Can I Do Payroll Manually or Should I Use Software?

Introduction

If you employ staff through your charity or small business, managing payroll is a legal responsibility. You must calculate wages, deductions, and National Insurance correctly, report to HMRC on time, and keep accurate records. One of the first decisions you will face is whether to handle payroll manually or use payroll software.

Both methods are legal, but the choice depends on the size of your organisation, your confidence with payroll rules, and how much time you can dedicate to administration. This article explains the differences between manual and software-based payroll, the risks of errors, and why many employers now rely on digital systems.

Understanding What Payroll Involves

Payroll management means more than simply paying employees. Each pay period you must:

• Calculate gross and net pay based on hours worked or salaries

• Deduct Income Tax, National Insurance, student loan repayments, and pensions

• Report payments to HMRC using Real Time Information (RTI)

• Provide payslips to employees

• Pay employees and HMRC on time

• Keep records of pay, deductions, and tax codes for at least three years

Mistakes in these steps can lead to penalties from HMRC and cause frustration among staff.

Doing Payroll Manually

Manual payroll means calculating wages and deductions yourself, using spreadsheets or paper records instead of digital tools. It can work for very small organisations with one or two employees and straightforward pay structures.

You will need to:

• Register as an employer with HMRC

• Obtain tax codes for each employee

• Use HMRC’s tax tables to calculate PAYE and National Insurance

• Keep your own records of payments and deductions

• Submit RTI reports to HMRC manually via their Basic PAYE Tools

While this approach saves software costs, it requires time, attention to detail, and up-to-date knowledge of tax rules.

Advantages of Manual Payroll

• No software costs: It can be done with a calculator, spreadsheets, and HMRC tools.

• Simple for very small teams: If you have only one employee and pay the same amount each month, manual calculation may be manageable.

• Greater control: You see every step of the calculation, which can help you understand your organisation’s payroll structure.

Disadvantages of Manual Payroll

• Time-consuming: Calculating tax and contributions manually takes time each pay period.

• High risk of errors: Even small mistakes in tax or pension deductions can lead to HMRC penalties or unhappy employees.

• Difficult to manage growth: As your team grows or pay structures change, manual payroll quickly becomes complex.

• Limited reporting: Manual systems do not automatically generate reports or year-end summaries, increasing the administrative burden.

• Compliance challenges: Keeping up with changes in tax rates and legislation requires constant attention.

For most employers, the risks and time demands of manual payroll outweigh the small savings on software.

Using Payroll Software

Payroll software automates much of the process. It calculates wages, deductions, and contributions automatically, generates payslips, and submits RTI reports directly to HMRC. Many systems also handle pension auto-enrolment and integrate with accounting software.

There are two main options:

• Commercial payroll software such as Xero, QuickBooks, or Sage.

• HMRC’s Basic PAYE Tools, a free program for very small employers.

Payroll software reduces the risk of human error and ensures that you stay compliant with HMRC requirements.

Advantages of Payroll Software

• Accuracy: Automatic tax and National Insurance calculations reduce the chance of mistakes.

• Efficiency: The software handles RTI submissions, payslip generation, and record keeping with minimal effort.

• Compliance: Systems are updated regularly to reflect tax law changes.

• Integration: Many packages link directly with accounting systems and pension providers.

• Scalability: Software can handle multiple employees and pay schedules as your organisation grows.

• Professional presentation: Payslips and reports look professional and can be accessed digitally by employees.

Disadvantages of Payroll Software

• Cost: Most software requires a subscription, although free or low-cost versions exist for small employers.

• Training: You need to learn how to use the system correctly to avoid mistakes.

• Technical issues: Software errors or internet downtime can delay processing, although this is rare with reputable providers.

What HMRC Recommends

HMRC strongly encourages employers to use payroll software. While manual payroll is legal, Real Time Information reporting must still be submitted electronically, and software simplifies this process.

HMRC’s Basic PAYE Tools can handle the basics for small organisations, but it lacks the flexibility of commercial systems. Most accountants and payroll professionals recommend using paid software for accuracy and time savings.

Comparing Manual and Software Payroll

Feature Manual Payroll Payroll Software
Cost Free or low-cost Subscription or licence fee

Accuracy Dependent on user skill High, with automatic calculations

Time required High Low

Risk of error Moderate to high Low

RTI compliance Manual submission Automatic submission

Scalability Limited Suitable for growth

Reporting Manual Automated and detailed

Example Scenario

Imagine a small charity, Community Connect UK, employing two part-time workers. Initially, the treasurer handles payroll manually using spreadsheets. As the charity grows, managing deductions and RTI submissions becomes stressful.

They switch to payroll software integrated with their accounting system. The software automatically calculates PAYE, pension contributions, and produces payslips each month. It also reminds them of HMRC payment deadlines. What once took two hours now takes 15 minutes, freeing time for other administrative tasks.

The Role of an Accountant

An accountant can help you choose the right payroll system and ensure it is set up correctly. They can also:

• Register your organisation with HMRC

• Process payroll on your behalf

• Ensure RTI and pension compliance

• Provide advice on expenses, benefits, and deductions

• Prepare end-of-year returns and reports

For small charities and businesses, outsourcing payroll to an accountant can be more efficient and cost-effective than managing it internally.

How to Choose the Right Option

When deciding between manual payroll and software, consider:

• The number of employees you have

• The complexity of your pay structure

• Your familiarity with PAYE rules

• Your available time and resources

• Your need for reports and integration with accounting systems

If your organisation has only one or two staff members, HMRC’s free tools may be sufficient. However, if you employ several people or expect to grow, payroll software will save time, reduce errors, and ensure long-term compliance.

Conclusion

While you can manage payroll manually, it requires time, precision, and ongoing knowledge of tax legislation. Payroll software automates calculations, ensures compliance with HMRC, and reduces administrative stress.

For most employers, especially charities and small businesses with limited staff time, using payroll software or outsourcing to an accountant is the best choice. It provides accuracy, efficiency, and peace of mind, allowing you to focus on your core mission or business goals.