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Income tax and national insurance contributions must be calculated and deducted from the employee each pay period, payslips produced for each employee and the tax liability accounted for and paid over to the inland revenue office. Calculating the deductions can be achieved using the HMRC CD-Rom while payslips represent an area which may well sway the decision.

Many medium and large companies employ a specialist wages department to perform these functions. Some medium sized companies may still choose to outsource the payroll function leaving many of the technical issues that might be encountered to a specialist payroll service.

Small businesses may choose to outsource the payroll function because they are not familiar with the intricacies of payroll although HMRC run regular paye seminars to assist employers. The payroll system adopted should calculates income tax and national insurance deductions and deal with tax code changes, new employees and changes to existing employees plus taxable benefits and allowances such as statutory payments for sickness and maternity leave, contracting out of the state pension scheme and student loan repayments.

The main benefit of manually producing the employee payroll in house is the low cost although the time spent might be better spent running the business which payroll administration can detract from. The cost may not be the cheapest option if a wages clerk is required to produce the payroll.

Purchasing payroll software can save significant time compared with manual calculations while outsourcing payroll may be more expensive but in some cases where there is a lack of knowledge the safer option. Although time is usually more important as the payroll production cost is not usually a big factor.

Outsourcing payroll adds a small additional cost to running the business but would normally carry worthwhile benefits in reducing the time spent on the function and reduces the payroll administrative burden.

Main benefits outsourcing payroll to a service provider

1. Time saving when calculating the payroll deductions and dealing with different and sometimes complex employee circumstances.

2. Using a professional outsourcing service to advise on potential payroll problems and difficulties.

3. The cost of outsourcing payroll should be compared against the cost of employing specialist in house payroll staff. Even when the payroll is outsourced some wages staff may be required.

4. Payroll service providers almost invariably use a payroll software package and normally produce accurate income tax and national insurance deductions and pay records reducing the prospect of problems with the tax authorities.

5. Payroll administration such as preparing the tax deductions schedules, dealing with starters and leavers, year end certificates for employees and the employer annual returns are normally all automated as part of the payroll service

6. The outsourced payroll company should also be responsible for producing employee payslips, advising tax and deductions liability and in larger businesses also provide a payroll analysis for accounting purposes.

Where to find outsourced payroll providers.

Finding a suitable outsourced payroll service is not difficult. Local telephone directories or searching the internet would produce many potential payroll service providers.

Many accountancy firms offer payroll services to their clients and although the prices may struggle to be competitive price is always negotiable. Using the business accountant for the payroll has advantages since a substantial cost area for most businesses is already known to the accountant since they prepare the numbers.

Choosing a payroll software package

The major alternative to outsourcing the payroll is for the business to acquire and use payroll software.

Larger companies require payroll software that has incorporated within it all the potential pay scenarios and also be capable of dealing with high numbers of employees. Large comprehensive packages can be complex to operate and require specialist wages staff. Small business may choose simpler less complex payroll software packages that meet the basic needs of the business.

It is important the person running the payroll within the wages function understands the payroll essentials and legal payroll administration requirements.

Choosing payroll software should save the business money against outsourcing the payroll and also retain control over the payroll in house. An ideal payroll package should take no more time that supplying employee details and gross wages to the payroll service and minimise the payroll knowledge required by the business staff responsible for wages...

If the business chooses to adopt a payroll software package then the complexity of the package should be considered and also the attributes and capabilities of the chosen software to produce all the payroll requirements in relation to pay and wage deductions, payroll administration and employee payslips.

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Terry Cartwright of DIY Accounting produce Accounting Software and Payroll Software packages for self employed and small limited companies. The simple payroll spreadsheets calculate income tax and insurance deductions, automate payslips and provide the employer with a full automated paye administration system.

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