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Payroll software

Using payroll software can speed up the process of calculating pay accurately,
and making payments on time. It can reduce the burden of understanding
complex payroll legislation and payroll systems operation. As a consequence, it
can also reduce administrative costs.

Payroll is a business-critical operation for every organisation - people must be

paid accurately and on time. It is therefore essential to train staff properly, and
implement procedures and disaster recovery plans to ensure payroll system
continuity.

It is important to select a reliable supplier. Unlike most other business functions,

you are dependent on a payroll supplier not only for training, support and help if
things go wrong, but also for regular updates when tax and other figures change,
and when there are alterations to legislation.

The advantages of payroll software

The most obvious benefit of payroll software is that payroll calculations - such as
tax and National Insurance deductions - can be completed in a fraction of the
time that they take to work out manually. Year-end reporting is also usually
automated, and both payslips and annual reports are archived in case copies are
needed later.

Time recording

Payroll systems can also incorporate, or integrate with, timesheet systems that
record employee attendance or time worked. In this way, information about
hours worked, whether collected automatically as a user or operator logs into a
system, or manually entered into an electronic form, can be automatically
transferred into the payroll system.

Reporting

Using basic payroll data, together with data on attendance and hours worked,
payroll systems can provide a wealth of reports. This allows in-depth analysis of
staff costs for the business as a whole, across departments and even individual
jobs and contracts.

Storing personnel records

Most organisations will also keep other data about employees, such as records of
annual leave. This type of information is usually associated with the broader

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human resources function. You can get payroll systems that will record these
additional types of information, avoiding the need for a separate software
package.

Planning

The ability of payroll packages to provide forecasts means you can plan staff
costs and budgets by entering hypothetical numbers to see the exact total cost of
an employee.

Assess the business requirements for payroll software

Not every business needs payroll software. If there are no complications, and if
the business is relatively small, manual payroll calculations can be quite
straightforward.

Bought software versus HM Revenue & Customs (HMRC) CD-Rom

Whether or not you need to buy software depends largely on the size of your
business. If you only have a few employees, the cost of the software may
outweigh the time you save using it.

Payroll software usually requires an annual subscription, in addition to the initial

purchase cost, in order to obtain regular updates to tax and National Insurance
rates, and information on changing legislation that can affect payroll
calculations.

HMRC now offers a basic calculator for tax and National Insurance contributions,
and provides this free of charge to all employers, on CD-Rom. Although this
cannot yet replace either a manual or computerised system completely, it can
save time in producing payroll calculations and may be sufficient for some
smaller businesses.

Who will use the software?

When choosing the best option for you, consider the expertise available within
your business. For example, who handles your payroll when the company
accountant is absent? You may find it easier to train someone else to operate the
basic payroll run if they have the benefit of a suitable software package, rather
than having to carry out the calculations manually.

What will happen if there's a problem?

You should also consider business continuity. If you manage payroll using a
computer, that computer will become business-critical. Therefore you will need
to plan support, back-ups of data and disaster recovery plans. It is always
possible to revert to a manual system if there is an emergency, but you should
be aware that using payroll software makes you reliant on your computer
system. See our guide on business continuity planning in IT.

Payroll software capabilities

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Payroll software can do many pay-related calculations. However, you will still
need to input and maintain certain data for each of your employees.

What payroll software can do

Any payroll software will take over the routine calculation of ordinary payroll
requirements such as tax and National Insurance contributions (NICs). It will
also calculate the NICs that you have to pay as an employer. It will allow you to
pay people at monthly or weekly intervals, as appropriate.

Payroll software will also:

calculate student loan and other deductions

produce payslips for your employees
produce payment reports to allow you to pay employees, showing the amount
to be paid to each employee
keep records of payments and deductions
produce year-end reports and documentation for you and your employees
produce the necessary figures or documentation when an employee leaves

What payroll software can't do

While payroll software will do automatic calculations for you, there will still be
administrative work for you to do.

In addition to inputting an employee's details when they start their employment,

you will need to make changes when their rates of pay increase or decrease. You
will also need to change tax codes when notifications are received. You may also
need to enter details of hours worked and overtime.

There are also many possible deductions from pay such as employer loans and
pensions. Even if the software can automatically calculate some or all of these,
you will still need to key in the details for each employee to whom they apply.
This information will have to be updated when appropriate.

Payroll software operation

Once computerised, the payroll function should be operated by someone
with appropriate knowledge and training. The operator will need to understand
the relevant accountancy practices and statutory requirements, especially if you
plan to use manual operation in the event of a system failure. See our guide on
pay - an overview of obligations.

Back-up plans

You need a back-up plan for when the usual operator is ill, on holiday or
otherwise unavailable. Alternatively, you may want to consider making
arrangements for your business' accountants to provide emergency cover.

You should have back-up copies of the payroll data, of which at least one should
be stored off-site and with appropriate security, eg in a fireproof safe. You may
find it most practical for both security and continuity purposes to run payroll

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software on a dedicated computer and printer to avoid any disruption to the

payroll system by the failure of other software. See our guide on business
continuity planning in IT.

Privacy

You need to comply with the Data Protection Act 1998, even if your use of
personal data does not require you to register with the Information
Commissioner. You must keep only essential information - it should be kept
securely for no longer than is necessary, in order to preserve confidentiality and
prevent unauthorised access. See our guide on how to comply with data
protection legislation.

Access to payroll information should be controlled using appropriate passwords

and, ideally, physical protection such as an office to which access is restricted.

Similarly, you will need to secure paper-based information, such as payslips,

probably by employing physical security, eg keeping them locked away. Trial
runs and tests, such as a payroll reports run to check that employee data has
been entered correctly and that calculations are being performed correctly,
should be destroyed.

Security

There are additional security measures you may need to take. If possible, at
least two people should be involved in managing the payroll process, from
inputting data to authorising the payroll run. Actual payments should only be
made with whatever authorisation is usually appropriate in your business.

Comprehensive, accurate and timely reporting can help to reveal any

discrepancies, such as mistakes in inputting hours, rates of pay and other data.

Payroll software functionality

Any payroll software will carry out basic calculations for pay, such as tax and
National Insurance deductions. However, if you need to make other deductions
you should check that any payroll software you use can handle these.

Pay intervals

Weekly and monthly pay intervals are standard, but if you have different
requirements you should check that these are supported. You may also want to
check whether the software can handle pension scheme administration.

Multiple usage

Smaller businesses may only require support for a single payroll operator at a
time, but you should check that multiple user operation is available just in case
you need it in future.

Reporting

Some basic end-of-year reports will be included as standard, but check that

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everything you need is supported. If necessary, look for a package that will
calculate and prepare P11D forms and provide the relevant figures to give to
employees to allow them to complete their tax returns. See our
guide: introduction to Self Assessment.

Data presentation

All payroll software will tell you the amounts that need to be paid to employees
and HM Revenue & Customs (HMRC), but check that this information can be used
in a way that meets your requirements. For example, you may want the software
to print cheques for you, or just to give you figures to help write cheques
yourself or use for electronic payment.

Personnel records

Additional features may include the calculation and recording of holiday

entitlements, self-service to allow employees to request or book annual leave
online, and tracking sick leave.

In addition, some packages may be able to keep records such as job position
history, previous employment history, education and academic qualifications,
references, skills and competencies and training records.

Integration

Integration with the main accounting system to enable payroll costs to be

automatically transferred is highly desirable. Expenses information is required to
complete P11D forms, so it helps if the payroll system offers or integrates with
expense reporting systems. If the system can record information regarding car
administration, this can also help with the preparation of data used in completing
P11Ds.

Reporting and analysis using payroll software

At a minimum, payroll software must produce payslips. However, it is also useful
if you can run pay and personnel-related reports.

Payslips

Before you acquire any software, check whether it can print onto normal
stationery or whether a special size or pre-printed stationery is required, and if
so, how much it costs. It usually makes more sense to print any necessary forms
directly onto blank paper or labels if the quantities are small. It can also be
useful to be able to reprint payslips in the event of a problem.

Check whether the software needs special stationery for employee P60 forms at
the tax year-end. Again, printing the form onto plain paper is often the better
option. For more information on P60s, see our guide: introduction to Self
Assessment.

To ensure privacy, payslips should be printed on a printer that employees do not

have access to. In some cases, you may prefer to use security stationery that

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cannot be read until opened by the recipient. If this is important, you should also
check that the software is compatible with such stationery.

Reports

Payroll systems will provide information either on paper or electronically to

update nominal ledgers, and a whole range of other reports are possible. Some
will allow a high level of detail in the information passed to the ledgers, allowing
accounting to distinguish between departments, managers and even individual
jobs.

Software can also report on compliance with National Minimum Wage legislation
and, if time and attendance information is recorded, the Working Time
Regulations. For more information on these, see our guides on understanding
national minimum wage law and hours, rest breaks and the working week.

If sickness and holidays are recorded in the payroll package, then these can
readily be reported on too, together with other absences such as maternity,
adoption and paternity leave.

Choosing a payroll software supplier

Payroll software is extremely complex and it is essential that you choose a
dependable supplier. Check that the supplier is successful, financially viable and
can provide excellent references. These factors should take precedence over the
temptation to choose existing suppliers.

HM Revenue & Customs (HMRC) accredited software

Ensure that software is accredited under the HMRC Payroll Standard

Accreditation Scheme. This scheme covers accreditation in:

calculation of tax and National Insurance contributions

electronic exchange of HMRC returns and payments
customer service
handling of statutory records, credits and deductions

The Scheme is updated regularly and all software packages are tested annually
to ensure that they remain compliant with current legislation. Find out about the
Payroll Standard Accreditation Scheme on the HMRC website - Opens in a new
window.

An alternative is to use the HMRC Employer CD-Rom, which comes as part of the
New Employer Starter Pack. You can order the pack by contacting the HMRC New
Employer Helpline on Tel 0845 60 70 143. You can read about the Employer
CD-Rom on the HMRC website - Opens in a new window.

Electronic filing

Electronic filing of HMRC returns and payments can save time and trouble. Any
supplier should provide electronic filing for some forms, and ideally all those that
can be filed electronically.

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If you employ fewer than 50 employees you can get a tax-free payment from
HMRC if you file certain end-of-year forms online. Read our guide on how to file
returns online.

Ask potential suppliers how quickly they've responded to producing software for
new electronic submissions.

Costs and updates

Whilst the purchase cost should be considered, most of the costs will be in
operating, supporting and updating the software. You will have to pay an annual
subscription for updates on rate and legislation changes. Check how much the
update subscription will cost, and how and when updates will be made available.

Find out how long the supplier continues to provide updates. Some suppliers
provide updates for only a few years, so you need to upgrade to a newer version
of the software.

Some suppliers have experienced problems with updates introducing bugs that
haven't been caught by testing. Check that when updates are applied, they can
be rolled back in the event of any problems.

Support

Because of the critical nature of payroll operations, excellent support is a must.

If a problem with the software occurs on payday, it must be resolved
immediately. Check the levels of support offered by the supplier, in particular,
the cost and response times.

See our guide on how to choose and manage your IT supplier.

Related guides on businesslink.gov.uk

Use our interactive tool to find out about the main online transactions you can
make with government

Computer software: the basics

Get the most from IT in your business

Choose and manage your IT supplier

Basic IT skills

Make the right IT choices

Accounting software

Business continuity planning in IT

Pay - an overview of obligations

Comply with data protection legislation

Information security best practice

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Keeping your systems and data secure

Introduction to Self Assessment

Understanding national minimum wage law

Keep the right staff records

IT support for your staff

Related web sites you might find useful

Payroll Standard Accreditation information on the HM Revenue &

Customs website
http://www.hmrc.gov.uk/ebu/acclist.htm

Payroll software information on the Payroll World website

http://www.payrollworld.com/

Employer CD-Rom information on the HMRC website

http://www.hmrc.gov.uk/employers/cdrom/index.htm

You can find this guide by navigating to:

Home > IT & e-commerce > Business applications > Payroll software

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