Guide

Getting your head around small business payroll

Starting to employ people? Here’s your introduction to the basics of pay, deductions, and dealing with the tax office.

Small business payroll being done on a phone

What does payroll mean for small business?

At a basic level payroll is giving with one hand and taking with the other. You need to:

  • pay your employees the right amount at the right time, every time (according to their contract and in line with employment law)
  • make accurate deductions from their pay for things like tax and retirement

As you can imagine, there are a lot of rules around payroll. You have to comply with a lot of government requirements.

What’s involved in payroll compliance?

To comply with government regulations, you must:

  • make accurate payments and deductions
  • provide your employee with a detailed payslip that shows what you’ve done
  • file and pay taxes on time
  • pay other deductions – such as retirement contributions – to the right places
  • hold onto payroll records for at least three years

For this guide, we'll assume you know how to work out your employee's pay. We'll take you through deductions and reporting requirements.

What are payroll deductions?

Deductions are amounts of money you take from your employee's earnings before paying them. Deductions cover things like:

  • contributions to employee pension schemes
  • employee income tax, and taxes on benefits
  • payments such as child maintenance

Your employees might also have arranged for deductions to come directly from their pay for additional healthcare insurance, pension schemes, or charitable donations. You can learn more about these deductions – including the order you make them – in our guide to hiring staff.

Reporting to HMRC

As an employer, you will collect taxes from your employees for the tax office. You need to hand over those taxes when scheduled, and file reports to the tax office on a regular basis. These reports show them you’re paying and taxing your employees correctly.

Every payday you send HMRC a full payment submission (FPS) payroll report using your payroll software. This shows them the details of the payments you’ve made to your employees and the deductions you’ve made. You can also report employee expenses and benefits through your payroll or do it separately at the end of the financial year.

Payroll options for small business

The more employees you have, the more complex your payroll usually gets, especially if you have a mix of employees on hourly wages and salaries. Throw in some contractors, staff on commission, overtime, expense claims, allowances, and leave entitlements, and your payroll can be different every time you run it.

There are different ways of handling your small business payroll:

  • Pen and paper, or spreadsheets: These methods are preferred by businesses with a handful of employees. However spreadsheets are often not accepted by the tax office.
  • DIY software: Apps can calculate pay and deductions and even fill out tax forms for you. You’ll need to make the payments yourself, however.
  • Payroll service providers: You can outsource your payroll to experts. Some providers will do absolutely everything for you. Others will help with specific tasks.
  • Accountants and bookkeepers: You don’t have to go to a specialist payroll company. Many accountants and bookkeepers can do payroll for you. Check out the Xero advisor directory to find one.

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

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