Hook up with the taxman when paying staff

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A basic system will suit most small businesses

If you employ staff, you must have payroll software. Here are your options.

If you run a business that employs staff, you can’t operate without payroll software. You don’t necessarily need the software to keep track of what you’re paying, or even to make tax, national insurance or pension contributions – in theory you could do these sums in an Excel spreadsheet or even on the back of an envelope.

But since 2015, when HM Revenue & Customs (HMRC) introduced real-time information – the system through which employers must submit payroll details at the time they pay employees – everyone has needed a system that can communicate with the government’s systems.

Don’t pay for what you don’t need

Besides that connectivity, think about your other requirements carefully – professional payroll software can cost thousands of pounds upfront, with providers then charging expensive running fees on an ongoing basis, but the vast majority of small and medium-sized enterprises (SMEs) shouldn’t need to pay anything like this.

Indeed, you may not need to pay anything at all. HMRC offers its own suite of basic pay-as-you-earn (PAYE) tools that allow you to carry out simple tasks, such as working out the tax and national insurance to deduct from employees’ pay. Naturally, these tools can also communicate with HMRC’s own systems, to meet the real-time information requirements.

If you don’t like the tools HMRC itself offers, you might at least want to check out its list of approved providers of free software. Its website lists details of around ten completely free payroll software packages that HMRC has tested and deemed potentially suitable for firms with up to ten employees.

For firms with a larger workforce than this, or those who don’t feel the basic packages offer all the functionality they need, there are a number of paid-for solutions that don’t cost huge sums. For example, Sage, one of the biggest providers of payroll software in the UK, offers a package that costs from £6 a month, while Xero has cloud-based packages from £10 a month.

Very often, these packages are designed to integrate with the provider’s broader accounting software – in some cases you will need to be using this software for the provider’s payroll package even to be an option. But some providers do offer software on a standalone basis. This might be useful if you’re happy with your accounting software generally but want something else for payroll.

At the least, all these systems will record employee details, calculate pay and deductions, work out statutory pay, integrate with HMRC’s systems and tell you what to pay the taxman. Just be aware that you might not necessarily be able to produce payslips for employees. Pension contributions aren’t covered by all systems, which can be awkward since auto-enrolment require all employers to set up a pension scheme for staff. If you pay staff in different ways – some monthly and some weekly, for example – you may also need a more sophisticated tool.

Are you ready for digital tax reforms?

The taxman is increasingly encouraging businesses to submit information in a digital format. From next April, any business with an annual turnover of more than the VAT registration threshold – £85,000 at the moment – will have to begin managing some of its tax affairs fully online. This is part of the government’s “Making Tax Digital” initiative.

Initially, the requirement will just be that these businesses maintain digital records and send their VAT returns using Making Tax Digital-compatible software.  Originally, the plan had been to switch businesses to an entirely digital-only tax system in April 2018, but this was pushed back, and it’s now expected that this will be made a requirement as of April 2020.

As it stands, HMRC has not said that it will provide any free software to help with the programme, notes the Institute of Chartered Accountants in England and Wales (ICAEW). Any commercial software you use must be able to keep and preserve records in digital form; create a VAT return from the records; provide HMRC with VAT data on a voluntary basis; and receive information from HMRC. The use of spreadsheets will be permitted, but they will need to be combined with third-party software. See the ICAEW’s website for more details of what’s required.