The Basics of Setting Up and Managing a Compliant Payroll and Workplace Pension Scheme

You are not alone if you feel overwhelmed by your new company's regulations and the complexities of managing payroll and pensions. Solo entrepreneurs taking on staff for the first time need to understand how to navigate and comply with rules surrounding payroll and onboarding new staff into a pension scheme.

Our team at Your Company Formations are here to help clarify what you need to do to give you peace of mind. In this post, we will cover topics such as:

  • Simplifying payroll: Gain clear insights into adding employees, processing salaries, and adhering to tax regulations.
  • Navigating pensions: Understand your workplace pension obligations, including auto-enrolment and contribution requirements.
  • Empowering compliance: Stay informed about changes in legislation and ensure you meet all legal requirements.

What is Payroll?

Payroll processing goes beyond simply issuing salaries and making tax deductions. It involves navigating a complex landscape of statutory contributions, pension regulations, and ever-evolving tax rules. Ensuring accurate and timely payroll is crucial for employee satisfaction and adherence to legal requirements.

As payday approaches, a key responsibility for any business owner or employer is ensuring accurate and timely payroll processing. This involves several critical steps: First, meticulously record each employee's hours worked and corresponding pay. Next, generate and distribute payslips reflecting their gross earnings, deductions, and net pay.

The process then moves on to calculating and withholding deductions like income tax and National Insurance contributions. Crucially, you must electronically submit these details to HMRC via a Full Payment Submission (FPS) on or before payday.

Additionally, remember to calculate and pay your employer's National Insurance contribution, completing the cycle and fulfilling your legal obligations. By diligently following these steps, you can ensure smooth payroll administration.

Now that we have explained what payroll is and how it works, we can turn to setting up your payroll system.

Managing Payroll In-House or Outsourcing

Deciding on your optimal payroll method is a crucial first step in establishing an efficient and compliant system. Two main options are open to you: in-house management and outsourced payroll services.

In-house payroll gives you control, flexibility, and lower costs. This method suits businesses with a small employee headcount, familiarity with payroll processes, and sufficient internal resources. However, it demands significant time commitment, necessitates staying abreast of complex regulations, and requires investment in specialised software.

Outsourcing payroll alleviates time burdens and expertise requirements. This approach benefits businesses lacking dedicated personnel, facing complex payroll structures, or prioritising core operations. While costlier than in-house solutions, outsourcing offers accuracy, compliance assurance, and access to dedicated payroll specialists.

The choice hinges on your specific needs. Consider factors such as business size, budget, staffing capabilities, and desired level of control before making this critical decision.

Setting Up Payroll: A Step-by-Step Guide for New Employers

Here are the key steps to get you started with payroll for your company:

1. Register as an employer:
  • Get your unique PAYE number from HMRC (it takes up to 5 days).
  • Register online within two months before paying employees.
2. Set up PAYE:
  • Use your HMRC login or enrol separately online.
  • Manage PAYE online for taxes and reporting.
3. Choose your payroll system:
  • Software or outsourcing for managing employee details, payslips, and taxes.
  • Consider the size, frequency, and complexity of your payroll needs.
4. Record essential data:
  • Register employees and update HMRC promptly.
  • Track wages, sick leave, tax codes, and other relevant information.
  • Be prepared for potential HMRC checks.
5. Calculate pay and deductions:
  • Include statutory pay and other relevant pay elements.
  • Use tax code and National Insurance information for accurate deductions.
  • Handle deductions like unpaid leave, pensions, student loans, taxes, and National Insurance.
  • Report everything to HMRC via Full Payment Submission (FPS).
6. Pay HMRC:
  • Settle tax and National Insurance contributions based on your FPS.
  • Payroll software can automate these payments.
7. Prepare for next year:
  • Complete previous year's reports, update records and adjust software as needed.


Do I need an accountant to do payroll?

While managing payroll yourself using payroll software is an option, consider these factors before deciding:

Benefits of using an accountant:
  • Expertise: Accountants ensure accurate calculations, compliance with regulations, and minimise penalties.
  • Time-saving: They handle complex tasks, freeing you to focus on core business activities.
  • Peace of mind: They provide guidance and support, reducing payroll-related stress and potential risks.
Drawbacks of using an accountant:
  • Cost: Hiring an accountant adds to your business expenses.
  • Limited control: You may relinquish some control over payroll processes.

Ultimately, the decision depends on your business size, complexity, and budget. DIY might be suitable if you are comfortable managing payroll and have the resources. However, an accountant can be invaluable for intricate setups, limited time, or seeking expert guidance and peace of mind.

Can I use Excel for payroll?

While Excel offers basic functionality for payroll tasks, it's crucial to carefully consider its limitations before relying on it as your primary solution.

Here is why Excel might not be the optimal choice:
  • Manual and time-consuming: Manually entering and calculating data is prone to errors and inefficient, especially as your business grows.
  • Error-prone: Complex formulas and intricate calculations increase the risk of mistakes, potentially leading to financial penalties and employee dissatisfaction.
  • Limited scalability: Excel struggles to handle large datasets and complex payroll scenarios, making it unsuitable for expanding businesses.
  • Compliance challenges: Keeping up with changing tax regulations and reporting requirements can take time and effort, potentially exposing you to non-compliance issues.
Alternatives to consider:
  • Payroll software: Streamlined solutions offer automation, accurate calculations, and built-in compliance features, saving you time and minimising errors.
  • Accountant: Expert guidance ensures meticulous handling of complex payroll tasks and provides valuable peace of mind regarding regulatory adherence.

Excel might be a temporary solution for small businesses with minimal payroll complexity. However, dedicated payroll software or an accountant is strongly recommended for long-term accuracy, efficiency, and compliance.

Workplace Pension Enrollment: A Guide for Employers

Understanding your responsibilities: As an employer, you are legally obligated to provide a workplace pension scheme for eligible staff, starting when your first employee joins your team. This initiative, known as automatic enrolment, ensures individuals can access a retirement savings plan.

Identifying eligible employees: The automatic enrolment requirements apply to staff who meet the following criteria:

  • Age: Between 22 years old and State Pension age
  • Earnings: Earn at least £10,000 per year
  • Location: Normally work in the UK (including those based in the UK and travel abroad for work)

Enrollment process: For all eligible employees, you must:

  • Enrol them in your chosen workplace pension scheme
  • Make the compulsory employer contributions as specified by the scheme
  • Inform them in writing within six weeks if they become eligible due to changes in age or earnings

Setting up your scheme: If you don't have a qualifying scheme, you must establish one. Utilise the valuable resources provided by The Pensions Regulator:

  • Employer tool: Navigate their online tool to understand your specific duties and deadlines.
  • Scheme eligibility: Confirm if your existing scheme meets the automatic enrolment requirements.

Maintaining compliance: Remember, ongoing responsibility entails regularly reviewing your employee eligibility, processing contributions accurately, and keeping detailed records for potential checks by The Pensions Regulator.

Understanding Employer Contributions in Workplace Pensions

Minimum contribution requirement: As an employer, you must contribute at least 3% of your employee's qualifying earnings into their designated workplace pension scheme.

Defining qualifying earnings: The definition of "qualifying earnings" varies depending on the chosen pension scheme. Consult your scheme provider for comprehensive details. Typically, it encompasses the employee's gross earnings within a specific annual range (currently £6,240 - £50,270 before tax) and includes elements like:

  • Salary or wages
  • Bonuses and commissions
  • Overtime payments
  • Statutory sick pay
  • Statutory maternity, paternity, or adoption pay

Contribution frequency and deadlines:

  • Deduct employee contributions from their salaries each month.
  • Forward these contributions to the pension scheme by the 22nd day of the following month (by the 19th if paying by cheque).
  • Settle your employer contributions according to the agreed date with your pension provider every time you process payroll.
  • Backdate any missed payments.

Potential consequences of non-compliance:

  • Fines: Late payments or contributions below the minimum requirement can trigger penalties.
  • Compliance risks: Failure to uphold these obligations can put your business at risk of regulatory action.

Additional considerations:

  • Employee contributions: Remember, employees also contribute a mandatory percentage of their qualifying earnings towards their pension. Their contribution rate varies based on their age and earnings.
  • Scheme provider guidance: Your chosen pension scheme provider should offer clear information and support regarding contribution calculations, payment processes, and deadlines.

Seeking support: For assistance with navigating the complexities of workplace pension enrolment, consider consulting reputable resources like The Pensions Regulator or seeking professional guidance from payroll specialists or financial advisors.


While establishing payroll and pensions seems straightforward upon choosing a management method, navigating the intricacies can become time-consuming and error-prone without proper tools and expertise. Accurate recording of employee data, payments, and deductions is crucial for compliance with HMRC and minimising financial penalties.

Investing in a suitable software or professional support solution ensures accurate payroll processes, reduces administrative burden, and protects your business from potential compliance issues. Feel free to seek assistance if payroll or pension complexities seem daunting or if your expertise lies elsewhere.

Further recommended reading:

Are you thinking about setting up a non-profit company? For valuable tips, please read our guide, How to Start a Non-Profit in the UK: A Guide for Socially Minded Entrepreneurs.

Many budding entrepreneurs start off working from home, but are there better options? Read our guide, Should I Use a Virtual Office or a Physical Office? For more insight into your options.

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