How to pay employees in a small business
Paying staff wages is one of your biggest responsibilities, both as a business owner and as an employer, make sure you're conducting yourself legally
Regardless of what sector your business operates in, what your opening hours are, or what tasks your employees undertake – you have a legal responsibility, as both a business owner and an employer, to pay your staff in a good and proper order.
Not only do you need to pay your employees at least the national minimum wage, but you also need to make sure you’re registered with HMRC as an employer and are calculating all necessary deductions from staff pay packets – such as student loan repayments, national insurance, and pension contributions (a process known as auto-enrolment).
Once you’ve produced a payslip for each employee, either physical or digitally before, or on, the date they’re paid, you’ll then need to report their pay and deductions to HMRC in what’s called a Full Payment Submission (FPS).
In this article, we’ll take a detailed look at all of the steps below so you can be sure you’re paying your employees the right way.
Thankfully, much of this process can be automated using good payroll software which allows you to pay employees quickly and efficiently – while remaining compliant with all regulations.
To compare the best small business payroll software providers, and to receive a free quote, simply complete the webform at the top of the page.
The step-by-step sections in this article are:
1. How to register as an employer
Once you decide to take on your first employee your legal rights and responsibilities change, so, you need to register yourself as an employer with HM Revenue and Customs (HMRC) up to four weeks before you pay your new staff member.
This process can take up to two weeks and you can’t register more than two months before you start paying your new staff.
It’s important to note that you should register yourself as an employer if you’re ‘employing yourself’ e.g. as the sole director of your business.
Only if you’re employing workers who earn £112 a week (or less than £486 a month or £5,824 a year) are you exempt from registering with HMRC.
However, if these workers receive a pay rise, have an existing pension, are employed elsewhere, or start to receive expenses then you’ll need to register as an employer.
2. How to calculate employee pay
A very delicate process, calculating the exact amount of money you’ll offer potential employees during the interview stage is all about finding a good balance.
Offer too high a salary, and you could put your start-up in serious risk of over stretching its financial resources with a poor return on investment, offer too little, and you could fail to attract the calibre of candidate you’re looking for.
Thankfully, there are a number of factors you can examine which can help you gauge the right salary to offer.
- Evaluate the role: Does the role require specialist knowledge or technical training? Or is it just an admin job? Will the problems they face day-to-day be simple and repetitive or complex and ever-changing? How much responsibility will they have to make decisions?
- Location of your business: Your postcode will heavily influence how much you’ll need to offer employees. For example, businesses in London need to pay more to employees than those based in rural England or in Northern Ireland.
- Experience of candidate: Is the candidate a graduate fresh out of university? Or do they have year's worth of experience or a specialist degree? Perhaps they have no degree or experience.
- Industry benchmarking: Many professional bodies publish regular pay surveys providing a benchmark on which to base salary scales. The main findings are usually freely available on the internet.
- Affordability: To determine what you can afford, you need to consider carefully the value to your business of the gap this person will fill and what impact they will have on the bottom line.
- Interviewee expectation: Ask your interviewee what they'd expect to be paid – this will help you manage expectations.
- Equal pay: Under law, you are not allowed to pay employees a different salary purely based on their sex, race, or whether they have a disability.
Taking on a general admin person may be less expensive than employing someone with the skills to help your business grow, but it could be a false economy in the long run.
If this is all sounding a bit complicated, don't worry, there are companies out there that specialise in providing payroll services to small businesses. For more information, take a look at our guide to small business payroll services that details the companies out there ready to handle the administrative side of the payroll for you.
Or, for our full guide on how much should you pay your staff, click here.
3. How to pay staff and calculate deductions
Depending on the type of business you own, or what role you’re looking to recruit for, there are many different types of pay which you may wish to consider offering potential workers.
What type of pay you’ll be offering any given staff member should be explicitly stated in their contract of employment.
|Type of pay||Description|
|Salary||This is where staff are paid based on the number of hours they would work in a year.|
|Hourly rate||This is where staff are paid for a set amount of hours they’ll work in any given week.|
|Commission||Most common in sales and recruitment roles, employees receive a share of the sales they make. Commission roles often include a basic salary/wage, though not always.|
|Piece work||Employees are paid a set amount for every unit they produce – common in the manufacturing and textiles sector.|
|Tips||Tips received from a customer directly, such as in a restaurant, do not form part of the worker's pay, as they are the property of the worker and are not paid by the employer. However, you can treat tips to your staff as normal pay if they’re paid into your till – this includes tips added to your customers’ card or cheque payments.|
When paying staff, you’ll need to keep a record of their salary or wages in your payroll software – to compare payroll software providers and to receive a free quote, complete the form at the top of the page.
Aside from their normal salary or wages, you may also need to record/pay employees a number of other types of pay.
- Statutory Sick Pay (SSP)
- Maternity Pay
- Paternity Pay
- Adoption Pay
- Parental Leave
For our full guide on managing sickness absence, click here.
As an employer, it’s your responsibility to calculate the amount of deductions you need to take from each employee's pay.
These deductions will always include tax, and national insurance and pension contributions – and can potentially include student loan repayments, pension contributions, Payroll Giving donations and child maintenance payments.
To make deductions for tax and national insurance, you’ll need each employee’s tax code and National Insurance category letter.
Once you’ve obtained this information, and entered it into your payroll software, the process of calculating and removing deductions from staff pay can be automated – saving you time and money.
4. How to pay commission to sales staff
As referred to previously, most sales staff in any given business will work for commission.
While the majority will also receive a basic salary, for some, 100% of their pay will be dependent on what sales they make – or don’t make, as the case may be.
For entrepreneurs with no experience in sales, the task of setting up a commission structure can seem daunting – especially because once implemented, any attempts to change things will be met with fierce resistance from angry sales staff.
For both the purposes of recruitment, and the process of calculating the commission itself, it’s best to keep things simple from the offset and offer sales staff a percentage of the gross profit they have brought in within a set month.
It can also be beneficial to offer an increased rate of commission or bonus for over achievement (say 120% of target), as this can keep staff motivated even during the best possible months.
On the flip side, you should also implement a cut-off threshold whereby commission is only paid above a certain figure against target. For example, a sales person’s generated GP should at least cover their costs (basic salary, expenses, car allowance etc) before they receive commission.
5. How to produce payslips
As an employer, you are legally required to give your staff a payslip on or before their payday.
You can either print off payslips and give them/send them to employees physically – or send them digitally.
The payslip must include:
- Pay before any deductions (‘gross’ wages)
- Deductions like tax and National Insurance
- Pay after deductions (‘net’ wages)
Payslips can also include information like your employee’s National Insurance number and tax code, their rate of pay, and the total amount of pay and deductions so far in the tax year.
You can produce payslips using payroll software, however, not all providers offer this feature so it’s best to make sure you pick the very best supplier for your business.
To compare the different options available to you, complete the webform at the top of the page.
6. How to report employee pay to HMRC
You’ll need to send a Full Payment Submission (FPS) to tell HMRC about what you’ve paid your employees as well as what deductions you’ve made.
The FPS has to be sent on or before your employees’ payday, even if you pay HMRC quarterly instead of monthly.
You can also send the FPS early, for example, if payroll staff are going on holiday.
However, you’ll need to send a corrected FPS if information changes – such as if an employee leaves or changes tax code. You also can’t send reports for the new tax year before March.
To send a FPS, you’ll need to enter your PAYE reference and Accounts Office reference in your payroll software (which HMRC will have sent you when you registered as an employer.)
Your payroll software should then provide you with instructions on how to send the FPS to HMRC.
7. How to pay HMRC from employee wages
You are legally required to pay HMRC all of the deductions from employee wages every month.
As mentioned above, these deductions will always include tax and National Insurance – and may contain others like child maintenance or student loan repayments.
You need to pay what you owe by the 22nd of each month, or the 19th if paying by post, or else your business may be subject to financial penalties. (Often this is interest of 2.75% for every day you’re late.)
Good payroll software can conduct this transaction instantly, so it pays to get the best payroll software for your business.
However, if you find you’re routinely paying less than £1,500 you might be able to pay quarterly instead of monthly – so contact HMRC if this is the case.
8. How to report employee changes to HMRC
Like anything in business, employee information will constantly change – and, once again, you have a responsibility to inform HMRC of these changes.
You can make note of this new and updated information in your Full Payment Submission (FPS) – which we talked about above.
You need to inform HMRC if an employee:
- Takes a leave of absence
- Starts receiving a workplace pension/joins or leaves a contracted out pension
- Changes their home address
- Becomes a director of your business
- Reaches State Pension age
- Goes to work abroad
- Goes on jury service
- Turns 16
- Is called up as a reservist
- Changes gender
9. How to change payday
For whatever reason, you may want to change your start-up’s payday to a different day or change how often you pay your staff.
For example, you might want to move your payday from the 21st of every month to the last working day of each month, or, pay your employees monthly instead of weekly.
If your new payday is in the same tax month or week as the old one, then you can just treat the first new payment as an extra payment for that period.
You don’t need to do anything special when recording pay if the new payday is in a different tax month or week.
However, if you need guidance on calculating National Insurance contributions for your employees after you’ve moved payday, then you should contact HMRC directly.
Thankfully, most payroll software can automatically manage these changes and work out deductions correctly.
If you want to pay employees less often (for example, if you want to change paydays from weekly to monthly) you need to contact HMRC so they don’t send you a non-filing notice and possible penalty.
If you change the month you pay your employees, you should send an FPS in the month that you want the new annual payment month to move to.
If it’s later than the month you usually pay your employees, you’ll need to send an Employer Payment Summary (EPS) for that month to tell HMRC you’re not paying anyone.
For example, if you usually pay your employees in August but want to change to September, send an EPS in August and an FPS in September.
If you send more than one FPS in a year, HMRC will assume you no longer wish to operate as an annual scheme and send you a letter to confirm.
10. Compare payroll software providers
The information on this page should help you to understand how to pay your employees.
The best way to ensure you do this in an efficient and legal way, however, is to invest in good payroll software.
Startups can help with this process too.
To speak to suppliers today, and to receive a free quote, you simply need to complete the form at the bottom of this page.
This comparison process is free, quick and easy, and it could save you both time and money.