Every business that employs people is responsible for using a payroll system and the alternatives are for the business to arrange for outsourcing payroll, use a payroll software package or produce the payroll calculations manually (such as using HMRC's Basic PAYE Tools). Each function has both benefits and disadvantages.
The essentials of any payroll system are to calculate the correct income tax and national insurance contributions to be deducted from the employee and also calculate the employer national insurance, produce payslips for each employee and account for the payroll deductions to the relevant tax authority (e.g. HMRC).
Running a payroll system is natural for medium and large companies who may employ specialist payroll staff to perform these functions. Many medium companies may still choose to outsource the payroll function leaving many of the technical issues that might be encountered to a specialist payroll service.
Small businesses may choose to accept the benefits outsourcing payroll function because they are not familiar with the complications that can occur as employee circumstances need to be accounted for and the process can be time consuming. The payroll system should not only calculate the income tax and national insurance contributions but also has to deal with changes to tax codes, new employee and changes to existing employees tax status plus taxable benefits and allowances such as statutory sick pay, maternity benefits, pension contributions and student loan repayments.
The benefits of a small business manually producing the payroll are mainly the cost is low although the time spent on the payroll function by the proprietor may be better spent generating business. The cost may not be the cheapest option if an employee is required to produce the payroll. Purchasing payroll software can save significant time and costs for the small business that chooses to prepare and control its own payroll function.
Outsourcing the payroll does add a small additional cost to running the business but would normally carry worthwhile benefits in reducing the time spent on the function and should also reduce the paye administrative burden.
The main benefits of outsourcing payroll function.
1. Frees up time in calculating the payroll deductions and dealing with different employee circumstances.
2. The cost of outsourcing payroll should be considered against the potential cost of employing specialist in house payroll staff.
3. Payroll service companies invariably use payroll software and being specialists are more likely to produce accurate tax and national insurance deductions.
4. Paye administration functions such as preparing the tax deductions schedules, dealing with starters and leavers, employee year end certificates and employer annual returns should all be automated.
5. The company to whom the payroll has been outsourced should also be responsible for producing employee payslips, advising the business of the tax and deductions liability to be paid to the tax authority and in larger businesses also provide a payroll analysis for accounting purposes.
The business has alternatives to outsourcing the payroll function.
Finding a suitable outsourced payroll service is not difficult. Local telephone directories contain payroll companies and a search on the internet would produce many potential payroll service providers.
Many accountants offer a payroll service and although the prices may struggle to be competitive that price is always negotiable. Using the business accountant for the payroll has advantages since a substantial cost area for most businesses is already known to the accountant since they prepare the numbers.
Choosing payroll software.
The major alternative to outsourcing the payroll is for the business to acquire and use payroll software. The choice of software should be made upon the requirements of the business.
Larger companies will require payroll software that has incorporated within it all the potential pay scenarios and also be capable of dealing with higher numbers of employees. Such software can also be complex to operate and require specialist wages staff.
Small business may choose simpler less complex payroll software packages that simply meet the basic needs of the business. In effect a simple payroll package that someone not initiated in the wages function can understand and use to satisfy the essential and legal paye administration requirements.
The advantages of choosing payroll software is basically the cost should save the business money against outsourcing the payroll, should retain control over the function and liabilities and ideally should take no more time that supplying employee details and gross wages to the payroll service. When outsourcing payroll the gross pay for each employee has of course still to be submitted plus and changes to the employee details received.
If the business chooses to adopt a payroll software package then the complexity of the package should be considered and also the attributes and capabilities of the chosen software to produce all the payroll requirements in relation to pay and wage deductions, paye administration and employee payslips.
A further advantage of choosing to operate a payroll software package is that it can be integrated into the accounting software further reducing the administration burden.