Your Guide To Running Payroll In The UK – A Review Of Methods

Team Pento
7 min

Administering payroll in the UK can be a challenge, fraught with complexities and a changing post-Brexit landscape. Long renowned for a robust regulatory environment, payroll in the United Kingdom is changing, requiring an adaptive approach. This means that businesses need to keep up with the fast-evolving methodology. 

Last year, annual wages for the average UK worker came in at ₤31,460. If we consider that close to 30 million employees in the UK draw an income, it is clear that payroll requirements are getting even more complex and difficult to administer. To keep up, companies are searching for alternatives to the outdated methods which are creaking under the pressures of a more modern, plugged-in world.

In this article, we examine the existing payroll administration approaches used by most UK businesses. We discussed their pros and cons, and how best practice guidelines inform the direction in which payroll in the UK is headed.

What is Payroll?

Payroll in the UK includes the salaries paid to employees and the supervision of taxes collected from that income. It forms an integral process in the mechanics of the company. It is seen as one of the critical measures of a company's ability to ensure that its employees are paid timely while maintaining detailed records of these transactions. Essentially, payroll responsibilities circle around four key areas:

  1. Maintaining employee financial records
  2. Distributing employee paychecks
  3. Calculating and paying taxes to HMRC
  4. Issuing the employees’ annual records.

How to run payroll in the UK? A review of methods

The first step in setting up a payroll infrastructure in the UK is registering as an employer with HM Revenue & Customs (HMRC). In doing so, the government can keep a record of all companies, businesses, and employers' activities and employee transactions. Following this, the employer is required, by law, to collect and keep detailed records of all payments to employees and to inform HMRC of any and all employee changes. 

These activities require systems and procedures capable of gathering and storing this information in a legible and manageable way. For this, we turn to tried-and-tested methods. Here, we discuss the three options available to employers in administering their payroll.

  1. Outsourcing to a Payroll Company, Contractor, or Accountant

In 2019, over one-third of organisations were prepared to pay third-party companies exclusively dedicated to administering payroll on their behalf.

In this scenario, there are a number of confirmation flows (i.e., information confirming that a specific transaction or event has taken place). For example, a CEO may need to prove that information has flowed to or from an accountant, or middle management must confirm that salaries have been paid to the personnel in their departments.  

Source: Unsplash 

The payroll procedure follows a general guideline:

  1. The company (usually, someone from HR or Finance) prepares an Excel sheet with payroll data (i.e., who’s getting paid, personal data, salaries, etc.).
  2. The company contracts the third party's accountant or tax advisor and then sends their basic financial information collected by the company's HR department.
  3. The accountant does all tax, pension and net pay calculations (using Excel or payroll calculation software).
  4. The accountant generates payslips in a PDF format. This lets them limit the risk of unauthorised editing or fraud. For this, they use Microsoft Office or similar software. 
  5. The company then pays their employees, either individually or through bank files, via batch payments.
  6. The company also distributes employee payslips after payments have been completed as proof that salaries and wages have been paid. This is done either electronically (email) or physically (printed). 
  7. Finally, the company’s own bookkeeper or accountant must manually post the payroll records.


Pros 


  • Outsourcing Complex Requirements - the company needs to only pay their employees without having to worry about tax issues, pension requirements, and PAYE calculations. This saves the company from employing payroll administrators on a full-time basis.
  • External Expertise - You can benefit from the contractors’ experience in payroll. You can also count on their advice and feedback. This lowers the risks of errors during the entire payroll process.


Cons

  • Complexity - Potentially, a lot of issues may arise due to the back-and-forth nature of the payroll process. This can negatively affect the information flow. Also, if something goes wrong on the contractor's side, payroll may come to a grinding halt until the issue is resolved.
  • Non-Scalability - Outsourcing payroll activities may initially yield quick, seamless results. However, as an organisation grows, so do its needs. This means that it will take more time to complete payslips (not to mention, it will lead to a rise in costs). This leads to the next point below.
  • Strict deadlines - you need to send all the documents to the accountant. This must be done at least 1-2 weeks before payday. If any changes take place after you’ve already sent the payroll data (for instance, you’ve hired a new employee), you will need to update the files. This means you’ll need to onboard the account and coordinate the changes, which can be time-consuming. 
  • Inflexibility - With outsourcing payroll activities, the finance and HR teams act as the middlemen between the contractor and employees. Any payslip problems must be sent to the contractor for resolution, increasing lead times and complicating communications channels.

Now, let’s compare this to in-house payroll management.

2. In-house Manual Work & Legacy Tools

Some organisations prefer to keep payroll in-house. This is common at large companies, which can afford to hire the right experts.

To take care of their own payroll needs internally, companies have mostly been using so-called legacy tools. One such example is accounting software Xero, which offers built-in payroll features.

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Source: Unsplash

Pros


  • Fuller Control – in-house payroll grants your administrators full control, eliminating the risk of external problems. 
  • In-House Corrections – if errors arise, your in-house payroll team is able to correct them on the spot, without first communicating the problem to external stakeholders before resolving it.
  • Learning and Upskilling – In-house administration allows your teams to gain a deeper understanding of payroll processes. This allows them to refine and even develop their own procedures and methods. 
  • Reduced Software Expenses – By relying on the experience and abilities of seasoned in-house payroll staff, you no longer need to install expensive software programmes as existing legacy tools will take care of tasks. 


Cons


  • Time-Consuming – Where finance and HR teams have other responsibilities beyond payroll, the added duties may take up time better spent on other tasks. 
  • Expensive – When companies who practice in-house payroll activities start to grow, more employees means that they will need to add more payroll staff and expertise to their teams. Over time, this can get expensive.
  • Risk of Errors – An environment that lacks sufficient payroll software infrastructure and experience can lead to an uptick in mistakes, driven by burnout and task repetition. Some of the more common transfer and calculation errors can be resolved, though.
  • Compliance Issues – Administering your payroll in-house requires a high degree of trust in your ability to meet all compliance, tax, and regulatory demands. Any issues arising on this front can become dangerously expensive very quickly.
  • Legacy Tool Constraints – Many legacy tools were designed in an era very different from today. This means that they don’t have the capacity to handle modern business payroll requirements. Xero, for example, can only process up to 200 employees at a single company.

3. Modern Cloud-Based Software

Where outsourcing exists on one end of the payroll methods spectrum, and in-house, manual administration on the other, modern cloud-based payroll software is in the middle. With the benefit of technology and computing resources, cloud-based payroll software enjoys better efficiency, accuracy, and scalability, while saving tremendously on time resources. 

Source: Pento

Positives


  • Fewer Errors – Payroll automation drastically decreases the probability of human error and, with it, reduces costly payroll mistakes and saves on time normally taken to manually identify and resolve problems. 
  • Increased Efficiency – Payroll software allows for changes to be made at any time in the process, without teams needing to communicate with external contractors. For instance, a tool like Pento allows you to change any payroll-related items – this can be done even on payday (as in the case of credit card company Pleo).
  • Reduced Workload – Automated software processes mean less effort and time spent on mundane payroll tasks (for in-house employees) or on lengthy discussions (with external accountants). 
  • Designed for Today’s Needs – Cloud-based software is a better alternative to standard, outdated legacy tools. Modern software tools like Pento, which is 100% focused on payroll, have been created for today’s payroll requirements. Payroll features aren’t added to them on top of other HR-related modules, as an afterthought. 
  • Better Flexibility – Software, as a 24/7 resource, essentially renders human-constrained deadlines moot. With improved processing power, lead times can be dramatically shortened.
  • Scalability – Cloud-based software is not limited by closed-circuit abilities. It is designed to update and evolve in line with companies’ requirements, meaning your payroll capability grows with your organisation.


Negatives


  • Migration Challenges - Switching to a new payroll tool can present time challenges when moving large amounts of existing data onto new software. Teething problems may also arise as your teams adapt to new systems.
  • Cost – Whether paying for outsourced payroll services or an in-house team, implementing new cloud-based payroll software does come at a monetary price. 
  • Training – people who've been using tools like Xero or excel for the last 20 years will need to learn how to use cloud-based payroll software. However, overall, even those who have very little experience running payroll can do it easily with a tool like Pento. It's highly unlikely that a company will need to train HR/finance in payroll in order to switch to a payroll platform, from whatever setup they have had until now.
  • Integration – A potential challenge when adding cloud-based software is how deeply integrated it is with the company’s existing infrastructure and processes. Pento offers a great solution in this regard, boasting an ability to integrate with numerous accounting and HR systems and tools

Best Practices to Effectively Running Payroll in the UK

Payroll in the UK is a process that can be well-guided and monitored. In a business environment characterised by efficiency and robust regulation, it is important that payroll activities follow the practices described by HMRC.

Maintain Cohesive Payroll Policies across the Company

This standardises the process throughout the organisation and ensures that the risk of discrepancies between departments and different employee levels are eliminated. 

Payroll guide Tip: Specify a payslip query deadline for each month.

Prioritise Important Dates for the Year

Doing this ensures that every employee is made aware of critical tax deadlines and bank or religious holidays that may affect payments.

Payroll guide Tip: Create and distribute a calendar at the beginning of each financial year.

Make Sure you Keep a Record of all Employees

From the day they are hired to their final day of service, a comprehensive employee record throughout the course of their tenure is considered necessary to meet regulatory requirements. 

Payroll guide Tip: Make use of a workforce management system to keep a complete record  of each individual employee. 

Come up with a payment approval process

Ensure that budget requirements are communicated efficiently and effectively between your payroll teams and management. You’ll need a reliable process if bonus and overtime approvals are required by a manager.

Payroll guide Tip: Conduct audits to monitor approvals, and control mechanisms to maintain budget oversight in areas a manager may have overlooked.

Invest in payroll software

Modern payroll needs require a modern solution. Investing in updated payroll software will soon become essential for success and is already replacing many of the older existing legacy tools.

Payroll guide Tip: A recent study found that only 30% of companies still use payroll systems which are older than 10 years, indicating a trend towards modern tools. 

Why managing payroll in-house with modern software is the way to go

Once you’ve considered all three payroll administration methods, it becomes apparent that coupling an in-house payroll team with a modern cloud-based software investment is highly beneficial.

The advantages here can be described as follows:

  • An in-house payroll removes that hassle of having to communicate outside of your company, while the software has the potential to eliminate many of the mistakes so often seen on employee payslips. This gives peace of mind to employees and HR departments alike.
  • This solution is scalable. While there will be an initial time and software investment, these are quickly offset by the benefits seen in the long run as your headcount grows. Evolving software can keep up with the larger payroll activity requirements, and costs are better managed by hiring in-house. 
  • Modern cloud-based software solutions grant your payroll employees more time to commit themselves to their strategic efforts and responsibilities instead of getting tied down by mundane manual payroll work.

Summary

As more UK companies are forced to adapt to the seismic changes brought on by the COVID-19 pandemic and Brexit, payroll has not been spared the upheaval. While many companies explore cost-cutting measures in an effort to survive, outsourced payroll accountants and contractors are finding themselves on the chopping block. This leaves many companies severely constrained by outdated legacy tools that struggle to serve the evolving needs of many UK organisations and their frustrated employees.

Here’s where payroll tools like Pento come into play, offering a flexible and robust solution for managing payroll in the UK. 

Pento’s adherence to best practices is reflected in its ability to integrate with the UK’s top accounting and HR systems, alongside HMRC systems.

If you’d like to explore how a cloud-based payroll solution like ours can support your business, reach out! We’ll happily schedule a free demo.