The three stages of payroll processing

Between organising payment schedules, making deductions, arriving at NET pay, and ensuring employees are paid on time, there are many moving parts when it comes to the payroll process.

Processing payroll efficiently can help ensure that employees are paid accurately and on time each month. In this post, we’ll look at what’s involved in payroll processing, the key considerations and the three stages of payroll processing.

What is payroll? Payroll is the process of calculating an employee’s pay. In addition to an employee’s salary or wages, they may also receive allowances, benefits, and bonuses that you need to take into account. Learn more about what payroll is in our separate guide. 📌

Table of contents

• What does payroll processing involve? 
• The three stages of payroll processing: A step-by-step guide 
• How to ensure a seamless payroll process
• Wrapping up

What does payroll processing involve?

The payroll process is often run by either the human resources (HR) department or the finance department. Small business owners may prefer to outsource this responsibility or handle payroll themselves. 

No matter who’s in charge of payroll processing, every administrator will need to do these things:

• Build a comprehensive, organisation-wide pay policy document, including leave policies, allowances, benefits, and bonuses

• Define payslip components, including details on gross pay, deductions and final net pay

• Gather other payroll inputs, like employee time, attendance bonuses and new hires

• Calculate net pay and gross pay to provide employees with their gross salary as well as their take-home pay

• Deliver employee salaries following a set schedule and method so that employees know when and how they can expect to receive payment

• File for payroll taxes, deductions, and other contributions that need to be removed from your employees’ pay

The three stages of payroll processing: A step-by-step guide

Properly managing your payroll process from day one will streamline your business’s financial and administrative records. Efficient payroll processes ensure employees are paid the right amount, on time, as well as saving you and your team valuable time and money. 

If you follow these three key steps, you’ll find it much easier to organise, manage and report on payroll processing. 

Stage 1: Before processing payroll

Building a well-organised payroll processing structure reduces the risk of error and boosts efficiency. 

1. Create a payroll policy

First things first, you need a set of clear payroll policies that the rest of your organisation and HMRC can refer to if necessary. These policies may include documentation on rules regarding: 

• Attendance and timekeeping – the procedures for time clocks or timesheets to accurately report time worked  
• Paid leave – any paid leave beyond the statutory annual leave, how employees can request time off, and the approval process  
• Benefits – any additional employee benefits in kind (BIK) that are tax-deductible, particularly for employees that need to file a Self Assessment tax return  
• Overtime – the processes and calculations for overtime, and what happens if an employee works any unauthorised additional hours if overtime is not permitted
• Breaks and meal periods – the policies around paid vs unpaid breaks (including lunch and any other short breaks), and whether employees need to clock out for longer break periods  
• Payroll deductions – the various types of deductions that will be withheld from wages and how the final net pay will look different to the original gross pay because of this   

Remember to periodically check these policies against current payroll legislation and make any necessary changes.  

2. Choose a payroll schedule

Your payroll schedule determines when employees will receive payment and should include key dates for tax payments. 

You can choose from four different pay schedules, depending on your business’ structure:

• Weekly 
• Biweekly
• Semiweekly
• Monthly 

Most businesses choose either biweekly or monthly payment schedules. But if you have a small team of staff, are working with short-term contracts, or struggle with cash flow, a weekly pay schedule may be easier to manage. 

3. Collect inputs

The next step is to gather payroll data inputs from different departments across your business. Accurate data collection is critical to preventing mistakes further down the line and ensuring a seamless payroll process.

To get started, you’ll need data from the following teams: 

• HR team – salary agreements and eligibility for benefits
• Employees – tax codes, National Insurance numbers and P45 forms (if applicable)
• Attendance systems – data from timesheets, attendance, and leave systems
• Finance – deductions for tax and other contributions

If your business doesn’t have all of these departments yet, you should set up a clear and simple system for tracking these details. Storing them in one accessible and central digital location will make it much easier for you and other team members to access data when you need to. 

4. Verify data

When you’ve gathered all the relevant information, you need to check that the data is right. Small errors may cause issues in your payroll processing further down the line. 

Before you move to the next step you should: 

• Ensure data is presented in the correct format, keeping your numbers in the same currency and format to be consistent

• Verify that the list only features active employees and has no record of inactive employees 

Stage 2: Processing payroll

Once you’ve verified all your data, it’s time to process payroll. When it comes to processing payroll you have several options:

• Processing payroll manually in-house
• Outsourcing payroll to a payroll service
• Hiring an accountant
• Using payroll software

Tide Payroll offers a great middle-ground for businesses looking to save time without breaking the bank. It’s the simple way to pay your team. Just add in all the details, choose your pay run date and our software will take care of the rest! 🚀

1. Calculate gross pay

Gross pay is the total amount you owe an employee based on the conditions of their contract, including any work done on public holidays and overtime pay – this amount does not include deductions. 

2. Determine deductions

Deductions are what you take out of an employee’s gross pay to arrive at their net pay. Deductions may be legally required, such as tax payments, or they could be voluntary like health insurance premiums and Payroll Giving donations. 

When you make deductions from an employee’s pay, you’re responsible for ensuring it goes to the right place.  

Some deductions are made before tax is taken out of your employee’s pay while others are made afterwards. Here are some examples of pre-tax deductions. 

National Insurance

Your employee’s National Insurance contribution is based on their category letter. Businesses must also contribute to their employees’ National Insurance from their business expense account.

Pension

By law, you must provide a workplace pension scheme for your employees. You must enrol eligible employees into your workplace pension as soon as they start working for you. 

Eligible employees are those who: 

• Earn at least £10,000 per year
• Are aged between 22 and the State Pension age
• Usually work in the UK (including those based in the UK who travel abroad for work)

Deduct your employees’ pension based on your workplace pension scheme. Always make pension deductions following National Insurance deductions. 

Again, you’ll need to contribute to your employees’ pension from your business expense account. The minimum contribution rate is 3% of your employees’ qualified earnings. 

Student loan repayments

If an employee is eligible to start paying back their student loan, you’ll need to make deductions based on their student loan repayment plan. 

3. Calculate employee-related taxes

Before paying employees, you need to deduct taxes from their earnings. You’ll probably need to hold onto these taxes for a while before you pay them to the government. To keep your business finances organised, it’s a good idea to set up a separate business bank account for them. 

Income tax

Provided they earn above the tax-free personal allowance (£12,570), all your employees will be taxed on their earnings. The income tax rate varies depending on which band their salaries fall into. 

Taxes on benefits

Employees must also pay tax on company benefits, like private use of a company car, season ticket loans, health insurance, or living accommodation. 

4. Calculate employee-related post-tax deductions

Employees may also have further deductions to come out after tax, like disability insurance, life insurance, charitable contributions, and child maintenance payments.

5. Calculate their NET pay and make payment

Removing taxes and deductions from your employees’ gross pay leaves you with their net pay – the amount you must pay them each pay cycle. 

Stage 3: After processing payroll

Once you’ve paid your employees, you need to ensure everything related to that pay cycle is stored and reported correctly. 

1. Store payroll records

HMRC has the authority to run a tax compliance check at any time. For that reason, all of your records on employee payments and deductions need to be accurate and up to date.  

You can choose to keep these records either digitally or in paper form, but you’ll need to keep records on: 

• Taxes and deductions
• Salaries or wages and time worked
• Where and when money was paid for employee pay
• Holidays and paid leave
• Employer contributions

These records must then be safely stored for three years, even if the employee no longer works for your organisation. 

Take a look at government guidelines on collecting and keeping records.

2. Make necessary corrections

Sometimes mistakes happen during payroll processing. Perhaps there’s a discrepancy in an employee’s NET pay and what they expected to receive. Accurate records help you review any possible errors and ensure your employees have received the correct salary. 

3. Produce annual reports

You must provide HMRC with an annual report that includes details on your employees’ pay, payroll benefits, and deductions in a Full Payment Submission (FPS). 

For the following tax year, you need to update your employee payroll records from the final day of the tax year. You must also report all employee expenses to HMRC along with giving your employees a P60, which shows how much tax they’ve paid on their salary in a tax year. 

How to ensure a seamless payroll process

When it comes to running payroll, it’s important that everyone works together and is in open communication to avoid payment-related mistakes. 

Follow this simple checklist to help you: 

1. Make sure your employee data is accurate  
2. Check your timesheets to prevent any unexpected errors  
3. Create and send payslips, which must include their hours worked, gross pay, deductions, net pay and payment method  
4. File tax reports on time, including your Full Payment Submission (FPS) and Employment Payment Summary (EPS)
5. Keep up to date with payroll legislation to stay on top of changes and make adjustments to your payroll process where necessary   

Wrapping up 

An efficient payroll process is the key to getting employees paid on time. By organising and streamlining your payroll process, you’ll ensure that you’re complying with HMRC legislation as well as saving your business time. 

With Tide Payroll you can take the pain out of payday. Our reliable and HMRC-recognised software allows you to send payments in minutes, with one click from the app.

Photo by Tima Miroshnichenko, published on Pexels