How to Do Payroll Yourself: 7 DIY Steps to Pay Your Employees

Running a business comes with many rewards, not least the power to shape your destiny and positively impact your community. However, it also comes with unique challenges, like managing accounting and taxes, raising funds, hiring people, and preparing payroll.

Managing payroll is especially challenging for new or growing businesses that are hiring and managing staff for the first time. You need to pay employees on time, withhold income and payroll taxes, and potentially contribute to health and retirement accounts. Failing to perform these tasks could result in unhappy employees, legal troubles, or fines from the IRS.

But with the right knowledge, it’s not an insurmountable task. In this article, we’ll explore how you can dodge the cost of outsourcing payroll by preparing it yourself, whether you have one employee, ten, or dozens. We’ll also explain how to scale your payroll to match your growing employer needs.

Key Takeaways

• Preparing payroll yourself can be a cost-effective option for small and growing businesses.
• Understanding the basic steps and tools before you actually need to run payroll can help you plan and save time later.
• HMRC (His Majesty’s Revenue and Customs) requires accurate and timely information reporting, with a Full Payment Submission (FPS) due before each payday and an Employer Payment Summary (EPS) by the 19th of each month, with potential penalties for late or non-filing.
• Payroll services and resources (free or paid) can help you simplify calculations, file payroll on time, and comply with HMRC regulations.

How to Run Payroll Yourself in 7 Easy Steps

Managing payroll independently can significantly enhance control and reduce costs for small business owners. However, you must understand the essential steps, tools, and strategies required to implement an efficient and error-free payroll system, navigate complex tax laws, and avoid compliance issues.

We share seven steps you can follow to ensure your payroll operations run smoothly.

Step 1 – Register as an employer with HMRC

Sign up with HMRC as an employer as soon as you start hiring employees. This allows you to be recognised as an employer in the UK, legally employ staff, collect National Insurance contributions (NICs), and collect and remit income taxes. You can register on the HMRC website.

HMRC requires that you register before the first payday and notes that it can take up to 30 working days to be approved. Once approved, you’ll be sent an employer PAYE (Pay As You Earn) number, which allows HMRC to identify your business and link payments to employees. Note that you can’t register as an employee more than two months before you start paying people.

If you need to pay employees before you receive your PAYE number, HMRC states you should do the following: run payroll, store your full payment submission information, and send a late full payment submission to HMRC.

Step 2 – Gather employee information

Collect essential details from each employee, including their full name, physical address, contact information (email and phone number), National Insurance number, bank account information (account number and routing number), and filing status (single, married, etc).

Request this information from each new employee as part of your onboarding process, as this allows you to set up their payroll account and pay tax obligations right away. Make sure you store this information securely (whether physically or digitally) and ensure that access to the information is limited.

Step 3 – Determine your pay schedule

Decide how often you’ll pay your employees. Common pay periods include weekly, bi-weekly (once every two weeks), twice per month, or monthly. You’ll need to ensure you pay employees on time, so consider choosing a payroll schedule that aligns with your income and cash inflows. You’ll use your chosen pay schedule to calculate gross pay in Step 5.

Step 4 – Classify your employees

Classify your employees as salaried (they’re paid a fixed monthly wage) or hourly (they’re paid based on the number of hours worked). Also, determine if you’ll pay annual bonuses, and if they’re paid hourly, whether you’ll need to pay overtime. These classifications and amounts will determine how you calculate each employee’s gross pay.

Step 5 – Calculate gross pay

Next, calculate each employee’s gross pay—their total pay before any deductions or taxes. To do this for salaried employees, divide their annual salary by the number of pay periods each year. For hourly employees, multiply their hourly rate by the number of hours they worked during the pay period (be sure to include overtime pay).

Step 6 – Deduct payroll taxes and other deductions

Next, deduct income taxes, National Insurance contributions (NICs), and any other deductions from each employee’s pay as follows:

• Income tax: Income tax is calculated as a percentage of each employee’s income and is based on their tax code, which you’ll receive from HMRC.
• National Insurance contributions: Both employers and employees contribute NICS to HMRC, so you’ll need to pay your portion and deduct your employee’s portion from their pay. You can use HMRC’s online calculator to determine the specific amounts. NICS fund the UK’s social security system, including state pensions, unemployment benefits, and disability payments.
• Health insurance: Deduct any employee contributions to employer-sponsored health insurance plans.
• Pension or retirement plans: Deduct any contributions to pension or retirement plans from each employee’s gross pay.
• Student loan repayments: If the employee is repaying student loans through a portion of their pay, deduct these repayments from their gross pay.

Step 7 – pay your employees

Finally, pay your employees the net amount after taxes and other deductions. You should offer various payment options to employees, such as direct deposit, bank transfers, or checks (for more old-fashioned employees). If you work with contractors, consider offering bank transfers, checks, or cash. This allows employees to receive their wages on time and in a form they can accept.

Pro tip: You can use free and paid payroll tools, like those mentioned below, to help streamline your payroll, tax, and net pay calculations.

Tools to Track and File Payroll Data

Now that you know the seven steps for running payroll effectively, let’s explore some of the best payroll solutions, tools, and services—both free and paid—to help get the job done efficiently.

Free payroll resources

Several free resources are available to help UK businesses track and file payroll accurately and on time. Here are the most useful:

HMRC’s PAYE tools

HMRC offers free payroll software called “Basic PAYE Tools” that calculates employee taxes and National Insurance contributions for you. It will then submit this information to HMRC.

You can also use this software with other payroll tools to:

• Check a new employee’s National Insurance number.
• Send an Employer Payment Summary (EPS).
• Send an Earlier Year Update (EYU), which is a correction to an amount submitted in Real Time for a previous year, for the 2019 to 2020 tax year and earlier.

Free payroll software

Some payroll software providers offer free plans to help small businesses run payroll and introduce them to the payroll provider’s services. IRIS Payroll is one such provider, offering free HMRC-recognised and RTI-compliant payroll processing for small businesses with fewer than 10 employees.

Spreadsheets

You can use spreadsheet software like Microsoft Excel, OpenOffice Calc, or Google Sheets to calculate pay, tax withholdings, National Insurance contributions, and more. It’s also possible to find free or inexpensive payroll templates or software add-ons designed to calculate payroll and withholdings.

However, while spreadsheets are a powerful tool for running payroll calculations, growing businesses with more complex payroll calculations may find them inadequate due to the need to input data manually.

Online payroll calculators

Numerous free online calculators can help you estimate payroll taxes and deductions. However, these calculators mightn’t be suitable for complex payroll scenarios or businesses with growing headcounts.

Paid payroll resources

There are many paid payroll tools, some of which include expense tracking or HR services. Let’s explore some useful options below.

Dedicated payroll software

Several companies offer software and web tools to help businesses track and run payroll, pay taxes, and remit National Insurance contributions. The cost depends on the features you use, the size of your teams, and more. We’ve listed some of the most popular providers below.

• Quickbooks Payroll: Quickbooks is a popular accounting software with integrated payroll functionality. Pricing starts at just £10 per month per employee, with additional fees for advanced features. This makes Quickbooks Payroll a great option for small to midsize businesses looking to save time and effort without spending too much money.
• Sage Payroll: Sage Payroll offers a range of payroll solutions tailored to businesses of different sizes. Pricing starts at £10 per month per employee, with additional fees for larger teams and advanced features, making it an inexpensive option.
• IRIS Payroll: In addition to a free payroll plan for small businesses, IRIS Payroll offers paid payroll solutions with a wider range of features. These include integrations with other software (like accounting and tax preparation) and the ability to manage more complex forms of payroll, like bonuses, commissions, overtime pay, and benefits.
• ADP Payroll: ADP Payroll is a popular option for many businesses operating both in the UK and elsewhere. It offers highly capable features that allow businesses to run simple or complex payroll scenarios with ease.

Take a look at our guide to payroll software for small businesses to learn more and choose the best option for your business.

Cloud-based payroll solutions

While some payroll software stores data on local drives, you can also opt for cloud-based payroll solutions. These allow your data to be stored securely off site, with built-in data backups, security measures, and IT maintenance. We explore several cloud-based payroll solutions for UK businesses below.

• 1 2 Cloud Payroll: 1 2 Cloud Payroll is a cost-effective cloud-based payroll provider that offers capable and accessible payroll features designed for small businesses. 1 2 Cloud offers clear pricing that starts at £5 per employee per month with costs increasing as the number of employees increases. 12 Cloud is capable of filing RTI, P11D, P11D(b), and more.
• Moorepay Payroll: Moorepay Payroll offers a cloud-based payroll solution that’s designed to simplify payroll with a user-friendly interface, integrated HR features, and automation capabilities. We found Moorepay a reliable, feature-rich, and user-friendly payroll software option. Moorepay’s pricing is bespoke, so you’ll have to contact its team to learn more.
• MHR Payroll: MHR Payroll offers both downloadable and cloud-based payroll software (or both) depending on the needs of your business. MHR’s plans include People First for startups and small businesses, iTrent for medium to large businesses, and MHR ERP for large and complex enterprises. MHR’s prices are bespoke, so you’ll have to contact its team for more information

Read our guide to the top 7 cloud-based payroll software options to learn more and find the best option for your business.