Online payroll for small businesses: HMRC and banking

Published Monday 20 April 2026

Table of contents

• What is online payroll?
• Essential features for small business payroll
• HMRC compliance and RTI submissions
• Free vs paid payroll software
• Online payroll software costs
• Choosing the right payroll software
• How does it work?
• Linking your business to your bank
• Benefits of online payroll and bank integration
• Test and test, then test again
• FAQs on online payroll

Key takeaways

• Choose HMRC-recognised payroll software to stay compliant with Real Time Information (RTI) requirements and avoid penalties for late or incorrect submissions.
• Use free software like HMRC's Basic PAYE Tools if you have fewer than nine employees and simple payroll needs, but switch to a paid plan once you need bank integration, automated pension management, or a larger team.
• Connect your payroll software to your business bank account to automate wage payments, reduce manual errors, and speed up financial reconciliation.
• Test your payroll setup thoroughly before going live to catch mistakes early and avoid costly corrections to employee pay or HMRC submissions.

What is online payroll?

Online payroll software is a cloud-based system that calculates employee wages, deducts taxes, and reports to HMRC automatically. Unlike spreadsheets or desktop programs, it runs in your browser and updates in real time.

Small businesses use online payroll to:

• calculate PAYE tax and National Insurance without manual formulas
• submit Real Time Information (RTI) directly to HMRC
• generate payslips and send them electronically
• connect to business bank accounts for automated payments

The software handles the complex calculations so you can focus on running your business rather than managing spreadsheets.

Essential features for small business payroll

Online payroll software automates wage calculations, tax deductions, and HMRC reporting for your business. A good system should help you:

• calculate Pay As You Earn (PAYE) tax and National Insurance contributions automatically
• generate and send payslips to your employees electronically
• submit payroll data to HM Revenue and Customs (HMRC) through Real Time Information (RTI)
• manage workplace pension auto-enrolment duties
• keep accurate records for compliance and reporting

HMRC compliance and RTI submissions

Real Time Information (RTI) is HMRC's system for receiving payroll data every time you pay an employee. UK businesses must report through RTI to stay compliant and avoid penalties.

HMRC-recognised payroll software simplifies this process by automatically creating and sending submission files, including when you need to correct your payroll data via a Full Payment Submission (FPS). If no payments are made within a pay period, a different process applies. This keeps your reporting accurate and on time with less manual admin.

Free vs paid payroll software

HMRC's Basic PAYE Tools is free payroll software that works well for businesses with simple needs and fewer than ten employees. It handles PAYE calculations and RTI submissions for up to nine employees.

Free software suits your business if you:

• have fewer than ten employees
• pay staff the same amount each period
• don't need bank integration or automated payments
• can manage pension communications separately

Consider paid software when you need:

• Bank integration: pay staff directly from your payroll system
• Auto-enrolment automation: manage pension duties without separate tools
• Multiple pay schedules: handle weekly, fortnightly, and monthly pay runs
• Dedicated support: access help when you're stuck

Most small businesses outgrow free tools once they hire their tenth employee or want to automate bank payments.

Online payroll software costs

Online payroll software typically costs between £5 and £15 per month for small businesses, with some providers charging additional fees per employee. Pricing varies based on features, employee count, and whether payroll is bundled with accounting software.

Common pricing models include:

• Flat monthly fee: one price regardless of employee numbers (usually capped)
• Per-employee pricing: base fee plus a charge for each person on payroll
• Bundled plans: payroll included with accounting software at a combined rate

When comparing costs, check what's included in the base price. Some providers charge extra for features like pension management, phone support, or additional users. Bundled plans often provide better value if you also need accounting software.

Choosing the right payroll software

HMRC-recognised software ensures UK tax compliance and helps you avoid penalties. HMRC provides free Basic PAYE Tools for businesses with fewer than ten employees, though paid options offer more features like bank integration and automated pension management.

When comparing providers, check that the software appears on HMRC's approved list and supports the features your business needs. Xero's HMRC-recognised payroll software handles RTI submissions, auto-enrolment, and bank integration in one platform.

Better online banking: six aspects to look for

When choosing a banking partner for payroll integration, check these six capabilities:

• Software compatibility: confirm support for your chosen payroll system
• Streamlined onboarding: look for guided setup processes
• Multi-platform access: ensure web and mobile banking availability
• Direct software connection: verify accounting software integration
• File upload capability: check payment file processing options
• Local support presence: consider banks with nearby branches for face-to-face help

Compare customer reviews and read each bank's terms carefully. Choose a banking partner that can grow with your business.

How does it work?

Online payroll works through secure file transfers between your payroll software and bank. The process takes three steps:

1. Generate: your software creates a payment file with employee wage details
2. Upload: transfer the file to your online banking platform
3. Confirm: approve payments with a single click

Your bank and payroll provider protect this process with bank-grade security and regulatory oversight, keeping your money and employee data safe.

Auto-enrolment for pensions

Auto-enrolment requires all UK employers to enrol eligible staff into a workplace pension scheme and make contributions. Online payroll software automates the complex parts:

• Assesses your workforce to identify eligible employees
• Calculates contributions for both employer and employee each pay run
• Manages communications with your pension provider

Linking your business to your bank

Bank integration connects your payroll software directly to your business account, so payments process automatically and your financial data stays current. This eliminates manual transfers and reduces the risk of payment errors.

Connecting to your account

Connecting your payroll software to your bank requires three things:

• Authorisation form: a signed bank permission document
• Connection fee: a small one-time or monthly charge (varies by bank)
• Compatible software: an HMRC-recognised payroll system

Benefits of online payroll and bank integration

Bank integration saves time and reduces errors across your entire financial workflow, not just payroll. Key benefits include:

• Reduced admin time: updates financial data automatically
• Faster reconciliation: eliminates manual transaction matching
• Fewer errors: prevents typing mistakes through automation
• Real-time visibility: shows current account balances instantly
• Mobile access: lets you manage finances from any location
• Quicker payments: schedules wages and supplier payments efficiently
• Stronger relationships: improves satisfaction through faster payments

Test and test, then test again

Testing your payroll setup catches errors before they affect employee pay or HMRC submissions. A thorough test process prevents costly corrections and builds confidence in your system before you go live.

FAQs on online payroll

Here are answers to common questions about online payroll and bank integration.

What's the difference between online payroll and desktop payroll software?

Online payroll runs in your browser and updates automatically, while desktop software requires installation and manual updates. Online payroll also allows access from multiple devices and locations.

Do I need to use HMRC-recognised payroll software?

Yes. HMRC-recognised software ensures your RTI submissions meet government requirements and helps you avoid penalties for incorrect or late reporting.

How long does it take to set up bank integration with payroll software?

Most businesses complete bank integration within a few days. The process involves submitting authorisation forms and connecting your accounts through your banking platform.

Can I use free payroll software for my business?

Free software like HMRC's Basic PAYE Tools works well if you have fewer than ten employees and simple payroll needs. You'll need paid software for bank integration, automated pension management, or more than nine employees.

What happens if I make a mistake in my payroll?

HMRC-recognised software lets you submit corrections through the Full Payment Submission process. Test your setup thoroughly before going live to minimise errors.