Payroll administration – 2022 in-depth guide for UK businesses

Last checked and updated on 13 May 2022

If you are a business owner, regardless of the size of your company, then there is one thing that you need to do, and that is pay your employees. Whether this is done on a weekly or a monthly basis, it is something that needs to be done correctly and on time.

As an employer, you have a duty of care to your employees to ensure this happens. Some businesses prefer outsourced payroll administration to an external company that specialises in payroll and fully understands all the rules. Others have their own internal payroll department. Read on as we take a look at precisely what you should know about this vital solution for UK businesses. 

What is payroll administration?

Let’s start by taking a look at precisely what constitutes payroll administration. The definition of payroll administration encompasses those tasks which are necessary in order to organise the financial compensation of every employee for those hours that have been worked.

This also includes keeping correct records of the number of hours that each individual has worked, sick days, rates of pay and, of course, managing the payments being made to the employees.

In the case of any business that uses a commission-based system in addition to salary remuneration, then it can also be appropriate to employ a dedicated payroll administrator. That way, you can better organise the payroll service that is provided to employees.

How to stay compliant with UK legislation 

It is vitally important when discussing payroll administration that a company ensures that they remain compliant with the current UK legislation. The following steps need to be followed to ensure full compliance:

  1. Keep and maintain accurate personnel records. Changes should be noted as soon as they occur, and employees should be reminded that if personal details change, these need to be advised
  2. Make sure employees understand the need to stay compliant with company policies, expenses policies and accurate overtime recording
  3. Understand your responsibilities in terms of a workplace pension; if you employ more than one person, you have a responsibility under the pension law
  4. Ensure that you have a robust audit trail with accurate records
  5. Legislation surrounding payroll is constantly changing, the best way to stay compliant is to keep up with the latest information on the government website
  6. If your company operates across several countries, you will need to make sure that you are also fully up to date with international legislation around payroll. It is likely that each country will have its own very separate and different rules
  7. Consider training for those doing your payroll administration – regular training courses are the best way to keep up with any changes in legislation and improve working practices
  8. Encourage feedback from employees. This will make sure that they know you have their interests in mind, and this gives them more incentive to help you.
  9. Always be on time with everything. Late submissions can occur penalties
What about GDPR?
Special attention should be paid to GDPR (General Data Protection Regulation). This is the law governing data protection that came into effect on 25th May 2018 as part of European law and was incorporated into UK law.

The law covers the protection of personal data and how it is kept. Because payroll administration involves processing large quantities of personal data, it is important to ensure that any processes that you use are compliant with GDPR. Any personal and payroll data should, therefore, be kept to the smallest number of locations possible.

It is also a good idea to consider other standards and rules, such as ISO27001, which can help you meet some of your GDPR security obligations. Emails, sick notes, and any communications from employees about holiday leave etc., should be kept in a secure fashion.

Online methods offer more security over things like paper payslips, and employees can be offered the chance to access these via online secure authentication, which keeps everything in the same place.

Payroll administration process – what are the steps, and what do companies need to do?

Payroll processing can be complex to manage as there are a number of factors that vary and need to be taken into consideration. These include employee classifications, pay scales, terminations, and promotions. Having a checklist can help to make the process a much smoother one. These are the steps that you should take to complete the payroll administration process:

How to do payroll administration

  1. Ensure your data is clean

    Unclean data can lead to miscalculations, so ensure that you have all of the correct data before you start. Before you do the first payroll with a new member on it, make sure all their personal information and tax code are correct

  2. Check information from timesheets

    If you have a system in place, then this should check for inconsistencies in things like hours worked, employee type and pay scale; otherwise, you will need to check this yourself

  3. Know the total cost of your payroll

    Knowing how much each employee costs the business over their wages will allow you to immediately spot any issues. Remember to factor in gross wages, tax and National Insurance withholdings and benefits for each employee. SSP and statutory pay for parents, maternity / parental leave, bonuses, tips and pension payments will also need to be accounted for

  4. Create and distribute payslips

    Each employee must be given a payslip that shows their gross pay, any deductions, net pay, and the hours worked during the pay period in question. It may also include the National Insurance number and tax code, rate of pay and any deductions and pay for the year-to-date. You should be able to set this up using your payroll software, and distribution can be done electronically or manually

  5. Make payments and file any reports on time

    Tax and National Insurance must be paid to HMRC monthly based on the figures you reported on your FPS (Full Payment Summary) for the previous tax month, excluding any reductions from an EPS (Employer Payment Summary). It must be sent before the 19th day of the current tax month. There are financial implications of not completing this on time

  6. Complete any annual reports and tasks in order to prepare for the next tax year

    You should always make sure that your records are up to date. This will make things much easier for you as you go along

A note on National Insurance and Pension requirements

There is now a legal requirement for any company with more than one employee to offer a pension scheme to their employees. Whilst it may initially seem like this can cause a lot more work on the payroll front, once everything has been set up, it is a relatively straightforward procedure and one that can be done easily through most payroll software packages.

Pension contributions are not subjected to income tax, and an employer’s contributions are not assessable as any form of benefit in kind. But the employee will still need to make National Insurance contributions on their pension payments unless there is a salary sacrifice arrangement in place. 

Doing payroll administration in-house vs outsourcing to a service provider 

As with any decision that you make for your business, there are always a range of options available to you, and this is certainly true when it comes to payroll administration. If you are considering whether you should be doing your payroll administration in-house or if outsourcing would be a better option, we have put together a list of the pros and cons to consider.

Outsourcing means that you will not need to spend time on all of the time-consuming admin that is associated with payroll. This is an important consideration for any company that does not have a dedicated member of staff who works on the payroll and only that. It can be easy for other tasks to take over. A specialist payroll provider will also have access to the latest and best software which will make processing your payroll a much simpler process. 

Benefits of outsourcing to a payroll specialist
It is also worth remembering that a company that specialises in payroll will make sure that they are also always up to date in terms of any changes in the legislation regarding payroll, pension payments, National Insurance contributions and anything else that may affect payroll as well. This will ensure that your payroll is fully compliant with all the up-to-date legislation at all times.

Because a payroll administration company is providing a service to your company, it is in their best interests to ensure that your payroll is completed correctly and on time to ensure minimum disruption to your company and employees. This is what they do all the time for hundreds of companies. 

The thing that puts many companies (particularly smaller ones) off outsourcing their payroll is simply the cost. They believe, incorrectly, that doing payroll in-house will cost less. This is not true; it can actually cost more to get the appropriate software and have a dedicated member of staff than it does to outsource your payroll. It is also worth remembering at this point that mistakes in your payroll can also be costly to your company in terms of the payments that you need to make to HMRC.

Payroll administration services – what types of services are on offer from different providers?

With so many payroll administration services out there, it is understandable that there are a range of different services available. In general, you will find that payroll administration services offer part-managed payroll or fully managed payroll

Fully managed means that you will hand over all of the commitments associated with your payroll to a payroll administration company. This means you will not have to undertake any tasks related to payroll in-house. A part-managed service, on the other hand, means that you only outsource some of your payroll tasks. You should be able to choose which tasks you want to hand over for a payroll administrator to deal with. 

One final option that some payroll companies may offer is the ability to outsource payroll software. This option means that you will take care of your payroll in-house, and the payroll provider will make sure that you have the best software solutions in place to make your payroll as easy as possible.

Best payroll administration companies – review of the top 10 providers 

By now, it is easy to see that there are a number of options available when it comes to payroll providers, and even that there are a range of options to consider when looking for the right one for your company. Let’s take a look at ten of the best UK payroll providers to see what is on offer:

RankCompanyWhy it made the list
1Payroll OptionsIf you are a smaller business in search of a payroll provider, then Payroll Options are one of the best choices out there. They offer a simple and easy to use service at a very good price, and you may struggle to find something that will work better for you. This provider offers a no-frills, no-nonsense service
2BuzzacottThis company work with an incredibly varied range of clients, so if your business is somewhat niche and you require a specialist payroll provider, this is the one for you
3Jeffreys Henry LLPBased in London, this accountancy firm have a very well established history dating back to 1880 when the company was founded. Offering both fully-managed and part-managed payroll, they are a name to be trusted
4PayplusPayplus offer the guarantee if your employees are not paid on time and with the right amount, they will give you your money back, which gives an indication of how dedicated they are to providing excellent service and an understanding of how much accurate payroll matters to them
5Crystal HR & Payroll LtdFor a personal and friendly service, then Crystal HR & Payroll ltd are a company worth looking at. They offer specialist packages, including carer payroll, one person payroll and nanny payroll
6ADP PayrollAlthough this is a global company, they have excellent coverage in the UK and offer both Payroll and HR services, meaning you will be covered for the entire employee lifecycle (Read our ADP Payroll review)
7Just Payroll ServicesAs the name suggests, this company only deal in payroll, so this is all they will focus on and do it incredibly well into the bargain. They offer both full and part-managed options
8MHRTo put it simply, MHR uses great technology to deliver payroll. In fact, iTrent is one of the best software’s out there, offering a central business hub for all of your employee data
9PayescapeAnother London based company, Payescape offer an incredibly streamlined solution that has been put together to make things as easy as possible for smaller businesses. They use a cloud-based software system to ensure the security of their client’s data
10MoorepayWith over 10,000 UK customers, this is an incredibly popular choice, and they have over 55 years of experience to boot. They offer a range of tailored packages with something to suit every type of business and ensure each customer gets exactly the type of payroll service they need. (Read our Moorepay review)
Best payroll administration companies

Payroll administration costs compared – how much do payroll administration companies charge? 

It is important to note that costs for payroll administration services will vary from one company to another and also between what you might expect to pay in-house in comparison to outsourcing. The type of service, your location and even the amount of employees you have will also have an impact on the cost. 

When making a comparison between different payroll administration companies, you should look at things like base charges which can start at around £35 – £39 per month for the more basic service, rising to around £150 for a more comprehensive payroll package. There is also a charge for the number of employees that you have on payroll, and again, this will vary from one company to another. However, you should expect to pay approximately £4 per employee

One thing you should ensure you are aware of when comparing payroll administration providers is exactly what you are paying for. Some companies offer a flat fee package that covers everything whilst others will only charge you for what you need; if you don’t need everything, then you could be wasting money. 

If you see the need to purchase payroll software, then you may also need training for your company. You will also need to factor this into the cost when deciding which is the best option for your company. 

Payroll administration software – what are the leading products, and how do they compare?

There are a range of leading products available to companies when it comes to payroll administration software, including packages from Sage Business Cloud Payroll, KashFlow Payroll, Intuit Payroll, Xero Payroll, HMRC Basic PAYE Tools, IRIS Payroll and FreeAgent.

RankSoftware nameWhy it made the list
1Sage Business Cloud PayrollA very user-friendly system that is fully HMRC compliant, this is one of the easiest packages that you will find out there for the full in-house payroll solution. It offers all the latest payroll features and has its own built-in payslip printer. (Read our Sage Payroll review)
2KashFlow PayrollA simple cloud-based product KashFlow allows you to manage all of your payments efficiently. It can also produce reports and complete things like RTI’s and holiday pay with ease. Great for its robust reporting and customisable software. (Read our Kashflow Payroll review)
3Intuit PayrollIf you want the added feature of extra support, then Intuit Payroll is a great choice with its 24/7 support and video call support in case you encounter any issues. It offers great tools allowing you access to things like HMRC submissions, payslip printing and automatic enrolment
4Xero PayrollThis is a flexible cloud-based solution offering a single location for payroll, pensions and finances. It offers real-time bank feeds, and with constant upgrades and account advisors, you are always in the best hands. (Read our Xero Payroll review)
5HMRC Base PAYE ToolA free option for UK organisations, this is not necessarily the best choice for every company; however, it does offer features like National Insurance number verification, full summaries and the ability to calculate apprenticeship levy. It is also HMRC compliant
6IRIS PayrollIf you want to cut your administration time, then this could be the software for you. It automates your payments, helping to ensure you are on time. It is easy to use, and the company offer telephone assistance with any problems that you might be having
7FreeAgentArguably one of the best payroll software solutions you will find, FreeAgent means there is no need for you to use multiple systems for your accounting and payroll. It offers all of the accounting and payroll functions that you could need and features constant updates. It is also surprisingly easy to learn to use
Best payroll administration software

Common mistakes to avoid with payroll administration

Once you have set up your payroll administration, it should be a relatively straightforward process to keep on top of any changes on a regular basis. However, there are a number of common mistakes that can occur, and it is important to make sure that these are avoided:

  • Misclassifying employees – when employees are misclassified, this can lead to incorrect payments
  • Miscalculating pay – common miscalculations include:
    • Over or underpaying employees
    • Making erroneous retroactive payments
    • Missing the first payroll for a new employee
    • Deducing the wrong amount for payroll deductions, including benefits
    • Improperly processing payments for employees on leave or some form of disability
  • Not tracking employee overtime and hours
  • Not reporting all types of employee taxable compensation
  • Incomplete or badly organised records
  • Missing important deadlines
  • Having incorrect P60 details

FAQ

What is payroll administration?

Payroll administration is all the tasks that ensure that employees will be paid. It involves processing salary and overtime payments, expenses claims, commission payments and ensuring that everyone’s salary is paid in a timely fashion and to the correct amount. It also refers to ensuring that records pertaining to employees, the details that allow these payments to happen correctly are kept up to date.

What does a payroll administrator do?

Payroll administrators process employees’ wages. They are responsible for creating, storing and maintaining payroll records for all employees – this means details of attendance, timesheets, hours worked, and even the relevant pay grade information.

What is involved in payroll administration?

Payroll administration requires meticulous attention to detail, keeping accurate records and ensuring that they are regularly updated, and due to the nature of the records in question, a good level of discretion for employee personal details. The ability to ensure that you are also up to date on any industry and regulatory changes is also a must.

How much does payroll administration cost?

The rate that you will pay for payroll administration will vary depending on a number of factors. These include where you are located in the country, the number of employees you have, and the sort of service that you are looking for – fully managed or part managed services will cost very different amounts. In general, most companies expect to pay £4 for each employee on their payroll per month. This cost can increase, however, usually in line with the type of service that you need.

What is the best payroll administration software?

With a significant number of payroll administration software’s available, it can be hard to know which one to select. Remember that the best one for your company is one that will fulfil all of the requirements you have and may not necessarily be the software that is best for another company. Software to look at includes Sage Business Cloud Payroll, Kashflow Payroll, Intuit Payroll, Xero Payroll, HMRC Basic PAYE Tools, IRIS Payroll and FreeAgent.

What is the best payroll administration company?

The UK has a good number of fantastic payroll companies. Because requirements will vary from one business to another in terms of what they need from a payroll administration company, there is no easy way to suggest which is the best, but rather which is the best payroll solution for each individual business. Consider the services that you need from a payroll provider and also see which ones have worked with companies like yours before making any decisions. Some of the names to take into consideration include Payescape, Moorepay, MHR, Buzzacott, Crystal HR & Payroll ltd, ADP Payroll Jeffreys Henry LLP. Payplus and Just Payroll Services. 

Important – The information provided in our articles is intended to be for general purpose use only, and not advice for you or your business. We strive to publish accurate information, but encourage you to fact-check and seek expert guidance. We recommend that you always speak to a qualified professional to get advice about how to operate your business under your specific requirements and circumstances.