Online payroll made easy: Connect payroll and banking

Published Monday 22 December 2025

Table of contents

• Essential features for small business payroll
• HMRC compliance and RTI submissions
• How does it work?
• Linking your business to your bank
• Benefits of online payroll and bank integration
• Choosing the right payroll software
• Test and test, then test again
• Streamline your payroll with the right setup
• FAQs on online payroll setup

Key takeaways

• Implement HMRC-recognised online payroll software that automatically calculates PAYE tax, National Insurance contributions, and submits Real Time Information (RTI) to avoid penalties and ensure compliance.
• Connect your payroll software directly to your business bank account through secure bank integration to automate payments, eliminate manual data entry, and reduce processing time by up to 75%.
• Test your entire payroll setup thoroughly by processing small test payments and verifying bank feed accuracy before running live payroll to prevent costly errors and ensure reliable operations.
• Utilize automated workplace pension auto-enrolment features within your payroll software to identify eligible employees, calculate contributions, and manage communications with pension providers without manual intervention.

Essential features for small business payroll

When looking for online payroll software, there are a few key features that can make your life easier. 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

In the UK, businesses must report payroll information to HMRC in real time every time they pay an employee, though a different process applies if no payments are made within a pay period. HM Revenue and Customs (HMRC) calls this Real Time Information (RTI).

HMRC-recognised payroll software simplifies this process. It automatically creates and sends the required submission files to HMRC for you, including corrections which are sent via a Full Payment Submission (FPS). This helps keep your reporting accurate and on time, so you avoid penalties and stay compliant with less manual admin.

How does it work?

Online payroll processing works through secure file transfers between your payroll software and bank. Here's the three-step process:

1. Your software generates a payment file with employee wage details
2. Upload the file to your online banking platform
3. Confirm payments with a single click

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

Auto enrolment for pensions

UK law requires employers to automatically enrol eligible staff into a workplace pension scheme and make contributions. Managing this can be complex, with duties like assessing your workforce, calculating contributions, and communicating with employees.

Online payroll software can automate these tasks for you. It identifies which employees are eligible, calculates the correct employer and employee contributions for each pay run, and helps you manage communications with your chosen pension provider.

Linking your business to your bank

Bank integration connects your payroll software directly to your business account, enabling automated payments and up-to-date views of your finances.

Connecting to your account

Bank feed setup typically has a few requirements:

• Authorization form: Sign bank permission document
• Connection fee: Small one-time or monthly charge (varies by bank)
• Compatible software: Choose HMRC-recognised payroll system

Benefits of online payroll and bank integration

Bank integration benefits extend beyond payroll and help you manage all your business finances more easily:

• Reduced admin time: Financial data updates automatically
• Faster reconciliation: Bank feeds eliminate manual matching
• Fewer errors: Automated processes prevent typing mistakes
• Real-time visibility: Access current account balances instantly
• Mobile access: Manage finances from any location
• Quicker payments: Schedule wages and supplier payments efficiently
• Improved relationships: Faster payments increase employee and supplier satisfaction

Anything that simplifies accounts reconciliation and payroll payments is good for your business.

Choosing the right payroll software

Choose HMRC-recognised software to ensure UK tax compliance and avoid penalties; for example, HMRC provides its own free payroll software for businesses with fewer than ten employees.

Check out Xero's HMRC-recognised payroll software.

Better online banking: six aspects to look for

When you choose a banking partner, check six key capabilities for successful payroll integration:

• 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: choose banks with nearby branches for face-to-face assistance

It always pays to shop around. Check out customer reviews, and read each bank's terms and conditions carefully. A good bank will stay with you for the life of your business, so take the time to compare your options carefully.

Test and test, then test again

Testing your payroll setup prevents costly errors and ensures reliable operations before processing live payments.

Phase 1: Bank feed testing

• Verify transaction imports match bank statements
• Check data accuracy and timing
• Confirm reconciliation processes work correctly

Phase 2: Payment testing

• Process small test payment to yourself or trusted employee
• Verify payment amounts and timing
• Confirm reversal capability if needed

Phase 3: Ongoing monitoring

• Review automated processes regularly during first month
• Check payment accuracy before each payroll run
• Monitor bank integration for consistent performance

Streamline your payroll with the right setup

Bank integration transforms payroll efficiency by automating manual processes and reducing administrative burden.

Key outcomes include:

• Time savings: Reduce payroll processing by up to 75%
• Error reduction: Eliminate manual data entry mistakes
• Real-time visibility: Access current financial data instantly
• Employee satisfaction: Ensure accurate, timely payments

Ready to streamline your payroll operations? Try Xero for free and experience seamless bank integration with HMRC-compliant payroll features designed for small businesses.

FAQs on online payroll setup

Here are answers to some common questions about setting up online payroll.

How much does online payroll software cost?

The cost of online payroll software varies depending on the provider and the number of employees you have. Many providers offer tiered subscription plans, so you can choose a package that fits your business size and budget. Some plans are bundled with accounting software, offering better value.

Can I switch payroll providers during the tax year?

Yes, you can switch payroll providers at any point during the tax year. Your new provider will guide you on how to transfer your year-to-date payroll data to ensure a smooth transition and maintain accurate records for HMRC.

Do I still need an accountant if I use payroll software?

While payroll software automates many routine tasks, an accountant or bookkeeper provides valuable expertise. They can offer strategic advice, help with complex payroll scenarios, and ensure your overall financial management is on track. The software is a tool to make your collaboration more efficient.