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Chapter 8

How to do payroll

Table of contents

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If all you had to do was pay staff, payroll would be easy. But employers are responsible for taking out deductions such as tax as well as managing leave entitlements and other human resource issues. Here are the basics.

What is payroll?

Payroll involves calculating employee pay, deducting things like tax and retirement contributions, then distributing money to all the right people by the right dates. You also have to show all your workings to the government so they can make sure you’re doing everything correctly.

Why does it matter?

Payroll is critical to keeping employees happy, but it’s also important to keep the government happy. There are lots of regulations, and failure to comply can result in fines.

How to manage payroll

You start by calculating pay for each employee, according to the terms of their contract. And then you set about making deductions in the right order. 

Employee pay

Figure 7, How employee pay is calculated each payday.

It’s up to you to channel the money to all the right recipients by the agreed dates. Make sure you understand when the money is due to each party, and transfer it on time. Learn more about how to manage pay runs.

Modern payroll management

Payroll software can automatically calculate pay and deductions, create payslips and generate reports for HMRC. If you pay by the hour, you can get employees to clock in and out of shifts on their phone and set up the app so the data flows into an online timesheet.

Because the tax status of individual employees can change for all sorts of reasons, payroll can become an admin headache. It’s common for businesses to outsource payroll.

Chapter 9: How to prepare tax returns

Learn about the main types of tax that a business may have to pay. And find out how small businesses get their returns in on time.

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