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How to run payroll without software

Interested in automated payroll processing?

Published on 3 June 2024 - Reading time: 9 - 11 mins

Paying Your People
How to run payroll without software

From paying employees to managing taxes, processing your payroll can be a real headache without automated solutions — not to mention both time-consuming and error-prone. Indeed, a staggering 19 percent of U.K. workers are often paid late or incorrectly on a regular basis¹.

That might sound daunting but manual payroll can be a cost-effective solution for many smaller businesses. So, let’s take a closer look at exactly what manual payroll entails and find out how you can run your payroll without payroll software.

Table of Contents

Understanding payroll essentials
Payroll options
Setting up payroll
Manual payroll calculation process
The benefits of payroll software
Manual payroll vs payroll software

Understanding payroll essentials

Running payroll is non-negotiable for any business owner. After all, you’re legally responsible for withholding the correct amount of income tax and contributions from employee pay. But before we can run, we need to walk. So, let’s quickly brush up on the payroll essentials.

The payroll process begins by calculating how much your employees have earned based on various information, including their salary and hours worked. You then need to make certain payroll deductions, including income tax, National Insurance, etc. and send these to HM Revenue & Customs (HMRC). Lastly, you’ll also need to produce payslips and keep detailed records.

Top tip: the U.K. Government provides a lot of useful information on running payroll.

Payroll options

There are three basic approaches to payroll. However, you can combine them for a more balanced, hybrid approach. Here are your three payroll options:

Manual payroll: running payroll manually can be cost-effective but also time-consuming and prone to human error.
Payroll software: payroll solutions automate the process to help minimise errors and save time.
Outsourcing: payroll service providers can handle all your payroll tasks for a more hands-off approach.

Setting up payroll

Before you can get your chosen payroll system up and running, there are a couple of tasks you need to complete, including:

Registering as an employer

First, you need to let HMRC when you start employing staff. Although the process is straightforward, keep in mind that it can take up to 15 days to get your PAYE reference number and login. You can start the application up to eight weeks before you pay anyone for the first time.

Deciding on pay dates

Next, you need to decide when you’ll pay your employees. Most companies pay their employees monthly, typically on or around the end of the month. Don’t forget that under the Employment Rights Act 1996 you must pay your employees on your agreed payday.

Checking your responsibilities

Lastly, you need to check automatic enrolment for workplace pensions. Under the Pensions Act 2008, all employers must enrol eligible staff in a pension scheme and contribute. Your legal duties start when you hire your first staff member, so it’s important to understand your obligations, including completing a declaration of compliance.

You can find more information about setting up payroll on the U.K. Government’s website. Bear in mind that HMRC advises payroll software if you decide to run payroll yourself.

Manual payroll calculation process

Although manual payroll can save you the cost of payroll software, it’s important to remember that it requires meticulous attention to detail and in-depth knowledge of relevant laws and regulations. What’s more, it’s often difficult to scale.

Nevertheless, manually calculating payroll can be a practical approach for both small businesses and startups operating on a tight budget. For example, if your business has fewer than 10 employees, manual payroll can be a viable and cost-effective solution.

Here are seven steps to calculate your payroll manually:

Step 1: Collect employee data

The first step in the manual payroll process is to gather information from your employees, including:

Personal information:

Forename(s) and surname
Date of birth
Address
Gender
National Insurance Number (NINO)
Tax code (on the employee’s P45)

Employment details

Hours worked (including regular hours and overtime)
Contracted salary
Type of employment (full-time, part-time, freelance, etc.)

Top tip: you can simplify this process by creating a payroll ID system. Simply assign a unique payroll ID to each employee to help you better track your records and protect employee privacy.

Keep in mind that accuracy is vital when collecting employee information. Manual payroll systems depend on proper record-keeping, as correct and up-to-date information helps you avoid any issues with tax returns or payments.

Step 2: Calculate gross pay

The next step is to work out how much each employee has earned based on their hourly rate or agreed salary, including other income sources such as bonuses and commissions. Bear in mind that gross pay will be different to calculate depending on employment type. For example:

For hourly employees, you can calculate gross pay by multiplying the hourly rate by the total number of hours worked in the pay period.
For salaried employees, gross pay is simply the agreed amount they earn in each pay period (fixed salary)

Step 3: Calculate deductions

Once you’ve worked out gross income, it’s time to tackle deductions. Deductions are a critical part of payroll and include income tax, National Insurance contributions, pension contributions and student loan repayments.

Here’s a quick overview of what you need to know for each type of deduction:

Income tax: you’ll need each employee’s tax code and the latest tax rates (or tax calculator) and thresholds from HMRC to calculate the correct amount of income tax to withhold from your employees’ pay.
National Insurance: National Insurance Contributions (NICs) are based on gross pay and employment type. You’ll need each employee’s National Insurance category letter to get started. Remember to calculate employee and employer contributions separately.
Pension contributions: you should deduct any pension contributions after National Insurance but before tax. You’ll also need to pay any employer contributions into your employee’s pension.
Student loan repayment: you can work out how much an employee needs to pay — and therefore how much you need to deduct — based on your employee’s student loan plan. It’s typically between six to nine percent of their income.
Voluntary deductions: these deductions are agreed between employee and employer. Charitable contributions are the most common. For example, employees can donate to charity directly from their pay before tax is deducted using Payroll Giving.
Union membership: any employees who are members of a trade union may have their membership fee deducted directly from their salary. This typically also needs to be agreed between the employee and employer.

Step 4: Calculate net pay

Now that you’ve worked out both gross pay and deductions, calculating net pay is easy. Simply subtract all deductions from gross pay. If you’re unsure you can check your payroll calculations using various calculators and tax tables provided by the government.

Step 5: Send out payslips

Once you’ve worked out your employees’ take-home pay, it’s time to send out payslips. In the U.K., payslips must contain certain information, including pay before deductions (gross pay) hours worked, pay after deductions (net pay) and the total amount of deductions withheld.

Although not mandatory, you can also include National Insurance numbers and tax codes on employee payslips. Just remember that payslips must be provided to employees on or before their payday — whether as physical or digital copies.

Step 6: Report to HMRC

Once you’ve made all your calculations and deductions, you need to inform HMRC of what you’ve paid your employees and what you’ve deducted. Send a Full Payment Submission (FPS) before or on your employees’ payday, making sure to include all employees.

After you’ve sent the FPS, you can view what you owe HMRC in tax and National Insurance and claim reductions. Note that you must pay the balance by the 22^nd of the tax month. However, you can also put right any errors with a corrected FPS and report additional information, for example, new employees or departures.

Step 7: Keep records

Keeping records of each employee’s pay is essential when running payroll. Not only does it help you stay compliant and avoid hefty fines, but it also makes your tax returns easier and budgeting more accurate. We recommend documenting every detail, including dates, employee information, gross pay, deductions, etc.

It’s also important to note that there are certain legal requirements when it comes to maintaining personal information, tax records and National Insurance contributions for employees. For example, you must keep PAYE records for three tax years and auto-enrolment records for at least six years.

The benefits of payroll software

The steps detailed above will help you manage your payroll without software. However, as your business grows investing in reliable payroll solutions can save time and money whilst also reducing the risk of both errors and non-compliance.

For small businesses, HMRC’s free basic PAYE Tools are a good starting point, but they may not cover all your needs as your business expands. As such, payroll software is essential to help small and medium-sized enterprises, as well as large businesses, run their payroll smoothly.

Here are three ways payroll software can save time and money for your business:

Automation

Payroll software can significantly reduce the time your team spends on manual tasks by, for example, calculating deductions. Automation also helps minimise human error for a more accurate and consistent payroll process.

Integration

You can connect payroll software with other systems such as accounting software. Integration not only keeps data accurate and up to date across all financial systems, but it also saves time — no more manual data entry or time-consuming updates.

Security

Payroll solutions can help improve your data security. With high-level encryption and security protocols, payroll software helps keep sensitive employee information — including personal and bank account details — safe and sound.

Manual payroll vs payroll software

Manual payroll is often complex and time-consuming, with many companies often struggling to maintain accurate records and comply with legal standards. It’s no surprise then that HMRC now requires employers to get payroll software that reports PAYE information online.

ADP provides intuitive, scalable and HMRC-recognised payroll solutions to meet the unique needs of your business. Find out how our payroll software can take your payroll process to the next level.

¹ADP People at Work 2022: A Global Workforce View

Challenges

Sage needed a solution fit for a large organisation
Sage was using 14 separate payroll solutions globally
Consolidating the disparate processes into one unified solution
Every country has its own set of rules, regulations, banking systems, and compliance requirements
Operating globally creates challenges for global businesses

How ADP Helped

Sage chose to use ADP Global Payroll for its large headcount and its smaller headcount countries.

ADP’s cloud-based Global Payroll platform makes it easy for companies such as Sage to run global payroll by using a single system of record to unify employee data while accommodating local payroll rules to run compliant payroll.

ADP Global Payroll, meanwhile, was perfect for the smaller territories as it helps HR and payroll professionals run multi-country payroll, while providing easy access to data. ADP Global Payroll easily handles changes, calculations and reporting by standardising international payroll processes and providing a tool that supports clients in meeting their compliance obligations.

ADP Solutions

ADP^® Global Payroll

Sage has successfully transformed its payroll growth strategy by adopting a partnership approach with ADP^®

Founded in a Newcastle pub 40 years ago, millions of small and mid-sized businesses (SMBs) around the world are now served by Sage and its partners. Customers trust its finance, HR, and payroll software to make work and money flow. By digitising business processes and relationships with customers, suppliers, employees, banks, and governments; Sage’s digital network connects SMBs, removing friction and delivering insights.

Take a new look at pay

Global Payroll and People Projects Director Charlotte O’Driscoll joined Sage four years ago and was tasked with setting up a unified global payroll strategy for the company. It was something she immediately relished. “Payroll is the only function that touches every employee, every month. As such, picking the right solution is key,” she explains. “Whilst Sage makes great payroll solutions for SMBs, these are not the solutions that we can use internally due to our size. I wanted to change to a strategy that would best suit the business on our current growth plan.”

Sage needed a solution fit for a large organisation that would give it control and consistency. However, the outcome of the analysis performed showed that Sage was using 14 separate payroll solutions globally. Sage knew

that consolidating the disparate processes into one unified solution was needed to minimise the amount of support required and leverage unified capabilities of a central payroll solution.

The challenges

Because every country has its own set of rules, regulations, banking systems, and compliance requirements, operating globally creates challenges for global businesses such as Sage to run a secure payroll. “We didn’t want to have a fragmented model with multiple systems in multiple countries” explained Charlotte. “Whilst many vendors claim to have a global solution, very few do so in reality. Even those that do rarely have proven performance within multiple countries, struggle to remain up to date with the constantly changing legislative landscape within them.”

In addition to a supplier’s global expertise, Charlotte wanted to ensure that the selected supplier had a high level of customer service and could boast the upmost security posture. “I needed to be able to trust them” she said.

The solution

Sage went through an exhaustive process to identify and assess available payroll solutions on the market. There was one clear winner. “We went with ADP. It is the market leader in terms of multi-country payroll operations and has a highly scalable solution so can expand and adapt to the needs of our business,” said Charlotte. This was key, as Sage is on a significant merger and acquisition drive that is likely to continue in the years to come.

The company chose to use ADP Global Payroll for its large headcount and its smaller headcount countries. “Using ADP Global Payroll means that we have the best and ensures we have the optimal solution within each country” commented Charlotte. “For example, in the smaller headcount countries, we still need to ensure compliance with local legal requirements, yet are unlikely to have the payroll specialists and expertise in those countries ourselves.”

ADP’s cloud based Global Payroll platform makes it easy for companies such as Sage to run global payroll by using a single system of record to unify employee data while accommodating local payroll rules to run compliant payroll.

ADP Global Payroll, meanwhile, was perfect for the smaller territories Sage operates in as it helps HR and payroll professionals run multi-country payroll, whilst providing easy access to data. ADP Global Payroll easily handles changes, calculations, funding and reporting by standardising international payroll processes and providing a tool that supports clients in meeting their compliance obligations.

Both solutions provide staff with a portal they can use to log on to view their pay statements and tax information. Something that proved extremely popular and helped gain stakeholder buy-in.

The results

Sage understands that it is always advantageous to have less vendors (and contracts) to manage. ADP provides a single platform right across the business. As well as easing continuity planning, it means that Charlotte and her team can now run global reports with minimal effort. “ADP provides us with sight across our entire business, which we didn’t have before. Through the process we discovered a number of security risks we were carrying within the business that we have been able to eliminate.”

Due to it enjoying standardisation across its global payroll processes, Sage’s resource requirements are now minimal. “By moving to a single solution from ADP, standard processes and a standard control framework means the only things left to deal with are country specific. This makes it much easier to support and maintain. Plus, by automating more data flows, has removed several manual processes that were previously prone to human error,” commented Charlotte.

Sage has been impressed with the service it received from ADP throughout the project. “Having the right team in place massively contributes to the success of any implementation. ADP ensured that was the case,” enthused Charlotte. “The team has been fantastic and a true partner to us in our payroll transformation journey. They have been very flexible throughout the three-year phased rollout and allowed us to make changes where necessary.”

The core change was to move from initially processing payroll in-house to a managed service from ADP.

“Data from payroll is really valuable to any business. By working with ADP, Sage now has a more global strategic view of the organisation and an effective governance model,” added Charlotte. “Both tools are great to work with and have really impressed me. ‘Whilst the benefits with each country have varied, internal productive and resource savings (30% reduction in headcount) has all helped achieve our overall goal of having a robust and compliant solution at a neutral investment.”

How to run payroll without software

Understanding payroll essentials

Payroll options

Setting up payroll