMRC have useful tips for small businesses on their site at:

How can I make this easier for myself?

If you use good software such as QuickBooks online payroll, you’ll be able to generate and file many of these payroll forms and returns online with HMRC. If you do this, you’ll never miss a deadline or payment. Which is much simpler as well as stress-free.

We hope you’ve found this article useful. QuickBooks online accounting software helps automate complex administrative tasks, making sure you pay the right amount of tax and NIC for your employees.

Discover QuickBooks online accounting software today