Payroll challenges and best practices for small businesses

But payroll isn’t as simple as it first appears. Getting it right means juggling tax codes, pension duties, and HMRC submissions, as well as factors like working patterns and bonuses. In this post, we’ll look at some common payroll challenges faced by small businesses in the UK, along with practical solutions and best practices that can help make life easier.

Common payroll problems for small businesses

Keeping up with UK payroll legislation

Let’s start with compliance. In the UK, there are plenty of moving parts to keep on top of: PAYE, National Insurance, Real Time Information (RTI), pensions auto-enrolment, and statutory payments like sick pay or maternity leave. Rules change regularly, and falling behind can be costly.

So what can you do?

• Stay informed by subscribing to HMRC updates and payroll newsletters.
• Use payroll software for small businesses that updates automatically to reflect new rules.
• Set time aside each quarter to review your processes, or rope in a payroll advisor if you’re unsure.
• Keep thorough records of everything you submit to HMRC. You’ll need to hang onto these for at least three years.

Getting payroll right

Do you find yourself double-checking spreadsheets when you should be getting on with other tasks? As well as being time-consuming, manual processes are prone to mistakes, and one wrong number in a tax code or a missed overtime entry can mean the wrong amount lands in someone’s bank account.

Here’s how to avoid this happening:

• Automate where possible: Good payroll software calculates tax, NI, and pension contributions for you.
• Use a payroll calendar to set clear deadlines for timesheet submissions, approvals, and payment runs.
• Double-check before you press ‘submit’. A quick review can save hours of stress.
• Train your team to handle your payroll processes and tools properly.

Dealing with different types of workers and variable pay

If you’ve ever had to stop and work out whether someone’s a contractor or an employee, or calculate commission at the last minute, you’re not alone. Employee classification and handling irregular pay are common payroll issues for SMEs.

To manage this effectively:

• Be clear on contracts: Keep job roles and statuses up to date.
• Use standard templates for logging bonuses, deductions, and overtime.
• Audit classifications once a year to make sure you’re not slipping into grey areas.
• When in doubt, get advice, whether from legal, HR, or payroll experts.

Managing pensions and auto-enrolment

Auto-enrolment isn’t optional, even if you’re only employing a handful of people. But understanding who’s eligible, calculating contributions, and handling opt-outs or re-enrolments can feel like another full-time job.

Here’s how to keep it manageable:

• Use payroll systems that integrate with pensions and do the heavy lifting for you.
• Set reminders for re-enrolment dates and deadlines.
• Communicate clearly with employees so they understand their options and responsibilities.
• Choose a pension provider that works well with small businesses, not one that expects an entire HR department.

Adapting as your business grows

What worked when you had fewer than ten employees might fall apart when you get to 25. More people means more admin, more varied contracts, and more chances for errors. And this presents serious risks for your business.

Plan ahead with these steps:

• Pick software that grows with you: You don’t want to have to keep switching platforms.
• Create simple, clear procedures for onboarding, pay changes, and leavers.
• Think about outsourcing payroll as things get more complex (more on that below).
• Track key metrics like payroll accuracy and processing time, so you know when something needs fixing.

Payroll best practices that save time and hassle

Choose a payroll system that actually helps

Not all payroll software is created equal, and some of it adds complexity rather than taking it away. If you’re currently hopping between spreadsheets, email chains, and pension portals, it’s probably time for a rethink.

Look for a system that’s:

• HMRC-recognised
• Cloud-based (so you’re not tied to one machine)
• Easy to use with built-in support
• Packed with features like payslip generation, auto-enrolment, and employee self-service

MHR’s People First payroll software for small businesses ticks all of these boxes, and you can buy it off the shelf with no long-winded sales call required.

Automate your HR and payroll tasks

Are you still typing out payslips manually? Or hoping you remember to submit pension contributions every month?

You don’t have to! Automate tax and NI calculations, set up recurring payment runs, and use automatic reminders for deadlines. This reduces errors and frees up time to focus on running your business, not endless admin.

Keep employee records in order

Messy records lead to messy payroll. If you’re hunting through emails to find someone’s hourly rate or relying on people to remember what holiday they’ve taken, it’s time to get organised:

• Log everything, including hours worked, pay rates, deductions, and bonuses.
• Store documents securely and in compliance with GDPR.
• Go digital: A decent HR system will centralise this information and make life easier for everyone.

Make compliance part of the routine

Payroll compliance in the UK isn’t something you can sort once and forget about. But if you bake it into your process, it won’t feel like a constant burden:

• Review legislation changes regularly.
• Carry out annual audits of your payroll setup.
• Make sure whoever’s handling payroll knows the rules, or has support if they don’t.

Communicate clearly with your team

Employees notice when payroll goes wrong, and they remember it too. Clear, timely communication is one of the easiest ways to build trust.

• Explain payslips, and make it obvious what deductions are for.
• Share payroll timelines so people know when to expect bonuses or expense reimbursements.
• Offer guides or FAQs, especially for new starters. It saves them asking the same questions every month.

Think about outsourcing

Payroll outsourcing in the UK can be a smart move, especially if you’re growing fast or just don’t have the in-house time or knowledge to keep up. Here’s why:

• It reduces the risk of mistakes.
• It frees up your time.
• It might be cheaper than hiring someone full-time to do it in-house.

Just make sure you choose a provider that understands small businesses and UK regulations, not one that’s geared up for multinationals with in-house legal teams.

Build for the future

A solid payroll process is one that grows with your business. To set yourself up for long-term success:

• Document your processes so they aren’t all in one person’s head.
• Create templates for things like onboarding and pay changes.
• Review everything annually, especially if your business has changed shape.

Key takeaways

Payroll mistakes cost time, money, and trust. And while it might seem like just another bit of back-office admin, getting it right is a crucial part of running a successful business.

By tackling common small business payroll problems head-on and putting best practices in place, you can simplify your processes, stay on the right side of HMRC, and give your team one less thing to worry about.

If you’re tired of manual payroll processes taking up so much of your time, take a look at our payroll and HR software designed for small businesses like yours. There’s no faff to wade through or jargon to translate; just easier, more accurate payroll. Explore our interactive demo today.