HR · 17 July 2015

Making payroll simple for small businesses

You can calculate pay manually, but getting it wrong can have serious consequences
People often ask me about payroll. You know, it’s one of those subjects that everyone who is in paid employment is subject to, but only a few of us have a good understanding of how it works. For me, after close to thirty years in the business, payroll is very much second nature as it’s been my bread and butter for all these years, but I can understand how the subject may appear a little daunting to the layman.

So what is payroll all about? Well of course, the simplest of answers is that it is the calculation of the salary payments for each of your employees, however it would be a foolhardy individual who thinks that payroll just requires an element of mathematical skill and off you go. This of course, couldnt be further from the truth. Payroll incorporates a whole raft of statutory obligations of the employer. You have to calculate PAYE (Pay As You Earn) tax and national insurance, pensions are deducted, there might be earnings orders against the employee and voluntary deductions can be applied. This is all on top of the specific legislation for payments to the employee when they are absent from work and the specific employment legislation for entitlement to payments while absent.

Okay, so were thinking that for the entrepreneur with a small business, payroll is a bit of a nightmare? Well, maybe? Of course any payroll payments have to comply with your statutory obligations but there are a large number of resources that are available these days that are inexpensive and can lead you by the hand through this particularly stressful minefield.

You could calculate the pay manually but I would not recommend this option, even for a sole trader. The risk of mistake, combined with the consequences if you get it wrong, do not really bear thinking about. If you are determined to go down this path, there are (usually) free online resources to calculate the statutory deductions of tax and NI (HM Revenue and Customs provide an online resource for both on their website, although there has been talk about this being withdrawn in the future). The issue with all of this is that you can still easily make mistakes, the entire responsibility is with you and in time, this will no longer be an option, as HMRC are more and more moving towards online filing of payroll data, which is not going to be possible from a manual operation.

Hiring an accountant is a simple and often cost-effective option
The second option would be to engage the services of an accountancy firm or specialised payroll service provider (also known as a bureau payroll). These organisations (often for a small fee) will take your instructions, calculate the gross pay (the payment before statutory and voluntary deductions are applied) and then calculate the net pay for you. All you do is provide some fairly rudimentary information (again they will guide you through the information to be supplied) and they will do the rest. The downside of bureau payroll or accountancy services is they that take away some of your control to make payments that you want to make in the way that you want to make them. Overall however, this is a simple and often cost effective option for the busy small business owner, allowing them the time to concentrate on their main interest making a success of their own business.

The third option requires the most effort from the business owner and may also be the most expensive. This is to purchase a piece of payroll software and to run the payroll yourself. The advantage is that you have full control of the payments you want to make. To start your own payroll you would need to register with the various statutory bodies for filing your payroll data, as well as set the payroll up (which can be not a small exercise). Traditional on-premise payroll systems can cause you to incur high costs when purchasing the software licenses, plus, you would also need to buy and maintain the appropriate IT infrastructure, making such solutions out of reach of all but the fewest of small business owners.

There is an interesting alternative that has started to increasingly make its presence felt and this is the ever-evolving world of cloud based systems (also known as SaaS or Software as a Service). There are an increasing number of cloud based solutions on the market. These are relatively simple to setup and are quite cheap to run. Basically, you pay a subscription fee (either monthly or annually) and this entitles you to a share of a system that is hosted somewhere in the world. No special software is needed to be loaded and these systems can be run from desktop or laptop PC (some are even compatible with tablet computers!). You add your own payroll data, enter the payments you want to make, run the payroll and issue your payments: simple!



Bryan has been in the IT software and services business since 1990, working across HR and Payroll solutions. He worked for PwC and Serco before founding AvalonVale UK in 2004 a niche supplier of payroll solutions, because he became so disenchanted with the attitude of the larger players in the market.