Essential guide to payroll software

Payroll software helps businesses manage the payroll payments they must make to employees. This includes not only salaries but also things like bonuses and holiday pay.

Payroll software lets you to calculate wages and print payslips, but the best packages go further, helping you to improve your business. The best payroll software enables you to submit important payroll data to HM Revenue & Customs (HMRC), meet your pension obligations, manage employment costs and keep track of individual employees.

In this guide, we describe what payroll software is, why you might need it and how to pick the best package for you and your business.

Do you need payroll software?

The advantages of payroll software

Initial payroll software costs

Buying payroll software

Testing a payroll system

Payroll software pitfalls

Getting help

1. Do you need payroll software?

If your business runs payroll in-house, you should use payroll software.

You must submit payroll data electronically to HMRC with each pay run

• You can only send Real Time Information (RTI) data to HMRC using compatible software.
• Businesses with fewer than ten employees can use HMRC's Basic PAYE Tools to run payroll.

Payroll functions are often available as part of your accounting software

• Using payroll and accounting software from the same company should make it simple to import payroll data into your accounts.
• It may cost extra to add payroll functions to your existing accounting package.

Payroll software is particularly useful if your payroll changes frequently

It can help if:

• you often hire employees on short-term contracts;
• employee pay is made up of several elements; or
• you make pay deductions, such as pension contributions.

Payroll software is more cost effective, efficient and accurate

• Manually processing payroll is time consuming, especially as your business grows. Payroll software will automate calculations.
• Relying on manual payroll records is risky. Records could be lost, destroyed, or stolen. Payroll software keeps data safe and secure by encrypting the data and storing it securely.
• Payroll software makes mistakes far less likely. When they do occur, it is usually quick and easy to fix incorrect data.
• Payroll software is surprisingly budget-friendly. Most payroll solutions are available for a small monthly fee. It's certainly cheaper than hiring a payroll manager or outsourcing payroll to someone else.

You need to analyse your employment costs

• Some payroll software will make it easier to allocate employment costs to cost centres.

The software must be kept up to date to comply PAYE and National Insurance legislation

• Most payroll packages are updated regularly to take account of tax and legislation changes.
• Cloud software should be updated automatically.
• Updates should be part of your ongoing monthly subscription fee.
• Payroll software will ensure your payroll data is compliant and submitted correctly. But it cannot advise you on the best course of action. You may still wish to consult your accountant if you have any payroll questions you need answered.

You could outsource your payroll instead of using payroll software

• Many companies specialise in managing payroll for companies.
• Your accountant may also be able to run payroll for you.
• It usually costs more to outsource than to pay for payroll software.
• Outsourcing payroll functions reduces your flexibility.

If you have fewer than nine employees, you can use HMRC's free payroll system, the HMRC Basic Payroll Tool. However, this will not be suitable if you take on more employees. You will need to transfer your employee data to a payroll software solution or outsource your payroll.

2. The advantages of payroll software

Once you've set it up, payroll software can run payroll quickly and accurately with little effort on your behalf.

The software automates repetitive tasks

• You can pay people weekly or monthly.
• Payslips are produced automatically and can usually be sent securely through email.
• Some software packages allow you to arrange direct payments through BACS.
• The payroll software will automatically calculate tax and National Insurance contributions.
• You can easily make additional deductions from each employee's wages such as pension contributions, membership fees or student loan repayments.
• The software should automatically calculate certain additional payments, such as tax credits, statutory sick pay, statutory maternity and paternity pay, holiday pay and back pay.
• Some packages log holiday and sick days, enabling accurate absence tracking.

Payroll software helps you stay compliant with payroll rules and procedures

• These include the RTI reporting requirements and pension auto-enrolment rules.

You should be able to share data between different software applications

• It’s essential that your payroll software can share data with your accounting systems and software.
• This minimises the number of times you must enter the data, reducing the likelihood of errors.
• You can combine data generated by different parts of your business.
  For example, use your payroll information to address letters and mailouts automatically.

You can analyse staff costs in greater detail

• The software should include a suite of standard reports. For example, a report to show National Insurance contributions.

• More sophisticated software provides you with detailed management information. Most payroll software enables you to run queries and generate reports that can help you make better business decisions.

3. Initial payroll software costs

Payroll software is easier to use than ever. Many modern packages will walk you through the process of setting up and running payroll for the first time, making it simple for anyone.

However, it is important to consider continuing costs for training, support and maintenance on your chosen software package. You will need to pay a monthly subscription charge to ensure your payroll software as secure and updated.

Cloud payroll software is accessed over the internet

• All your data is stored safely by the software provider, so you can sign in and use it from anywhere.
• Cloud software offers great flexibility.
• You usually pay per user per month, spreading your costs out across a fixed period (usually a year).
• The payroll packages that are easiest to use tend to be cloud-based, so it's usually the best option for small companies.
• Cloud packages cost from £5 per month, although the cost is likely to depend on how many employees you have and the features you use. The more users or features, the higher the cost.

You may need to budget extra to convert your payroll data from another format

• Most packages can import employee details saved as an Excel spreadsheet, or CSV.
• You may need to manually enter some data, or ask your supplier if they have a conversion service available.
• You will need to check the data, even if the conversion was done automatically or by a third-party.

Your employees may require training on how to use your payroll software

• Cloud-based payroll packages are simple to use and usually come with a range of guides and videos to help staff learn the features.
• You can always ask your payroll software provider for support if you run into problems while using it.
• However, payroll is a complex area and it's important you understand the relevant legislation. Your business is legally required to comply, and blaming software is no excuse.
• A three-day course, covering the whole subject of payroll, can costs over £1,000 per-person.

Continuing costs

The costs of maintaining and supporting payroll software are low, but the benefits are high

You will have to pay for ongoing updates and support

• Cloud-based payroll packages are typically paid for with a monthly subscription including everything you need.
• Desktop payroll software is purchased as a one-off, but you will need to pay for regular updates to ensure the software complies will all legislation.

Maintenance and support services normally cover both accounting and IT problems

• You may need on-line, telephone or even on-site support to implement and maintain a payroll system, depending on your in-house IT team
• Payroll is a vital part of your business, so make sure your contract guarantees a reasonable response time.

4. Buying payroll software

Take time to consider carefully which payroll software is right for you. Speak to colleagues, friends and professionals, such as your accountant. Ask your staff if they have used packages before as this can make implementation quicker.

Decide your business objectives

• Assemble a team of interested parties, including those who will be using the software, to set specific, quantified objectives.
• Ask the team to identify current problems and future requirements. For example, do you need an online solution which will allow you to access it from anywhere.

Professional organisations can provide you with lists of suppliers

• Look for an HMRC-accredited package.

Recommendations are a good way to find payroll suppliers

• You can also search online, read articles and advertisements, or visit trade shows.

Shortlist suppliers by asking them a series of questions

• How many customers use their payroll systems? A large number of users generally indicates better support.
• Do they supply businesses like yours? Ask if you can question these businesses about their experiences.
• Does the supplier allow software developers to create add-ons? This can be useful if you need to expand your payroll system in the future.

Ask selected suppliers how their products can meet your needs

• Does the system have to be modified to meet your specific needs?
• What additional features are there? Look for the specific features you need.
• Do they have other suggestions as to how their systems can benefit your company? These may indicate how well they understand your business.
• Cloud providers will have detailed specification sheets online to help you narrow down your search.

Check your accounting software

• If you already use accounting software, it will probably offer payroll functions too. You may have to pay extra to access these.
• Using the same software for your accounts and payroll usually makes it easier to import payroll data.

5. Testing a payroll system

The cost of implementing a payroll system is related to how easy it is to use. Asking for a demonstration or signing up for a free trial can help you learn more about payroll software before you decide.

How easy is it to input an employee's details when they join or leave?

• Does the software prompt you for all relevant tax and NI information?
• Does the software determine how much holiday pay or back pay the employee is entitled to?
• How easy is it to input details of additional deductions, such as pension contributions?
• Can you set up templates? For example, a template for temporary employees.

Can the software handle PAYE RTI reports?

• All businesses are required to submit RTI data to HMRC.

How does the program calculate net pay?

• Can you input different pay rates?
• Can you automatically calculate bonuses and commissions?

How easy is it to change an employee's pay details?

• Can you make global changes that will affect every employee?
• Can you correct an error for one employee without affecting others?
• Does it matter in what order you input any changes?

How easy is it to make one-off payments or changes?

• Can you tell the software when to apply specific rates of pay? For example, periodic payments, such as year-end bonuses.

How easy is it to run reports and queries?

• Will you be able to do this yourself, or will you need additional support?

How flexible is the system?

• Are there any limits on the number of deductions or employees that the system can handle?
• Can the software handle different hourly rates for the same employee?
• Can the software handle foreign currencies and different tax systems?
• Can you customise the way the program looks and operates?
• Can you send payslips by email or allow employees to sign in and view payslips or log absence?

How will the system handle new legislative requirements?

• Does it include a feature to handle pensions auto-enrolment?
• If there's a monthly or annual fee, does it include updates in line with changes to legislation?

6. Payroll software pitfalls

Integrating different pieces of software can be complicated

• Integration should be handled by someone with expert knowledge.
• Not all systems are compatible.
• Integrating several pieces of software makes tracking errors harder.

Payroll software uses sensitive data about employees and what they get paid

• Make sure only authorised personnel have access to payroll details.
• Information about your staff must be stored in compliance with the Data Protection Act and stored according to GDPR.
• Periodically check payroll details to prevent fraud.
• Remember that confidential documents such as payslips you print, send or email must remain protected.

You are required to archive your payroll records for at least three years

• Storing them electronically makes them easier to access. Ensure your payroll software will store old data.
• Protect against data loss by backing up information regularly.

7. Getting help

Always involve your accountant when deciding what system to opt for

• Using the same system as your accountant can save you time and money.
• However, remember that good payroll software can reduce reliance on your accountant, so they may have a vested interest in not recommending the most appropriate package.
• Additionally, they may prefer you to use software that makes their life easier. But you need software that's right for your company.

Some accountants are software resellers

• Larger accountancy firms may have an IT department dedicated to accounts and payroll software.
• Again, they may have a vested interest in selling certain software. Seek independent advice if you're unsure.
• Many resellers can customise software to meet your exact needs. For smaller businesses, the costs of customisation will usually outweigh the benefits.

Consultants can help you determine the priorities for your payroll system

• Choose a consultant who has experience of your type and size of business.
• A consultant may also be able to suggest other ways a payroll system can help.

Signpost

• Find information on and download HMRC's Basic PAYE Tools.
• Look for an HMRC-accredited payroll package.
• Find payroll advice and training courses through the Chartered Institute of Payroll Professionals (0121 712 1000).