Payroll administration: a comprehensive guide to managing employee compensation

Introduction

The term ‘payroll administration’ refers to the administration of expenses and payment of wages to employees within an organisation. It also incorporates withholding employee benefits such as pensions, reporting taxes to HMRC, and compliance with UK tax and labour laws.

If your record keeping isn’t up to scratch or your processes aren’t in line with UK laws, you’ll risk penalties for non-compliance or legal repercussions. In 2023, HMRC imposed £7 million pounds in penalties on the UK’s biggest retailers for breaching their payroll rules, suggesting that no company is immune from HMRC's robust payroll investigations.

Managing payroll can be labour-intensive, and keeping up-to-date with payroll legislation can be challenging. In this article, we’ll explain everything you need to know about payroll administration.

The basics of payroll administration

Payroll administration is a broad-stroke term that basically means administering employee pay and managing their employee financial records (including salaries, wages, bonuses, deductions, and taxes) and complying with UK tax and labour laws.

Employers must adhere to UK legislation, including the National Minimum Wage and National Living Wage, data protection laws like GDPR, and tax laws. Compliance ensures timely and fair payment to employees for their work and helps organisations avoid legal penalties.

Payroll administrators are usually responsible for managing these processes. Their responsibilities include recording pay, calculating deductions, generating payslips and being the first point of contact if there are any discrepancies in income, expenses or benefits.

It’s also their responsibility to keep precise, up-to-date records. They often work with payroll specialists to ensure everything is on track.

Setting up payroll systems

Choosing the right payroll solution for your organisation is essential to get things running smoothly. Consider the following aspects when making your decision.

• HMRC-recognised software: Opt for HMRC-recognised payroll software for frictionless reporting and compliance.
• Essential features: Evaluate software features and how they fit with your needs. Consider functionalities like PAYE reporting, automated deductions, PAYE reporting and flexible pay scheduling.
• Company reputation: Choose a verified payroll system provided with demonstrable experience. Read customer reviews and evaluate their client base.

Having clear communication and transparent policies can swerve any confusion and errors when setting up your payroll systems. Consider the following when setting up yours:

1. Documentation: Create a payroll manual that includes guidelines for employees on tax withholding, overtime, pension, and leave calculations.
2. Compliance: Adhere to UK employment laws, covering areas like minimum wage, statutory sick pay, and parental leave.
3. Communication: Educate employees about payroll processes. Explain how they can access payslips and report any discrepancies to payroll staff.
4. Accessibility: Ensure teams can access documentation quickly and understand the process–and are able to communicate any issues. Self-service helps to smooth the process.

One of the most critical aspects of payroll (especially for your employees) is timekeeping and pay frequency.

Decide how often you plan to pay your employees (weekly, monthly) and communicate this clearly to your workforce. Establish strict deadlines for submitting timesheets and expenses, and clarify when employees can expect to receive their salaries from the outset.

Managing employee compensation

Payroll isn’t just about paying people. Unfortunately, it’s much more complicated than that and requires in-depth knowledge about salary, tax codes and deductions. These are some things to bear in mind when managing employee compensation:

1. Your employee's salary is a mutually agreed amount paid to a worker and divided into periods. Salaried employees will receive the same base salary each month unless they’ve worked overtime (beyond usual working hours).
2. Deductions are withheld from this salary, also known as ‘witholdings’. These include income tax (PAYE), National Insurance Contributions (NICs), pension contributions, and student loan repayments. The employer must deduct these amounts from the employee's salary and remit them to HMRC.
3. Benefits should also be treated as deductions. These usually include performance bonuses and profit sharing but vary from company to company.
4. Reimbursements are paid to employees to refund any expenses incurred while performing job duties (for example, travel expenses or purchasing office equipment).
5. Allowances are additional, pre-agreed payments for things like housing and food. These should be treated carefully to stay on the right side of payroll legislation.

Payroll administrators should also be mindful of labour laws and regulations, including the Employment Rights Acts, which define employee classification and holiday and sick leave entitlements. The National Minimum Wage and the National Living Wage should also be taken into account, as should GDPR, which preserves employee data privacy.

Your first step will be to register as an employer with HM Revenue and Customs (HMRC) to pay taxes and NICs. You’ll need to submit payroll information to HMRC via Real Time Information (RTI) reporting, remitting tax and NICs owed to HMRC.

Taxation and compliance

The employer is responsible for deducting income tax and NICs, and any withholdings are based on an employee’s earnings and tax codes. HMRC also requires that you pay your employees the minimum wage, use the correct tax codes, and comply with auto-enrollment rules for workplace pensions.

Employers need to ensure they’re making the right calculations and are required to submit regular payroll reports to HMRC that detail their calculations. These reports are usually submitted using HMRC’s Real Time Information (RTI) system. HMRC uses these to track tax liabilities, so staying up-to-date with any changes and updates in tax laws is helpful.

Payroll administrators should be adequately prepared for the risk of tax investigations. These can happen at any time, and you could be selected totally randomly, or trigger investigation due to errors or discrepancies in your reporting.

You must keep up-to-date records, including payroll and employee data and your tax calculations, and respond quickly and cooperatively to any requests from HMRC during the auditing process.

As part of your employee onboarding, it’s important to collect verifiable details for your employees, including their full name, address and National Insurance Number. Employee management software can help you streamline this process with data collection workflows that improve accuracy and provide reminders for missing data.

As a payroll administrator, you process payroll runs based on the pay schedule you’ve decided upon and agreed upon with your teams and generate payslips accordingly. You must also ensure that payslips are delivered securely by email or a self-service portal.

Some rules dictate how payslips are generated, and they should include the following:

• Employee’s name
• National Insurance Number
• Gross pay
• Pay period
• Deductions
• Net pay (take-home pay)
• Employer and employee contributions
• Additional benefits and allowances

Dealing with payroll challenges

Payroll comes with a plethora of challenges. Naturally complex and prone to human error, ensure you onboard your employees to your HR system accurately to avoid discrepancies. Make sure you’ve clocked the correct tax code for your employee, plus classifications, exemptions and pay rates. HR software can help streamline this process, helping you to avoid issues further down the line.

Keep communication channels open so employees feel able to approach you with queries or disputes about their pay. Resolving issues quickly helps to develop a positive work culture where employees feel valued.

A huge challenge is staying compliant. Schedule regular updates to your payroll processes in line with evolving laws, and make sure your teams have the proper training they need. If any mistakes comes up, deal with them promptly to avoid legal challenges.

Payroll automation and technology

You need payroll software that streamlines these complex processes, avoiding human error and ensuring that your people are paid the right amount and on time.

Payroll software automates the calculations for you, accounting for any withholdings and making the process run like clockwork. ADP has been helping businesses like yours automate all or part of their payroll processes for over 70 years. That gives you more time to focus on your business, not tricky payroll legislation.

Any payroll software you choose should be able to integrate easily with HR and accounting systems to provide a streamlined, holistic solution that automates much of the grunt work, resulting in error-free consistency across several functions.

Payroll administration best practices

To get the most out of your payroll system, it’s good to stay informed about best practices. Essentially, data accuracy, security controls like protected access, audits, and legal awareness help your payroll system function like a well-oiled machine. Payroll software can handle the tricky stuff, like alternating work schedules and alternative shift patterns. Make sure you stay compliant with UK labour laws and tax legislation and maintain a protected internal system where you store information securely. Regular audits help you stay on top of things and ensure accuracy and compliance, minimising risks.

Future trends in payroll administration

Payroll processes are always evolving, and with the advent of AI, we’ll see things become even more streamlined. Predictive analytics uses data and machine learning to predict future outcomes, which can help flag up future risks.

In the context of payroll, this can help your workforce strategy, identifying potential talent gaps and increasing retention. Distributed workforces are another trend that requires robust payroll systems adaptable to different work patterns and time zones. With its advanced encrypted data security, blockchain technology will be a boon for employers looking towards intelligent technology solutions to improve accuracy and security.

Conclusion

It’s hard to understate the importance of payroll administration. Payroll systems ensure that your people get paid on time and correctly while keeping you compliant.

Ensuring compliance with tax and labour laws can be a massive burden, and organisations that don’t have the resources or expertise to run payroll themselves might benefit from seeking professional assistance from a third party.

Payroll software can run your payroll simply and way more effectively, saving you time and avoiding costly, manual errors. Outsourcing your payroll could be an even better solution for your organisation.

Whether you need an HR solution, payroll software, or managed payroll services, ADP has been helping businesses just like yours streamline payroll for over 70 years. Our award-winning payroll outsourcing services combine your payroll and human resource information systems (HRIS), and thousands of payroll experts are available to answer any questions.

Our human capital management (HCM) software brings together HR, payroll, time, talent, tax and benefits in one intelligent Human Resource Management (HRMS) solution to maximise the potential of your employees. Find out more about how ADP can help your business manage its payroll more effectively.