How to manage payroll administration as a small business

Payroll administration involves calculating the correct pay and tax for employees. We describe what payroll administration is, and how to manage it effectively.

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Payroll administration is the process of paying wages to employees, and ensuring the correct tax and National Insurance (NI) contributions are deducted and paid to HMRC.

The role also involves ensuring all employment laws and payroll administration tasks are followed efficiently and compliantly, and the accounting transactions involved balance.

Below, you will find out what payroll administration is, the tasks involved, who is responsible for operating payroll, and payroll best practice.

What is payroll administration?

At its core, payroll administration involves organising, managing, and processing the tasks involved in paying employees’ wages.

This involves deducting tax and NI contributions for both employers and employees, paying these on time to the tax authorities, integrating payments into the cash flow of the business, and balancing and reconciling the transactions to the business’s accounts.

It also covers responsibilities linked to hiring and managing employees, such as employment benefits, employment laws, and the accurate recording of employee hours, wages and deductions.

A payroll administrator must maintain accurate and up-to-date records for employee salary payments, make correct payroll tax payments, and maintain payroll compliance.

How does payroll administration work?

Payroll administration is the epicentre of a business, and involves using payroll software to compile and record all work undertaken by employees. This manifests itself in a range of outgoings, chiefly the accurate, consistent and timely payment of workers.

Errors can undermine staff morale, cause problems with tax authorities, and hinder accurate accounting and financial reporting.

Employers can decide how frequently to operate payroll. In the 20th century, this was weekly. Nowadays, monthly payroll is more common and less complex because payroll tasks need to be performed less often.

The frequency can depend on the type of business. Hospitality is an industry in which weekly payment is more common, because workers tend to cover various shifts, and most workers are on an hourly rate rather than an annual salary because the work is often seasonal.

What are the main payroll administration tasks?

Trained payroll administrators need to understand tax and employment rules and keep updated to operate payroll effectively and comply with regulations.
The main tasks are:

  • Collect employee information – Gather employees’ national insurance numbers, tax codes, and bank details to ensure the right payments are made to employees and HMRC.
  • Record employee attendance – Keep records of the contracted and actual hours performed by each employee through manual timesheets or bespoke timekeeping software. Record overtime, holidays, sick days, or other absences and process any differences to contracted hours in line with company policy and wider employment laws.
  • Use payroll software – This simplifies and standardises calculations and generates accurate payslips.
  • Maintain a consistent payroll schedule – Employees need to know when they will be paid to cover their outgoings. Monthly wages are usually the biggest outgoing for a business so it aids your cashflow management to use a regular date.
  • Create and distribute payslips – Generate payslips that detail earnings and deductions and distribute to employees each pay period.
  • Report and pay tax to HMRC – Submit the correct payroll tax reports and forms showing all payroll earnings, deductions, tax payments, student loan repayments, and pension contributions to HMRC by specified deadlines to comply with payroll reporting laws. You also need to pay the correct tax and National Insurance rate liabilities to HMRC by the deadline.
  • Compliance – Payroll administration involves many rules to be followed to comply fully with pay and tax regulations. These include minimum and national living wage rules, child labour laws, age related rates, GDPR, and data protection. A payroll administrator must adhere to them to reduce the legal and financial risk to the company of non-compliance or payroll errors.

Who is responsible for payroll administration?

The payroll administrator is responsible, but who this is often depends on the nature and size of a business.

For a startup, it is likely to be the owner. For an SME, it will be the accountant or a member of the finance team, if the business has one. If it does, the team is likely to be small, so the person who takes on payroll administration duties may combine this with an additional role within the team, such as the purchase ledger function of paying suppliers and overheads.

For a larger business with a finance team, there will likely be a dedicated payroll administrator. Very large businesses may have a team dedicated to payroll. This team may work with the business’s HR team to get accurate information on staff absences, promotions, and updated remuneration structures.

In some cases, a member of the HR team may be trained to take on the role, as it relates to employee management as well as accounting.

Alternatively, businesses of any size may decide to outsource the entire payroll operation to an external payroll service provider.

Payroll administration: to outsource or keep in house?

This is an important choice and one that really depends on the circumstances, not necessarily the size, of your business.

Some owners like to keep control of wages, benefits and pension costs, so can be hesitant to outsource. On the other hand, for SMEs and startups, outsourcing is one less business function to worry about, leaving more time to focus on growth-oriented aspects of running a business such as marketing or hiring.

For larger businesses, it may be more cost effective to keep payroll administration in house, using a dedicated payroll team to manage it.

Why should I outsource my payroll?

The benefit of outsourcing payroll to a specialist company or accountant is that you can have experts performing a complex and important job. This can save time and money. Dedicated payroll companies will understand all compliance regulations and prioritise keeping your company data safe.

Meanwhile, the disadvantages of outsourcing payroll include:

  • Being dependent on one payroll provider, whose service level quality could decline
  • A loss of control of a vital business function that has a major impact on cash flow and employee morale
  • In some cases, it could be more expensive, if outsourcing the function costs more than keeping it in house

What are the challenges of payroll administration?

A payroll administrator has to manage complex information about pay and tax governed by many tax and employment laws. This can make performing the role correctly challenging.

The right tax code for each employee must be applied. It is easy to make an error in pay or deductions, which can mean the accounts don’t balance, creating extra work to reconcile accounts.

A payroll administrator needs to know and apply minimum wage laws and rates, which are usually updated annually. They must comply with company rules about overtime, and ensure an employee doesn’t work more than the maximum legal amount, which is currently 48 hours averaged over a 17-week period.

Complying with tax laws is vital. These change regularly – the UK is renowned for having the longest list of tax laws globally – often after a Budget. New rules usually apply from the start of a new tax year on 6 April. Aspects that a payroll administrator needs to keep up with include tax rates, allowances, thresholds, and reporting rules. All these can impact payroll calculations, payments, and deductions.

Need to know

If you file tax forms and returns late, underpay tax and NI, file inaccurate reports, or fail to comply with auto-enrolment pension requirements, you could face consequences.

Penalties for non-compliance include monthly fines, penalty charges, and interest payments. If regular errors are found, HMRC may conduct an audit to identify any further errors.

How can payroll software help?

Using payroll software is standard and provides many benefits, particularly accuracy and efficiency. Payroll software automates calculations, payments, and deductions, and ensures transactions are made at the correct time.

There are many options. To find the best HR and payroll software product, conduct research, look at reviews, talk to other payroll administrators, and utilise free trials. We’d recommend starting with our guide to the best HR and payroll software.

The main benefit of using payroll software is that it guarantees accuracy, as long as you input the correct data! It saves time and usually money too. It helps your business be compliant, and often comes with extra functions to aid further reporting and analysis that can be integrated into management accounts and other reports.

Conclusion

The role of a payroll administrator is a pivotal one for businesses of all sizes. Paying employee salaries accurately and on time is very important and complying and paying the correct tax, NI, and other deductions is a key responsibility for all businesses. Getting it wrong risks damaging consequences.

It is imperative that all businesses have a trained payroll administration function, whether in house or from an external payroll service provider.

Find out more about HMRC’s PAYE and payroll rules for employers.

Payroll administration best practice involves:

  • Establishing and maintaining clear and effective payroll procedures
  • Using an accurate timekeeping system to monitor employee hours and absences
  • Using trained staff who understand the relevant laws and keep updated on changes to allowances, tax rates, and employment law
  • Maintaining accurate employee records
  • Ensuring payroll accounts are balanced and reconciled each month
  • Using a reputable payroll software system or outsourcing to a professional payroll service provider
  • Conducting internal audits and reviews to ensure compliance with all payroll laws

Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.

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