What is Payroll Software? The Ultimate Beginners Guide

Tired of your manual payroll processes or outsourcer but not sure where to start? 

Below we'll be giving you the essential crash course in all things payroll software so you can make a genuinely informed decision about whether or not switching to a software solution is best for your business - and what exactly is actually out there for you to choose from.

The basics: what is payroll software?

In short, payroll software is an application used to manage and streamline your payroll process - automating payroll tasks like calculating wages and paying employees.

Payroll software is mostly used by HR/People and Finance departments (or payroll professionals depending on the size/structure of the business) to help alleviate the manual admin work that comes with running payroll, reduce manual errors and ensure they are HMRC compliant.

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Do I need payroll software?

If you're not currently using any kind of payroll software, then chances are you're either managing payroll manually in-house, or are using an outsourced bureau or managed service.

Here at Pento, we've spoken to countless Finance and People teams...

And they often tell us that even when using an outsourced payroll provider, the process still requires a lot of manual legwork and double checks are still needed to avoid human errors.

So, if you're using an in-house, manual payroll process or a payroll bureau, we've put together a definitive list of questions to ask yourself.

If you find yourself nodding along to these - it's probably a sign you've outgrown your current process and may want to look at using a software solution.

• Are you currently wasting too much time on payroll admin each month?
• Do you have headcount changes every month?
• How many employees do you have - is it over 100 yet?
• Do you need to collect data across multiple sources to run payroll?
• Do you need to have additional team members involved in payroll with different access levels?
• Are you double and triple checking payroll data every pay cycle?
• Do you catch errors in the payroll drafts?
• Does payroll currently sit with a member of the team who has other duties (like someone from your People or Finance team)?
• Are you looking to introduce enhanced benefits that will add complexity to your payroll?

How does payroll software work?

Whilst the exact process may differ between specific software, you'll generally follow a process of inputting employee details (names, addresses, tax codes, start dates etc), which the software will use to calculate employee wages accurately and make sure the correct amounts of tax and National Insurance contributions are made to HMRC.

Pento, for example, works with three simple steps 

1. Edit employee details/pay: Update any employee information like name, bank details, salary, work days etc + make any pay changes
2. Review and approve: You can set up a formal approval flow to ensure your payroll is correctly handled and audited - as well as compare changes in earnings to previous pay periods to check for errors.
   
   
3. Confirm payroll: Once you confirm your payroll, Pento will pay employees as well as your PAYE owed to HMRC and submit payroll journals. 

Types of payroll software

When it comes to the payroll software landscape, here are some of the most common types of software you'll tend to see (which one is best for you will depend on your specific requirements)...

Cloud-based payroll software

Instead of just being on a single computer, cloud-based payroll software lives on the internet (kind of like how photos are stored in your online albums).

This means you can use it from anywhere as long as you have an internet connection.

With cloud-based payroll software, you type in all the important details about your employees, like their names, how many hours they worked, and any special things they get, like bonuses...

And the software then calculates how much money each person should get, including things like taxes and other deductions.

These kinds of solutions tend to be somewhat more modern and automated than others - allowing you to have a bit more flexibility and control over your payroll process rather than submitting your information into a 'black box'.

P.S. Cloud-based payroll software is what we do here at Pento.

On-premises/local payroll software

Unlike cloud-based software, on-premises payroll software is installed on your company's local servers and computers - so it stays within your own physical infrastructure. 

Instead of on the internet, all of your payroll-related data is stored within your business premises, which is generally considered safer than uploading to the cloud.

Given the extra control over data and security, on-premises software tends to be favoured by larger enterprises with specific data privacy requirements… 

However, it does require regular maintenance and updates which will all have to be managed in-house. 

ERPs

ERPs (or Enterprise Resource Planning) are like specialised tools inside your computer system that take care of paying your employees - keeping track of who works when, how many hours they put in, and how much they should get paid.

ERPs are your big, well-known payroll solutions.

When you break down how this kind of solution actually works , they're pretty old school... 

These are basically a software/services hybrid and not very tech-heavy.

ERPs will give you dashboards to work with but there'll still be humans taking on the brunt of the admin work behind the scenes.

What this means is - if you're using an ERP, your experience will probably be much more like that of outsourcing payroll to a managed service than a more modern, automated solution like Pento.

Employers of record

Employers of Record  (EORs) are payroll services that essentially assume the responsibility of being the official employer for your employees.

Why do they do this? Well EORs are predominantly used by businesses with very distributed teams.

This means that when it comes to paying employees, there's different tax systems, currency conversions, and country-specific payroll requirements that all need to be considered.

So if your team is spread thin across several countries, it might make sense to use an EOR - they'll handle payroll processing, benefits administration and legislation etc - acting as an intermediary between you and your employees.

Although EORs fall roughly within the 'payroll software' category...  you won't have too much control over your payroll.

Similarly to ERPs, there'll still be humans working in the background, likely partnering with bureaus in certain regions where they lack expertise.

Employee self-service portals

As the name suggests, self-service employee portals are online websites where employees can input their own data without needing any intervention from your HR/Finance department.

So, if an employee moves to a new house or changes their phone number, they can make those changes themselves within the portal.

Technically speaking, employee self-service portals are actually more of a HR tool than ‘payroll software’.

This is because they still need to feed into a payroll system in some way - they can’t be used to run payroll end-to-end.

In these portals, employees can log in using their personal details and access their payslips to see how much they're getting paid and where their money is going – like taxes and other deductions. They can also find documents like tax forms or employment contracts.

If your payroll is fairly straightforward, a self-service portal might not be a bad idea, but the more complex your HR and payroll processes get, the more flexibility you'll need which is where you may run into problems with this type of solution.

What are the benefits?

Below are some of the key benefits you can expect to see from making the switch to payroll software.

Note: these are based on a modern software solution like Pento and may not apply to things like ERPs/EORs.

Automation of payroll calculations

Payroll software automates manual calculations around salaries and taxes, pro-rata, National Insurance contributions, etc.

This is how teams using Pento, for example, manage to cut time spent on payroll by 80% on average.

Accuracy and compliance

Using software that automates calculations will minimise any manual errors - so you can count on things like employee pay, deductions and tax calculations always being accurate.

The software will also stay up-to-date with any changes HMRC makes to payroll legislation and reporting requirements, so you can steer clear of penalties.

Real time information (RTI) reporting

Payroll software like Pento allows you to submit Real Time Information (RTI) reports to HMRC.

RTI is a requirement where employers report their employees' earnings and deductions to HMRC each time they are paid.

This report will be sent automatically each time you run payroll.

Tax calculation and deductions

Using payroll software will usually mean that things like income tax, National Insurance contributions, pension contributions and student loan deductions are automatically calculated in line with HMRC's latest tax rates and thresholds.

Payslip generation

Payroll software can be used to generate digital payslips for your employees, which will break down their wages, deductions, and net pay.

This information is required by law and is essential for employees to understand their earnings and deductions.

Auto enrolment for workplace pensions

Many payroll software solutions will assist with the administration of automatic enrolment for workplace pensions.

You'll be able to manage pension contributions and ensure compliance with pension regulations.

Statutory payment calculation

Instead of attempting to work it out manually, payroll software will help calculate and manage statutory payments such as sick pay, maternity pay, paternity pay, and adoption pay.

Year-end reporting

At the end of the tax year, you'll be able to generate P60 forms for each employee, with their total earnings and deductions.

You can also use payroll software to complete and submit your end-of-year payroll reports to HMRC.

Data security and compliance

Payroll software ensures the security and confidentiality of employee data, so you won't have to worry about staying compliant with GDPR and other relevant data protection laws.

Integration with HR and accounting systems

If you decide to use a modern payroll solution like Pento, you'll be able to integrate your payroll software with whatever HR or accounting software you're already using to automatically sync any necessary information across.

Here's how employee updates can be synced from BambooHR to Pento (we also work with the likes of HiBob, CharlieHR, Personio, Humaans and PeopleHR) 👀

How much does payroll software cost?

How much payroll software costs will depend on a whole bunch of factors - the size of your business, the features you need, the number of employees etc.

On average, for small to medium-sized businesses, you can expect to pay anywhere from £10 to £30 per month per employee for cloud-based software.

If you're at a larger business or have more complex payroll needs, costs can range from £50 to £150 per month or more, depending on the software's capabilities and the level of service.

*Our pricing starts at £5 per employee/month, with more bespoke pricing for larger businesses (500+ employees).

How to choose the right payroll solution for your business

Here are a few things you'll want to consider when assessing payroll software providers:

Are you planning to scale any time soon? Payroll should never be a blocker for growth... but more employees means more chance for human errors and more admin. If your business is going to grow in the near future, you'll want to look for software that can scale with you.

How complex is your payroll? Having payroll with various changes each pay cycle is going to require a flexible solution that'll give you the level of control you need. ERPs are fine for more simple payroll with fewer changes but don't tend to do well once you start adding more complexity.

Do you need to integrate with your current systems? If you have existing HR and accounting systems that you intend to keep, you'll need to make sure the payroll software you choose integrates with these so you don't need to waste time copying data from one to the other.

How much support do you need? Not all payroll systems offer the same quality or availability of support. How much support you need will obviously depend on the level of expertise you already have in-house.

How distributed is your team? - If your employees are very widely distributed then you may want to use an EOR... but if you have enough employees based here in the UK, it may be worth using a more modern software solution like Pento for the bulk of your UK team, and then an EOR for those in other regions.

What is Pento? Why choose us?

Pento is an automated payroll solution that comes with expert support from payroll professionals.

Automate everything from salary calculations to HMRC payments and run payroll in minutes instead of weeks.

Automate your process with an easy to use interface

Sick of clunky interfaces or physical paperwork? We designed Pento to be as simple and user-friendly as possible. 

Take the stress out of payday. Automate manual calculations, reduce human errors, and get time back to work on the things that really matter.

Make changes right up until payday

Pento gives you access to all your data in real-time. So, you can access information whenever you need it. You'll control your payroll process, work to your own deadlines and can make changes right up until payday.

Get first-class support from a CIPP expert

You don't need an in-house payroll team or expertise to run payroll with Pento. Our dedicated team of CIPP experts will be on-hand to help whenever you need them.

Build a process that can scale with your business

Pento was built to scale alongside your team... easily introduce new employee benefits with automated P11Ds or payrolling, integrate Pento with whatever tools you're already using and take the hassle out of managing payroll, no matter how complex it gets.

Payroll software FAQ

What does payroll software do?

payroll software stores employee information, automates manual calculations and makes sure your employees get paid accurately and on time - without any errors.

What is the best payroll software?

The 'best' payroll software will come down to your specific needs. ERPs and big, legacy software may be suitable for businesses with more straightforward payroll with fewer changes. But if you're planning to scale or add complexity to your payroll, you may need a more robust, flexible solution like Pento.

How to choose payroll software?

When surveying the payroll software landscape, we'd recommend using the following template to assess where you're at:

• The complexity of your current payroll
• Your headcount
• The level of support you need
• Expected business growth in the short-mid term