Not every business needs payroll software. If your headcount is small and the calculations you need to carry out simple, you may be comfortable processing your payroll manually. However, if you employ more than a few people, automating your payroll can save you valuable time and money, and even improve your payroll accuracy.

Manual payroll vs computerised payroll

Manual payroll involves working out calculations for each pay period entirely by hand and keeping records on paper. This process is relatively cheap but tedious to prepare and liable to human error. It typically becomes more difficult to manage as you grow and employ more staff.

Computerised payroll uses software with built-in capabilities that allow the user to carry out routine payroll tasks more efficiently. It enables you to gather all payroll-related information in one place, electronically, and automate processes such as wage calculations, deductions, tax returns, reports, etc. See payroll software: what it can and can't do.

If you decide to run payroll yourself, you need payroll software to report to HM Revenue and Customs (HMRC). See more on choosing a payroll software supplier.

Should you get payroll software for your business?

Whether you should get payroll software or not depends largely on the size of your business and the type of calculations you need to carry out. It may be worth getting payroll software if you need to speed up your payroll calculations, keep on top of rates and allowance changes or avoid computational errors.

Many businesses choose to automate their payroll. However, bear in mind that using payroll software makes you dependent on your computer system. If you're switching from manual to automated payroll, take steps to protect and back up your data and IT systems regularly.

You can typically buy payroll software on its own, or as part of a wider business management system.

Payroll software costs

If you only have a few employees and you decide to purchase payroll software, keep in mind that the costs may be greater than the advantages. The total cost of ownership of the new system may not always be obvious and may include:

• the initial purchase costs
• fees for system implementation, upgrades and maintenance
• labour costs for staff involved in setting up or running the system
• consultant or supplier fees
• annual subscription costs (covering any regulatory or rate updates)

Outsourcing your payroll activities to an accountant or a payroll specialist may help you save time and reduce some of the costs. Read about the advantages and disadvantages of outsourcing your payroll.

Computerised payroll systems make managing payroll considerably easier. They enable you to automate your processes, minimise potential mistakes and cut down time and resources needed for payroll administration.

If you're not sure if you should automate your payroll processing, see do you need payroll software.

Types of automated payroll systems

Many different types of automated payroll systems exist. They typically fall under two main categories:

• payroll software that you install on your computer
• online or cloud systems that you access via a web browser over the internet

A simple, standalone payroll software will usually tie your payroll management to a single computer. The functionality of such software may be limited. For example, it may carry out the calculations but not produce payslips, so you may have to supplement it with manual processes or use other applications.

Free small business payroll software UK

Businesses with fewer than ten employees can download free payroll software from HM Revenue and Customs (HMRC). The software has some limitations, but it allows you to perform most payroll tasks, including working out the tax and National Insurance for your employees and sending this information to HMRC.

Use the latest version of the HMRC's Basic PAYE Tools.

If you're looking for other software options, HMRC has tried and tested several free small business packages - see their list of free payroll software for small business.

Online payroll and cloud payroll software

An online or cloud-based system stores your data remotely, so you can access it easily from different locations using a secure login. Most online systems will automate the whole payroll process for you, taking care of things like:

• National Insurance and pension deductions
• tax calculations
• producing payslips for staff
• keeping up with legislation
• generating year-end tax returns

See what payroll software can and can't do and read about payroll software features.

Integrated payroll management

Payroll management often overlaps with the running of accounting and human resource (HR) processes in business. For example, you may want to:

• transfer pay run data from your payroll system into your accounting software
• check and transfer timesheet data from payroll to HR

When choosing a new payroll software, make sure that it is compatible and works well with your existing systems.

Depending on your business needs, you could also consider integrating payroll with related systems, eg through enterprise resource planning software. This could help you reduce costs and eliminate duplication of paperwork, data and efforts across various departments in your business.

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 does payroll software 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

Payroll software will automate most of the calculations, but there will still be administrative work for you to do in terms of inputting relevant data into the system.

You will have to:

• enter employee's details when they start their employment
• make changes when their rates of pay increase or decrease
• change tax codes when notifications are received
• 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. You will have to update this information when appropriate.

Read more about payroll software features.

Most payroll software offers certain basic payroll features to help you pay your employees correctly and on time. For example, payroll processing, tax management, tax form preparations, direct deposits, etc.

Depending on the software, extra features may be included as part of a customisable or enhanced payroll package, to help you manage different aspects of payroll effortlessly and reliably.

Various payroll periods

Weekly and monthly pay intervals are standard in most payroll software. If your business has other requirements, make sure that you chose software that can adapt to different intervals (eg fortnightly, quarterly or annual). Some software can support multiple pay schedules, allowing you to customise your pay schedule based on your employees' needs.

Multiple user operation

Smaller businesses may only require support for a single payroll operator at a time, but you should check that multiple-user operation is available in case you need it in the future. If you intend to grow your business, choose a payroll system that is easily scalable and customisable according to your changing needs.

Reporting capabilities

Some basic end-of-year reports are included as standard in most payroll software. You should choose software that has flexible reporting and supports online filing - consider features that allow you to handle RTI submission, generate expenses and benefits reports, prepare and print P45, P60, P30 and P32 forms, etc. Other features may allow you to create reports for payroll history, paid time off, deduction analysis and more. You may be able to use template reports from the software or build custom reports, if you need them.

Payslips

All payroll software will tell you the amounts that you need to pay to employees and HMRC, but check that you can use this information in a way that meets your requirements. For example, you may want the software to create and print payslips for you, or automatically email payslips to employees on a specific date. You may want features that allow you to customise digital paystubs, send payslips in different formats or let staff view their payslips online.

Pension scheme automatic enrolment

Some payroll packages include automatic enrolment functionality, allowing you to set up your pension scheme, enrol employees, process opt-out requests, issue communication, make contributions, view reports and more.

Employee management

Fully featured payroll software may also include functionality to help you calculate and record holiday entitlements, track sick leave or provide self-service to allow employees to request or book annual leave online. Some packages may also 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 capability

Most payroll software can integrate with another accounting or HR system, which can be highly useful and desirable. For example, time-tracking integration can automatically import employee hours from payroll into an HR system. Expense integration can help you automatically synchronize expenses with payroll. This helps to minimise the need for duplicate data entry, and allows you to streamline processes and prevent errors. For integration to work, a payroll product must be compatible with the related system.

Some businesses may prefer to process payroll via their accounting software. However, keep in mind that payroll modules of accounting packages may not always provide all capabilities of a dedicated payroll solution. See payroll software: what it can and can't do.

Payroll is a business-critical operation for every organisation. You must pay your staff accurately and on time to avoid low morale, poor performance and possibly even reputational and legal difficulties. A good computerised payroll system can help you carry out your pay run with greater speed, efficiency and confidence.

Advantages of payroll software

Many businesses choose to use payroll software over manual processing, as it can help them to:

• work out payroll calculations and deductions quicker
• generate accurate payslips
• calculate bonuses, expenses, holiday pay, etc with minimum effort
• send returns to HMRC and print P45, P60 and other forms for employees
• automate certain tasks, such as year-end reporting
• reduce the burden of compliance
• remove the need to understand complex tax legislation
• store data such as payslips and annual reports in a secure, easily accessible system

Payroll software can also provide additional data and analysis to make payroll information more useful to your business. See do you need payroll software.

Linking payroll software with time recording

You can link payroll to timesheet systems that record employee attendance or time worked. This allows you to automatically transfer information about hours worked into the payroll system and make payroll calculations much simpler.

Using payroll software for reporting

By 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. By getting payroll systems that record these additional types of information you can avoid the need for a separate software package.

Using payroll system to plan future costs

As payroll packages can provide forecasts, you can use these to plan staff costs and budgets by entering hypothetical numbers to see the exact total cost of an employee.

Depending on your business needs, you may find other payroll software features more useful.

Disadvantages of payroll software

Payroll software, like any other IT system, can have certain weak points. Potential problems may arise around the issues such as:

• data security, loss or theft
• cyber security and fraud
• information access, quality and control

Read about payroll software security and data protection.

Other limitations with payroll software often arise around costs. Full featured software will generally be more expensive than manual payroll systems. It will also require computer equipment, resources and skilled operators. If you don't have these in-house, you will need to invest money into producing them.

Payroll software is complex and it is essential that you choose a dependable supplier. You will want to choose a supplier who is successful, financially viable and can provide excellent references.

HMRC-recognised software

UK businesses with less than ten employees can use free payroll software from HMRC.

If you have more than ten employees, you may benefit from investing in a fully functional computerised payroll system. HMRC tests payroll software to check it can report PAYE information online and in real time (RTI). You can choose from free payroll software and paid-for software that has been tested and recognised by HMRC.

Electronic filing

Most employers now have to file end-of-year and in-year returns online. Electronic filing of HMRC returns and payments saves time and trouble. Suppliers should provide electronic filing for all forms that must be filed electronically.

Payroll software updates

As well as the purchase costs, you should also consider costs in operating, supporting and updating the software. You will have to pay an annual subscription for updates on rates and legislation changes. Check how much the subscription costs, and how and when you will get access to updates.

Find out how long the supplier continues to provide updates. Some suppliers only provide updates for a few years, so you may 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, you can roll them back in the event of any problems.

Payroll software support

Because of the critical nature of payroll operations, excellent support is a must. If a software problem occurs on payday, you must be able to resolve it immediately. Check the levels of support your supplier offers, as well as the associated cost and response times.

See how to choose an IT supplier for your business.

Managing payroll services in-house often requires an individual, or a team, with a thorough knowledge of the PAYE tax system. If your business doesn't have these skills in-house, you can organise your payroll by outsourcing it.

What is payroll process outsourcing?

Payroll outsourcing involves hiring an external company or an individual to handle all payroll functions. The level of services you can outsource varies. Some suppliers provide a basic service; others provide the full package including liaising with the HMRC and maintaining full compliance so your business never has to deal with payroll.

Typically, businesses outsource payroll to:

• an accountant or bookkeeper
• a specialist payroll company

If you're considering outsourcing payroll to someone else, you should weigh up the pros and cons.

Advantages of outsourcing payroll

Attending to payroll demands a great deal of time and expertise. Outsourcing your payroll to a specialist can help:

• free up precious time to focus on your core business
• reduce the need for training in-house payroll staff
• remove the expense of buying and maintaining a costly payroll system
• minimise the chance for errors, omissions or late payroll tax filings
• stay compliant with your tax obligations and PAYE responsibilities

As with all outsourcing, you should balance the advantages against the potential pitfalls - in this case, the financial costs and the risk of communication errors, particularly for complex payrolls.

Whether payroll outsourcing will be cost-effective for your business depends on the complexity of your payroll requirements.

Disadvantages of outsourcing payroll

The costs of outsourcing payroll can be high, especially for a young business. There is a certain degree of risk if communication lapses - for example, if you don't advise the payroll specialist of a staff member starting or leaving.

Outsourcing will also mean losing control of some of the key elements of your business, eg:

• you may not have instant access to payroll if it has been outsourced
• you won't always be able to check it when you want to, or add anything that's missing
• you will have to hand over confidential and sensitive staff information

Read more on the advantages and disadvantages of outsourcing.

Handling payroll requires processing vast amounts of personal data relating to your employees, including names, addresses, bank account details, social security numbers and salary information. This is all sensitive information, which the law requires you to protect from accidents, misuse, loss and prying eyes.

Does data protection law affect payroll?

Because it involves processing personal data, payroll is one of the key HR areas affected by data protection laws. The UK General Data Protection Regulation (GDPR) requires you to:

• document the personal data you hold, where it came from and who you share it with
• minimise, if possible, the amount of data that you hold - only keep what is essential and for no longer than necessary
• review and amend, if necessary, privacy notices to ensure that they comply with the new regulations
• control access to payroll information using appropriate safety measures
• safeguard and comply with specific data subject rights, eg the right to be informed, the right to access personal data, etc
• in some cases, appoint a data protection officer

The UK GDPR also requires you to implement technical and organisational measures to safeguard the personal data you hold. These measures may include, for example:

• secure workstations, servers and storage space
• encryption protocols
• specific security policies
• confidentiality clauses to establish best practices for data protection

If you're using payroll management software, some of its features (such as password-protection, access control, secure storage, etc) may help you to comply with some aspects of the security requirements under the GDPR.

Find out more about the security principle under the UK GDPR.

Protecting your payroll data

A risk assessment can help you determine if the users, processes and systems you have present a risk to your payroll data. Once you identify potential risks, you can create internal controls and policies to address them. For example, you could:

• Manage access to the payroll system - restrict to necessary staff only. Use timeout features to log employees out of the system after a period of inactivity.
• Segregate duties within the payroll team - if possible, have at least two people manage the payroll process. This can help avoid conflict of interest and minimise fraud risk.
• Use peer review and/or approval process - it helps to validate data input and changes. Only make actual payments with appropriate authorisation.
• Run and review payroll control reports, eg for system access, new hires, leavers, new bank accounts, etc. This can help identify potential issues and reveal any discrepancies early, such as mistakes in inputting hours, rates of pay and other data, and or fraud.
• Implement a data retention policy and ensure payroll operators adhere to it.
• Classify data according to sensitivity and agree procedures on encryption, transfer, etc.
• Use and regularly update security measures such as firewalls, antivirus and patches.

If a single person runs payroll in your business, have a back-up plan in case that person becomes unavailable. For example, your business' accountants could provide emergency cover.

Keep back-up copies of the payroll data, ideally stored off-site with appropriate security, eg in a fireproof safe. You may find it practical for security and continuity purposes to run payroll software on a dedicated computer to avoid any disruption caused by the failure of other software.

If you keep paper-based information, such as payslips, you must consider their physical security. Destroy any trial runs and tests, such as payroll reports, to prevent accidental access to sensitive data.

Taking note of the UK GDPR, you may want to consider moving from printed payslips to a digital alternative. This could help you consolidate your employee data in one secure place where you can control access to sensitive documents.

Read more about risk management and IT risk management best practices.

Not every business needs payroll software. If your headcount is small and the calculations you need to carry out simple, you may be comfortable processing your payroll manually. However, if you employ more than a few people, automating your payroll can save you valuable time and money, and even improve your payroll accuracy.

Manual payroll vs computerised payroll

Manual payroll involves working out calculations for each pay period entirely by hand and keeping records on paper. This process is relatively cheap but tedious to prepare and liable to human error. It typically becomes more difficult to manage as you grow and employ more staff.

Computerised payroll uses software with built-in capabilities that allow the user to carry out routine payroll tasks more efficiently. It enables you to gather all payroll-related information in one place, electronically, and automate processes such as wage calculations, deductions, tax returns, reports, etc. See payroll software: what it can and can't do.

If you decide to run payroll yourself, you need payroll software to report to HM Revenue and Customs (HMRC). See more on choosing a payroll software supplier.

Should you get payroll software for your business?

Whether you should get payroll software or not depends largely on the size of your business and the type of calculations you need to carry out. It may be worth getting payroll software if you need to speed up your payroll calculations, keep on top of rates and allowance changes or avoid computational errors.

Many businesses choose to automate their payroll. However, bear in mind that using payroll software makes you dependent on your computer system. If you're switching from manual to automated payroll, take steps to protect and back up your data and IT systems regularly.

You can typically buy payroll software on its own, or as part of a wider business management system.

Payroll software costs

If you only have a few employees and you decide to purchase payroll software, keep in mind that the costs may be greater than the advantages. The total cost of ownership of the new system may not always be obvious and may include:

• the initial purchase costs
• fees for system implementation, upgrades and maintenance
• labour costs for staff involved in setting up or running the system
• consultant or supplier fees
• annual subscription costs (covering any regulatory or rate updates)

Outsourcing your payroll activities to an accountant or a payroll specialist may help you save time and reduce some of the costs. Read about the advantages and disadvantages of outsourcing your payroll.

Computerised payroll systems make managing payroll considerably easier. They enable you to automate your processes, minimise potential mistakes and cut down time and resources needed for payroll administration.

If you're not sure if you should automate your payroll processing, see do you need payroll software.

Types of automated payroll systems

Many different types of automated payroll systems exist. They typically fall under two main categories:

• payroll software that you install on your computer
• online or cloud systems that you access via a web browser over the internet

A simple, standalone payroll software will usually tie your payroll management to a single computer. The functionality of such software may be limited. For example, it may carry out the calculations but not produce payslips, so you may have to supplement it with manual processes or use other applications.

Free small business payroll software UK

Businesses with fewer than ten employees can download free payroll software from HM Revenue and Customs (HMRC). The software has some limitations, but it allows you to perform most payroll tasks, including working out the tax and National Insurance for your employees and sending this information to HMRC.

Use the latest version of the HMRC's Basic PAYE Tools.

If you're looking for other software options, HMRC has tried and tested several free small business packages - see their list of free payroll software for small business.

Online payroll and cloud payroll software

An online or cloud-based system stores your data remotely, so you can access it easily from different locations using a secure login. Most online systems will automate the whole payroll process for you, taking care of things like:

• National Insurance and pension deductions
• tax calculations
• producing payslips for staff
• keeping up with legislation
• generating year-end tax returns

See what payroll software can and can't do and read about payroll software features.

Integrated payroll management

Payroll management often overlaps with the running of accounting and human resource (HR) processes in business. For example, you may want to:

• transfer pay run data from your payroll system into your accounting software
• check and transfer timesheet data from payroll to HR

When choosing a new payroll software, make sure that it is compatible and works well with your existing systems.

Depending on your business needs, you could also consider integrating payroll with related systems, eg through enterprise resource planning software. This could help you reduce costs and eliminate duplication of paperwork, data and efforts across various departments in your business.

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 does payroll software 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

Payroll software will automate most of the calculations, but there will still be administrative work for you to do in terms of inputting relevant data into the system.

You will have to:

• enter employee's details when they start their employment
• make changes when their rates of pay increase or decrease
• change tax codes when notifications are received
• 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. You will have to update this information when appropriate.

Read more about payroll software features.

Most payroll software offers certain basic payroll features to help you pay your employees correctly and on time. For example, payroll processing, tax management, tax form preparations, direct deposits, etc.

Depending on the software, extra features may be included as part of a customisable or enhanced payroll package, to help you manage different aspects of payroll effortlessly and reliably.

Various payroll periods

Weekly and monthly pay intervals are standard in most payroll software. If your business has other requirements, make sure that you chose software that can adapt to different intervals (eg fortnightly, quarterly or annual). Some software can support multiple pay schedules, allowing you to customise your pay schedule based on your employees' needs.

Multiple user operation

Smaller businesses may only require support for a single payroll operator at a time, but you should check that multiple-user operation is available in case you need it in the future. If you intend to grow your business, choose a payroll system that is easily scalable and customisable according to your changing needs.

Reporting capabilities

Some basic end-of-year reports are included as standard in most payroll software. You should choose software that has flexible reporting and supports online filing - consider features that allow you to handle RTI submission, generate expenses and benefits reports, prepare and print P45, P60, P30 and P32 forms, etc. Other features may allow you to create reports for payroll history, paid time off, deduction analysis and more. You may be able to use template reports from the software or build custom reports, if you need them.

Payslips

All payroll software will tell you the amounts that you need to pay to employees and HMRC, but check that you can use this information in a way that meets your requirements. For example, you may want the software to create and print payslips for you, or automatically email payslips to employees on a specific date. You may want features that allow you to customise digital paystubs, send payslips in different formats or let staff view their payslips online.

Pension scheme automatic enrolment

Some payroll packages include automatic enrolment functionality, allowing you to set up your pension scheme, enrol employees, process opt-out requests, issue communication, make contributions, view reports and more.

Employee management

Fully featured payroll software may also include functionality to help you calculate and record holiday entitlements, track sick leave or provide self-service to allow employees to request or book annual leave online. Some packages may also 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 capability

Most payroll software can integrate with another accounting or HR system, which can be highly useful and desirable. For example, time-tracking integration can automatically import employee hours from payroll into an HR system. Expense integration can help you automatically synchronize expenses with payroll. This helps to minimise the need for duplicate data entry, and allows you to streamline processes and prevent errors. For integration to work, a payroll product must be compatible with the related system.

Some businesses may prefer to process payroll via their accounting software. However, keep in mind that payroll modules of accounting packages may not always provide all capabilities of a dedicated payroll solution. See payroll software: what it can and can't do.

Payroll is a business-critical operation for every organisation. You must pay your staff accurately and on time to avoid low morale, poor performance and possibly even reputational and legal difficulties. A good computerised payroll system can help you carry out your pay run with greater speed, efficiency and confidence.

Advantages of payroll software

Many businesses choose to use payroll software over manual processing, as it can help them to:

• work out payroll calculations and deductions quicker
• generate accurate payslips
• calculate bonuses, expenses, holiday pay, etc with minimum effort
• send returns to HMRC and print P45, P60 and other forms for employees
• automate certain tasks, such as year-end reporting
• reduce the burden of compliance
• remove the need to understand complex tax legislation
• store data such as payslips and annual reports in a secure, easily accessible system

Payroll software can also provide additional data and analysis to make payroll information more useful to your business. See do you need payroll software.

Linking payroll software with time recording

You can link payroll to timesheet systems that record employee attendance or time worked. This allows you to automatically transfer information about hours worked into the payroll system and make payroll calculations much simpler.

Using payroll software for reporting

By 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. By getting payroll systems that record these additional types of information you can avoid the need for a separate software package.

Using payroll system to plan future costs

As payroll packages can provide forecasts, you can use these to plan staff costs and budgets by entering hypothetical numbers to see the exact total cost of an employee.

Depending on your business needs, you may find other payroll software features more useful.

Disadvantages of payroll software

Payroll software, like any other IT system, can have certain weak points. Potential problems may arise around the issues such as:

• data security, loss or theft
• cyber security and fraud
• information access, quality and control

Read about payroll software security and data protection.

Other limitations with payroll software often arise around costs. Full featured software will generally be more expensive than manual payroll systems. It will also require computer equipment, resources and skilled operators. If you don't have these in-house, you will need to invest money into producing them.

Payroll software is complex and it is essential that you choose a dependable supplier. You will want to choose a supplier who is successful, financially viable and can provide excellent references.

HMRC-recognised software

UK businesses with less than ten employees can use free payroll software from HMRC.

If you have more than ten employees, you may benefit from investing in a fully functional computerised payroll system. HMRC tests payroll software to check it can report PAYE information online and in real time (RTI). You can choose from free payroll software and paid-for software that has been tested and recognised by HMRC.

Electronic filing

Most employers now have to file end-of-year and in-year returns online. Electronic filing of HMRC returns and payments saves time and trouble. Suppliers should provide electronic filing for all forms that must be filed electronically.

Payroll software updates

As well as the purchase costs, you should also consider costs in operating, supporting and updating the software. You will have to pay an annual subscription for updates on rates and legislation changes. Check how much the subscription costs, and how and when you will get access to updates.

Find out how long the supplier continues to provide updates. Some suppliers only provide updates for a few years, so you may 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, you can roll them back in the event of any problems.

Payroll software support

Because of the critical nature of payroll operations, excellent support is a must. If a software problem occurs on payday, you must be able to resolve it immediately. Check the levels of support your supplier offers, as well as the associated cost and response times.

See how to choose an IT supplier for your business.

Managing payroll services in-house often requires an individual, or a team, with a thorough knowledge of the PAYE tax system. If your business doesn't have these skills in-house, you can organise your payroll by outsourcing it.

What is payroll process outsourcing?

Payroll outsourcing involves hiring an external company or an individual to handle all payroll functions. The level of services you can outsource varies. Some suppliers provide a basic service; others provide the full package including liaising with the HMRC and maintaining full compliance so your business never has to deal with payroll.

Typically, businesses outsource payroll to:

• an accountant or bookkeeper
• a specialist payroll company

If you're considering outsourcing payroll to someone else, you should weigh up the pros and cons.

Advantages of outsourcing payroll

Attending to payroll demands a great deal of time and expertise. Outsourcing your payroll to a specialist can help:

• free up precious time to focus on your core business
• reduce the need for training in-house payroll staff
• remove the expense of buying and maintaining a costly payroll system
• minimise the chance for errors, omissions or late payroll tax filings
• stay compliant with your tax obligations and PAYE responsibilities

As with all outsourcing, you should balance the advantages against the potential pitfalls - in this case, the financial costs and the risk of communication errors, particularly for complex payrolls.

Whether payroll outsourcing will be cost-effective for your business depends on the complexity of your payroll requirements.

Disadvantages of outsourcing payroll

The costs of outsourcing payroll can be high, especially for a young business. There is a certain degree of risk if communication lapses - for example, if you don't advise the payroll specialist of a staff member starting or leaving.

Outsourcing will also mean losing control of some of the key elements of your business, eg:

• you may not have instant access to payroll if it has been outsourced
• you won't always be able to check it when you want to, or add anything that's missing
• you will have to hand over confidential and sensitive staff information

Read more on the advantages and disadvantages of outsourcing.

Handling payroll requires processing vast amounts of personal data relating to your employees, including names, addresses, bank account details, social security numbers and salary information. This is all sensitive information, which the law requires you to protect from accidents, misuse, loss and prying eyes.

Does data protection law affect payroll?

Because it involves processing personal data, payroll is one of the key HR areas affected by data protection laws. The UK General Data Protection Regulation (GDPR) requires you to:

• document the personal data you hold, where it came from and who you share it with
• minimise, if possible, the amount of data that you hold - only keep what is essential and for no longer than necessary
• review and amend, if necessary, privacy notices to ensure that they comply with the new regulations
• control access to payroll information using appropriate safety measures
• safeguard and comply with specific data subject rights, eg the right to be informed, the right to access personal data, etc
• in some cases, appoint a data protection officer

The UK GDPR also requires you to implement technical and organisational measures to safeguard the personal data you hold. These measures may include, for example:

• secure workstations, servers and storage space
• encryption protocols
• specific security policies
• confidentiality clauses to establish best practices for data protection

If you're using payroll management software, some of its features (such as password-protection, access control, secure storage, etc) may help you to comply with some aspects of the security requirements under the GDPR.

Find out more about the security principle under the UK GDPR.

Protecting your payroll data

A risk assessment can help you determine if the users, processes and systems you have present a risk to your payroll data. Once you identify potential risks, you can create internal controls and policies to address them. For example, you could:

• Manage access to the payroll system - restrict to necessary staff only. Use timeout features to log employees out of the system after a period of inactivity.
• Segregate duties within the payroll team - if possible, have at least two people manage the payroll process. This can help avoid conflict of interest and minimise fraud risk.
• Use peer review and/or approval process - it helps to validate data input and changes. Only make actual payments with appropriate authorisation.
• Run and review payroll control reports, eg for system access, new hires, leavers, new bank accounts, etc. This can help identify potential issues and reveal any discrepancies early, such as mistakes in inputting hours, rates of pay and other data, and or fraud.
• Implement a data retention policy and ensure payroll operators adhere to it.
• Classify data according to sensitivity and agree procedures on encryption, transfer, etc.
• Use and regularly update security measures such as firewalls, antivirus and patches.

If a single person runs payroll in your business, have a back-up plan in case that person becomes unavailable. For example, your business' accountants could provide emergency cover.

Keep back-up copies of the payroll data, ideally stored off-site with appropriate security, eg in a fireproof safe. You may find it practical for security and continuity purposes to run payroll software on a dedicated computer to avoid any disruption caused by the failure of other software.

If you keep paper-based information, such as payslips, you must consider their physical security. Destroy any trial runs and tests, such as payroll reports, to prevent accidental access to sensitive data.

Taking note of the UK GDPR, you may want to consider moving from printed payslips to a digital alternative. This could help you consolidate your employee data in one secure place where you can control access to sensitive documents.

Read more about risk management and IT risk management best practices.