When you set up your own limited company, one of the most important things to consider if you also have employees is to set up your company’s payroll.
In practical terms, a payroll system will calculate the gross and net pay of all company employees and its directors, following deductions for taxes, pensions, child maintenance, and so on. This is the fundamental basis of PAYE (Pay-As-You-Earn).
Payroll software will work out how much income tax, employers’ and employees’ National Insurance Contributions need to be set aside to pay to HMRC.
Outsourced payroll common for smaller companies
In larger companies, there will be a dedicated accounts team tasked with payroll management. However, small company owners typically outsource this task to an accountant – as part of an ongoing monthly/yearly accounting package.
Before you can start paying employees, you (or your accountant) will first have to register your company as an employer with HMRC.
You then need to work out how much you are going to pay yourself (and any employees). You may decide to pay yourself a small salary beneath the prevailing National Insurance thresholds, for example.
For staff, you need to take into account National Minimum Wage (NMW) legislation. This doesn’t apply to the company’s directors, however. The current NMW rate for over-23’s is £10.42 / hour (from 1st April 2023).
You will then decide how frequently to pay yourself and your staff. Many limited company owners opt for a monthly payroll.
How does the payroll process work in practice?
When it is time to pay your employees (usually once per month), your payroll software will record their pay, and calculate any deductions (including tax).
In addition to their salaries, employees may be entitled to receive a wide array of additional types of pay, such as statutory sick pay and maternity pay. You can read a full list here.
Deductions, which are also processed by the payroll system, include Student Loan payments, pensions and child maintenance payments.
Your payroll software will then work out how much Employers’ National Insurance your company will have to pay on each employee’s salary.
In the 2023-24 tax year, this amounts to 13.8% of each employee’s salary above £9,100 per year (the Secondary Threshold).
The software will then create a payslip for each employee, which clearly shows the ‘gross’ and ‘net pay for the period in question.
Once these activities have been completed, you should submit a Full Payment Submission to HMRC, which contains all of these calculations.
For obvious reasons, almost all small limited companies use an accountant to run the payroll on their behalf.
Other ongoing payroll tasks
Alongside producing your regular payroll, there are a number of ongoing payroll-related tasks to complete each year.
- You (as the employer) must pay any payroll tax liabilities (National Insurance / Income Tax) to HMRC by the 22nd day of the following month (if you pay monthly), or the 22nd of the month following the end of the current quarter (if you pay quarterly). Smaller companies can often make payments quarterly, as their liabilities tend to be small.
- You must report each time an employee leaves or joins your company payroll, they join your workplace pension, or changes address.
- You must also provide your employees with a P60 following the end of each tax year, which shows the total pay and deductions for the year.
- By 6th July each year, employers must report any expenses and benefits received by employees during the previous tax year – upon which further National Insurance Contributions may be payable. These details are submitted via the P11D form.