Running Payroll Yourself: How to Do It and Risks to Consider

If you’re a small business owner or an entrepreneur starting out, you may be considering handling payroll yourself. It can save you money and give you greater control over your finances.

While this may be true, processing payroll manually comes with challenges, such as keeping up with regulations, tax codes, and deadlines.

So, is doing payroll yourself the best choice for your business? In this article, we’ll explore the process of managing payroll yourself while looking into its complexities and potential pitfalls.

Steps for Processing Payroll

Processing payroll involves several key steps, from collecting employee data to calculating wages and managing deductions. Here’s a rundown of what these steps include:

1. Register as an Employer

Before you can start paying employees, you must register as an employer with HM Revenue & Customs (HMRC) and receive a PAYE (Pay As You Earn) reference number. This allows you to process payroll and report taxes to HMRC.

2. Gather Employee Information

Collect essential employee details, including their name, address, phone number, bank details, date of birth, and National Insurance (NI) number.

You must also obtain a Starter Checklist (previously P46) or a P45 from a new hire’s previous employer. This helps determine the correct tax code for their payroll deductions.

3. Set Up a Payroll Schedule

Determine how often you will pay your employees. Common payroll schedules in the UK include:

• Weekly
• Fortnightly
• Monthly (most common)

When deciding, consider:

• Cash flow – Ensure you have sufficient funds available when payroll is due.
• Industry standards – Some sectors, such as retail and hospitality, may favour weekly pay.
• Payroll processing time – If handling payroll yourself, ensure you have enough time to process it accurately before payday.

4. Determine Payment Method

Many UK employers pay staff via BACS (Bankers' Automated Clearing Services), which takes 3 business days to process. Payroll platforms like Workforce.com offer more modern solutions, such as Modulr, which ensure greater accuracy, enhanced security, and the ability to pay staff in minutes.

Additionally, providing a payslip is legally required and must detail gross pay, deductions (e.g., tax, National Insurance), and net pay.

5. Track Employee Work Hours

Accurately tracking time worked is crucial for calculating wages, particularly for hourly employees. Record working hours, overtime, leave, and absences. Using a reliable, digital time-tracking system can help reduce errors and streamline payroll calculations.

6. Calculate Gross Pay

To determine an employee’s gross pay, multiply their worked hours by their hourly rate or divide their annual salary by the number of pay periods.

If applicable, factor in:

• Overtime pay
• Bonuses
• Holiday pay
• Commission
• Shift differentials

7. Compute and Apply Deductions

After calculating gross wages, you must factor in deductions, which fall into three categories:

• Mandatory Deductions:
  
  • Income Tax (PAYE): Deducted based on HMRC tax codes.
  • National Insurance Contributions (NICs): Both employee and employer contributions apply.
  • Student Loan Repayments: If an employee has a student loan, you’ll need to deduct repayments based on their loan type: Plan 1, Plan 2, Plan 4, or a Postgraduate Loan. Each plan has different income thresholds. The HMRC or the employee will tell you which plan to use.
  • Pension Contributions: All UK employers must assess employees for automatic enrolment eligibility, and if eligible, must enrol and contribute unless the employee opts out. 
• Voluntary Deductions:
  
  • Private pension schemes
  • Salary sacrifice
  • Union dues
  • Workplace benefits (e.g., cycle-to-work schemes) 
• Court or Government Ordered Deductions:
  
  • Attachment Earnings Orders (AEO)
  • Direct Earnings Attachments (DEA)

8. Calculate Net Pay

Subtract total deductions from gross pay to determine net pay (the amount employees take home).

9. Pay Employees

Make payments via BACS transfer or other method. BACS transfers take three business days, but payment solutions like Modulr can issue payments in an average of 9 seconds, helping you pay staff faster and with greater reliability.

10. Report Payroll to HMRC

Every time you run payroll, you must submit a Full Payment Submission (FPS) to HMRC using payroll software. This report includes employee earnings, deductions, and tax details.

11. Keep Payroll Records

HMRC requires employers to keep PAYE records for at least 3 years after the end of the tax year they relate to. In practice, this often means holding on to records for up to 4 years or more. However, many businesses choose to keep records for 6 years as a best practice,  offering better protection in case of audits, disputes, or compliance checks.

Things to Consider Before Doing Payroll Yourself

If you’re considering handling payroll manually, here are some key factors to consider:

Legal Risks

Errors in payroll, like incorrect tax payments or late filings, can result in HMRC penalties. Even small errors can trigger investigations, fines, or compliance notices. It can be easy to underestimate just how significant the legal risks can be. That’s why it’s crucial to stay compliant with HMRC legislation and avoid costly consequences.

Cost

Doing payroll yourself can save money on outsourcing or payroll software. However, the risk of errors can lead to fines, additional administrative costs, or employee dissatisfaction due to incorrect pay, making software a worthwhile investment.

Time

Payroll processing is time-consuming, especially as regulations change. Time spent on payroll could be used to grow your business instead.

Employee Satisfaction

Many businesses take several days to run payroll. Delays or errors in paying staff can erode trust as employees expect to be paid accurately and on time. Repeated issues can impact employee morale and retention.

Why Using Payroll Software Makes Sense

Automation and accuracy make payroll software an essential tool for businesses of all sizes.

A good payroll system will: 

✅ Automate tax calculations – PAYE and NICs deductions are handled automatically. 

✅ Integrate with time tracking – Reducing errors from manual data entry. 

✅ Generate payslips & reports – Ensuring compliance with HMRC requirements.

Do Payroll in Minutes with Workforce.com

Workforce.com simplifies payroll, reducing processing time and ensuring compliance with UK regulations. With automation features and seamless integrations, Workforce.com helps businesses stay on top of payroll without the headaches.

It also improves the employee experience by ensuring staff are paid accurately and on time, with easy access to payslips, P45s, and other documents via our mobile app. That transparency builds trust and keeps your team happy.

Discover how Workforce.com can streamline your payroll process and keep staff with you for many years to come — book a demo today!