What is payroll processing?
Payroll processing involves calculating employee salaries, deductions and taxes, as well as ensuring that payments are made correctly and on time. It’s the responsibility of the HR or payroll department to ensure that the business is compliant with regulatory requirements, while also providing a smooth, transparent payment process for employees.
9 key steps for effective payroll processing
1. Ensure you have completed payroll setup tasks
Before processing payroll for the first time, you need to carry out the initial setup. This involves registering with HMRC as an employer, and setting up a PAYE Online account, as well as getting to grips with your legal obligations. Once you have a solid understanding of these obligations, you need to ensure that your business is compliant, otherwise you could be hit with a fine or legal action further down the line.
You’ll also need to implement a robust payroll processing solution to support compliance and ensure that your payments are made accurately and on time. If your business has 10 or fewer employees and you only need a simple solution, you can download Basic PAYE Tools from HMRC.
2. Compute gross pay
Once you’re set up with PAYE, HMRC and your chosen software, you’ll need to calculate gross pay for each of your employees. This is done by multiplying their pay rate by the number of hours worked within the pay period to get their base salary.
You then need to include any overtime pay, bonuses or additional earnings to calculate their gross pay. Failure to include these additional earnings could result in incorrect deductions and tax calculations, so take care with this initial calculation.
3. Calculate payroll taxes
Calculating payroll taxes is essential to ensure that your business adheres to relevant compliance requirements, and that your employees are paid accurately. This step is extremely important, as mistakes could lead to poor employee relations, or even legal issues for your business.
The tax that each employee must pay depends on their tax code and National Insurance category letter. HMRC offers calculators and tax tables that allow employers to check manual calculations for payroll, including tax, National Insurance contributions, and student loan deductions. If you’re using software, there should be features built in to make these checks.
4. Determine employee deductions
You also need to identify any other deductions such as pension contributions, health insurance premiums, and other benefits. It’s important to understand the difference between pre-tax deductions and post-tax deductions and ensure that you calculate them at the right point of the payroll process for accurate payments.
5. Calculate net pay
Once you’ve calculated taxes and employee deductions, you then need to deduct these from the gross pay. The amount left is the net pay, which is also referred to as the employee’s take-home pay. This is the final amount that will be paid to the employee for the current pay period.
6. Approve payroll
It’s essential to conduct a thorough review before processing it to make sure that employees are being paid correctly, and that the business remains compliant with all relevant legislation. Usually, the payroll manager, head of HR or business manager will be the one to approve the payroll. It may be tempting to skip this step during busy periods, but it’s an important safeguard against errors and discrepancies that could be costly for the business.
7. Pay employees
Whether paid weekly or monthly, always ensure that payroll is processed on time to maintain employee trust and support financial visibility within the organisation. You can pay employees via BACS, online payment, cheque or cash. Whichever method you choose, you must provide employees with a printed or electronic payslip for the pay period. The payslip is legally required to show their earnings before and after deductions, the amount of the deductions, and the number of hours worked.
8. File tax reports on time
After processing and paying employees, make sure to promptly file all necessary payroll tax reports and pass on the deductions you’ve made to HMRC, usually by the 22nd of the month. It’s important to keep on top of any changes in legislation to make sure your business remains compliant with the latest regulations.
9. Maintain accurate records
The final step of payroll processing is to ensure that you keep all records up to date. They must be kept secure, with encrypted cloud storage being the preferred choice for many businesses. Make sure to also keep records of any relevant documentation required to comply with the law, such as copies of payslips and proof of payments made to HMRC. Payroll errors can be costly, so it’s important to back up all your data to streamline any future auditing processes, and to prove exactly what you’ve paid and when.
How long does payroll take to process?
How long it takes to process payroll depends on factors, such as the size of your business, the number of employees, the payment method, and whether you use timesheets. For SMBs, you can expect the payroll process to take 1–3 days. However, for larger, more complex businesses, it could take up to a week.
The act of running payroll itself might only take a few minutes or hours, but it’s the processes on either side that can be time consuming. You must consider these times and factors to work out when to start the process. Start with the scheduled employee payment date and HMRC payment deadlines and work backwards from there. It’s important to find a balance between starting early enough so that you can complete the process on time, while leaving enough time to gather all the necessary information for each payment period.
What factors affect payroll processing time?
There are many different factors that can affect how long it takes to complete the process. Let’s delve into these factors to understand their impact on payroll processing time.
Accuracy of data
Ensuring the accuracy of employee data is crucial for smooth payroll processing. Details such as hours worked, pay rates, deductions and benefits must be entered correctly to ensure the accuracy of pay calculations. Any mistakes or discrepancies in data entry can significantly slow down the process, as rectifying errors requires additional time and effort.
Number of employees
The size of the workforce directly affects the time taken to process payroll and generate payslips. In larger organisations with a higher number of employees, there’s more data to input and verify, which means that calculating salaries, deductions and taxes takes longer.
Complexity of payroll structure
The complexity of your payroll structure adds another layer of intricacy to the processing time. You might be dealing with various pay rates or periods, additional earnings such as overtime or commission, and deductions for pension contributions or student loans. Managing a more intricate structure takes more time and attention to ensure accuracy and compliance with regulations.
Payroll frequency
How often you pay your employees also impacts payroll processing time. Weekly or bi-weekly runs require more time and resources than monthly runs, as data needs to be processed and verified for each run. For monthly payments, you only need to follow the end-to-end payroll process once each month, making this option less time-consuming.
Approval processes
Internal approval processes play a crucial role in determining how long it takes to process payroll. Manager approvals for timesheets or payroll changes are essential steps in the process to ensure that everything is accurate and compliant. Delays in obtaining approvals can slow down the payroll process and could lead to delays in employee payments.
Payroll processing methods
The method used to process payroll significantly influences the time it takes to complete the process. There are primarily two methods: manual and automated payroll processing. Let’s look at each of these in more detail.
Manual vs automated payroll
Manual payroll processing involves using paper-based documents or simple spreadsheets to manage payroll. This method is time-consuming and prone to errors, as it relies on manual input and calculations. In contrast, automated systems streamline the entire process by automating repetitive tasks, reducing the risk of errors, and incorporating electronic timesheets for greater speed and accuracy.
Outsourcing
Outsourced payroll involves delegating payroll processing tasks to a third-party service provider. While outsourcing may initially seem like it would take longer, it can actually expedite the process and free up internal resources for other important tasks. Outsourcing allows businesses to tap into specialised expertise, leading to faster and more efficient payroll processing while ensuring that all compliance requirements are met. When deciding whether in-house or outsourced payroll is right for your business, you need to weigh up the cost of outsourcing versus the savings you’ll make by freeing up your internal resources and improving the efficiency of your process.
Speed up payroll processing tasks using software
Payroll processing is a complex undertaking, and one that is extremely important to get right. By following the steps we’ve outlined above, you can create a smooth process, no matter how large your business is. However, there are many different factors that can affect how long it takes to process payroll, and these must be considered to ensure that your employee payments are made on time.
Implementing specialised payroll software helps to simplify the processing by collating all necessary information into a single interface, automating repetitive tasks, and providing end-to-end visibility for compliance and auditing purposes. This makes payroll processing even more efficient, ensuring timely payments and regulatory compliance without any additional administrative burden for your HR or accounts department.
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