Guide to UK payroll software

Payroll software has been developed to provide a cost-effective way for businesses to automate their payroll processes, increase the accuracy of employee data and ensure compliance with the latest payroll legislation. This guide will provide an overview of payroll software, assess the options available in the UK market and help you decide what is the right payroll system for your business.

This is the main photograph for the article Guide to UK payroll software. It shows a computer screen showing the payroll software dashboard.

Photo by Lukas Blazek on Unsplash.

The payroll process is complicated and time consuming requiring a detailed knowledge of all relevant employment, tax and accounting legislation, an awareness of how and when relevant legislation is updated, and an understanding as to how those rules and regulations should be applied.

Payroll software has been developed to help a business’s payroll personnel generate accurate employee data and, through automation, manage the payroll process as efficiently as possible.

This article looks at the benefits of payroll software, compares the different options available in the UK market and will help you decide which payroll system vendor is right for your business.

Payroll services are complex and use many acronyms and technical terms. To help you understand the jargon we have provided a glossary of payroll terms for reference alongside our articles.

In this article

What is payroll software?

Payroll software is primarily designed to ensure that your business can:

  • Pay its employees correctly and on time; and
  • Comply with all relevant UK legislation and regulations.

The payroll process is complicated, technical and time consuming and so software has been developed to assist a business’s payroll personnel in:

  • Making accurate pay and tax calculations.
  • Processing employee and HMRC payments.
  • Generating employee documents such as payslips.
  • Making filings to HMRC.
  • Maintaining all appropriate records.

Managing payroll within a business not only requires the right software but also a skilled and experienced payroll person or team to manage the payroll processes.

Payroll software can be installed ‘on-premise‘ on your business’s own IT network (also known as ‘desktop‘ software) , or it can be hosted online (or in the ‘cloud’) by a payroll services supplier.

Setting up a payroll function in-house

If you decide to manage your business’s payroll function in-house you will need to complete the following steps:

  • Register as an employer with HMRC.
  • Choose the business’s payroll software.
  • Provide HMRC with information about the business’s employees.
  • Record, pay, make deductions and report to HMRC on or before the first payday.
  • Pay HMRC the tax and National Insurance that the business owes.
  • Collect and keep payroll records.

Your business must also complete certain tasks and file annual reports in preparation for the next UK tax year starting on 6 April. Payroll software will assist your business’s payroll personnel in managing the payroll activities set out above as efficiently as possible.

HMRC recognised payroll software

HMRC tests both free and paid-for payroll software to ensure that the software can report PAYE information online and in real time (RTI). The software that passes HMRC’s tests is added to its recognised software list although HMRC does not recommend one product or service over another.

HMRC has provided an introductory payroll video guide.

Checking that the software you have selected is recognised by HMRC will give you comfort that it will comply with the HRMC’s payroll guidelines.

The list of all HMRC recognised free and commercial payroll software can be found here.

UK payroll software options

There are a range of payroll software options available to UK businesses:

  • HMRC: The HMRC provides its own payroll software, ‘Basic PAYE Tools’, free to UK business with under ten employees.
  • Other free software: A number of commercial payroll system vendors provide free software to businesses with under ten employees.
  • Commercial software:
    • On-premise software: This is paid-for software licensed from a payroll software vendor and run on your business’s own IT platform.
    • Online software: This is paid-for software maintained on a payroll software vendor’s own servers in their data centre, accessible by your payroll staff over the internet.

We discuss each of these payroll options in more detail below.

HMRC’s Basic PAYE Tools

HMRC provides its own ‘Basic PAYE Tools’ software which allows a business to perform most basic payroll tasks including making tax and National Insurance calculations and sending filings to HMRC. It is free to UK businesses with less than 10 employees.

However, the ‘Basic PAYE Tools’  software has a number of limitations:

  • It is only available to small businesses with less than 10 employees.
  • It has limited features and functionality.
  • It cannot produce payslips.
  • It does not have workplace pension auto-enrolment functionality.
  • It is not designed for agents or bookkeepers with many clients.
  • HMRC is not set up to provide software support.

To use the Basic PAYE Tools software effectively your business will need to have a team member with payroll experience or to allocate an employee to spend a significant amount of time familiarising themselves with the software and relevant payroll legislation.

HMRC’s Basic PAYE Tools software can be downloaded in Windows and Mac formats from its website.

Free payroll software

There are a small number of payroll vendors that offer free payroll software for an unlimited period. However, free software comes with a number of restrictions:

  • It is limited to a maximum of only 10 employees and in some cases to a lower number (e.g. 2-3 employees).
  • It has limited features and functionality.
  • The user experience is usually less developed than paid versions.
  • Customer support tends to be more limited than in paid versions.
  • Free software may not be as reliable as paid software.

Free payroll software is also often offered by payroll system vendors on an introductory trial basis. At the end of the trial period the business will need to upgrade onto a paid package.

As with HMRC’s Basic PAYE Tools, a business using free payroll software will need to have personnel with the appropriate payroll knowledge and expertise in-house to use the free software properly.

A list of HMRC recognised free payroll software suppliers can be found on HMRC’s website.

On-premise payroll software

On-premise or desktop payroll software is licensed from a commercial software vendor and installed onto a business’s own IT network.

On-premise software has been the standard deployment of payroll software for many years. However, the huge growth in broadband penetration and the development of cloud-based services has led to a fall in popularity of on-premise systems in favour of online payroll systems.

Some on-premise payroll system vendors bridge the gap between on-premise and online software by offering add-on online features such as automatic cloud back-up and online employee portals.

On-premise software is usually licensed from a payroll system vendor on an annual basis and charged based on a number of factors including number of employees, number of companies within the group running payroll and the features provided by the software.

Advantages of on-premise software

  • Security & control: Your business can maintain complete control and security over its employee data – particularly important in relation to GDPR compliance.
  • Payroll personnel: Payroll skills and expertise are retained in-house and payroll personnel can respond immediately ‘on the ground’ to employee queries.
  • Costs: A large organisation with many employees and/or which has invested in developing its own integrated technology platform could benefit from the economies of scale of upfront investment in on-premise software and retaining a payroll team in-house.

Disadvantages of on-premise software

  • Set up & maintenance: On-premise software needs to be installed, configured, maintained and updated by your business’s IT team or IT contractors which can be time consuming. You may also need to acquire a new server to host the software if you do not have sufficient server capacity.
  • Security & control: Your business will be dependent on its own security protocols to protect its employee data.
  • Compliance with payroll legislation: Your payroll team will need to update your on-premise software to reflect all relevant changes to payroll legislation before the legislation becomes operative.
  • Remote working & mobile: On-premise software is generally accessed from your payroll personnel’s computers via desktop applications. However, on-premise software could be accessed on a mobile device through an add-on cloud application (if available), or using a business’s Virtual Private Network (VPN) although this is likely to be much less user friendly than a purpose built online payroll system.
  • Employee portal: On-premise software will generally require an additional cloud application to be able to offer an employee portal.
  • Scalability: Adding significantly more employees, additional offices or overseas locations may require significant reconfiguration of the on-premise software.
  • Customer support: The payroll system vendor will provide customer support although this is likely to be less comprehensive than for an online payroll system.
  • Payroll personnel: Your business will need to retain, hire or train in-house payroll personnel with the appropriate levels of payroll skills, expertise and knowledge of payroll legislation to manage your business’s software and payroll processes.
  • Business resilience:
    • On-premise software will not be available if your business’s IT systems are off line and/or your premises is inaccessible.
    • Using in-house payroll personnel puts the business at risk if those employees leave the business or are unavailable at key times due to holidays or sickness.
  • Costs: Costs of on-premise software can include the costs of an annual license; costs of installation, configuration, maintenance and upgrades; potentially the hardware costs of a payroll server; the costs of your business’s IT team; and the costs of your business’s employees who have payroll responsibilities.

If you are interested in finding an on-premise software vendor for your business’s payroll read our article Guide to UK small business payroll services suppliers.

Online payroll software

Online or cloud payroll software has risen in popularity in line with the increase in broadband penetration, improving internet speeds and online reliability, and innovations in cloud technology.

Online software runs on your payroll system vendor’s servers in its data centre and is accessed by your business’s payroll personnel via the internet using a web-based application.

Online software is usually charged on a monthly subscription basis based on the number of employees covered and features provided by the software.

Advantages of online software

  • Set up & maintenance: The software is quick to set up as there are no installation or configuration requirements. Access to the software is provided through a web-based application. Maintenance and upgrades are carried out by the software vendor.
  • Compliance with payroll legislation: Online software should automatically update to reflect changes in payroll legislation.
  • Remote working & mobile: Online software is purpose built to provide 24/7 online access from multiple locations (with internet access) and using a variety of mobile devices.
  • Employee portal: Online software can provide a self-service online employee portal allowing employees to access all of their documents (payslips, P60s etc) electronically so that your business would not need to print and send out paper documentation.
  • Customer support: The online payroll system vendor will have a help desk of experienced payroll professionals to answer any questions that your payroll team may have.
  • Payroll personnel: Payroll skills and expertise are retained in-house and payroll personnel can respond immediately ‘on the ground’ to employee queries.
  • Scalability: Easy to scale as your business grows and takes on new employees.
  • Business resilience: Online software will continue to operate and be available to your payroll personnel even if your business’s premises or IT systems are inaccessible.
  • Costs:
    • Online software has minimal upfront costs; straightforward monthly subscription fees; lower ancillary costs if employees can access documents (e.g. payslips) electronically from an employee portal; and minimal in-house IT support costs.
    • Larger businesses may benefit from the economies of scale of retaining their payroll personnel in-house.

Disadvantages of online software

  • In-house legislation compliance: Your payroll personnel will need to keep up to date with any legislation changes to be able to use the online payroll system properly.
  • Security & control: There is less control and security over employee data than with on-premise software as the data is held on a third party’s servers. However, online payroll system vendors maintain sophisticated data security and online protection measures particularly to ensure that they can offer GDPR compliant software.
  • Payroll personnel: Your business will need in-house payroll personnel with appropriate and up to date payroll expertise to manage the online software.
  • Business resilience:
    • Online software is reliant on your business’s internet connection. Although broadband penetration and internet connectivity is very high in the UK there are still some parts of country where internet reliability is poor (e.g. rural areas).
    • Using in-house payroll personnel puts the business at risk if those employees leave the business or are unavailable at key times due to holidays or sickness.
  • Costs: Monthly subscription costs can mount up for an organisation with large numbers of employees. Your business will still need to carry costs of its in-house payroll team which can be expensive.

If you are interested in finding an online software vendor for your business’s payroll read our article Guide to UK small business payroll services suppliers.

Payroll software costs

Payroll software is charged on a monthly or annual basis, and costs may vary by software vendor according to the:

  • Number of employers/companies within a business’s group i.e. if a business employs its staff through more than one company that will involve more complexity for the software.
  • Number of employees.
  • Features provided.

On-premise software tends to be sold on an annual licence basis while online software tends to be charged monthly. However, there are exceptions to the rule.

In comparing payroll software packages you should check the features that are offered carefully as some vendors only include basic RTI processing in their basic pricing package and charge additional fees for other add-on services such as P11D, CIS (Construction Industry Scheme) or printing payslips functionality. Other vendors offer a single price including all of the above features within their core software proposition.

Pricing is usually quoted ex-VAT and many payroll vendors offer introductory free trial periods.

On-premise payroll software

Annual licences for on-premise software can start as low as £50 per year in total for a business employing less than 3 employees and £70 per year in total for a business employing up to 10 employees, while packages catering for an unlimited number of employees can start at £200 per year in total and rise to over £1000 per year in total depending on the payroll features and functionality.

Using on-premise software may also require additional costs including:

  • The hardware costs of the servers running the software.
  • Software installation and configuration costs.
  • Ongoing maintenance and software upgrade costs.
  • Ancillary costs such as the cost of printing and mailing payslips.
  • Cost of your in-house IT team or IT contractors.

Online payroll software

Monthly online software pricing models can start at £1 per month per employee reducing to £0.50 or lower per employee per month for businesses with larger work forces.

Bespoke enterprise pricing

Organisations with large numbers of employees will usually fall into a payroll system vendor’s ‘enterprise’ fee structure which are priced on a bespoke quotation basis.

Payroll personnel & ancillary costs

Whether you select on-premise or online software, in addition to the basic software costs, you should also factor in the costs of your business’s in-house payroll personnel.

On-premise and online payroll software comparison

We have set out below a comparison of on-premise and online payroll software:

This table compares on-premise payroll software and online payroll software against a range of criteria.

Recommendations

  • HMRC/Free software may be effective for managers of small businesses that have few employees, are subject to very tight budgets and who are prepared to take on the administrative burden of managing their payroll processes themselves.
  • Commercial software is well suited to businesses that are large enough to afford the costs of, and can benefit from, having in-house payroll personnel: 
    • On-premise software will be attractive to businesses that wish to maintain complete control over their employee data and payroll processes.
    • Online software is an excellent solution for those businesses wishing to retain their in-house payroll personnel and expertise, while benefiting from the cost savings and ease of use of an online software solution.

If you are interested in finding an on-premise or online software vendor for your business’s payroll read our article Guide to UK small business payroll services suppliers.

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