How Do I Manage Payroll for Charity Staff?

Introduction

Running a charity often involves hiring staff to deliver services, manage operations, or handle administration. Whether you employ one person or an entire team, you must pay them correctly and comply with HMRC rules. Managing payroll for charity staff may sound complicated, but with the right systems and understanding of your legal obligations, it can be straightforward.

This article explains how to set up and manage payroll in a charity, covering registration, PAYE, pensions, and practical tips for ensuring compliance and efficiency.

Understanding Payroll in a Charity

Charities that employ staff must follow the same employment and tax laws as any other organisation. This means registering as an employer, running payroll through a recognised system, and reporting pay, tax, and deductions to HMRC.

Even if your charity only employs one person or pays trustees for specific roles, you will likely need to operate PAYE (Pay As You Earn). Volunteers, however, are not employees and do not go through payroll, though you can reimburse them for genuine expenses.

Step 1: Register as an Employer

Before you can pay staff, your charity must register as an employer with HMRC. This can be done online and usually takes around five working days. You will receive a PAYE reference number and an Accounts Office reference, both of which are needed for reporting and payments.

You should register before the first payday to ensure there is enough time to set up your payroll system.

Step 2: Choose a Payroll System

Charities can manage payroll in several ways:

• Use payroll software such as Xero, QuickBooks, or Sage, which automatically calculates tax and National Insurance.

• Outsource to a payroll provider or accountant who handles everything on your behalf.

• Use HMRC’s Basic PAYE Tools if you have fewer than ten employees and want a free option.

Payroll software makes it easier to stay compliant, manage Real Time Information (RTI) submissions, and issue payslips electronically. For small charities, outsourcing may be cost-effective and reduce administrative pressure.

Step 3: Collect Employee Information

You will need to gather essential details for each staff member before running payroll:

• Full name, address, and date of birth

• National Insurance number

• Bank details for payment

• P45 from their previous employer (or a completed starter checklist)

• Tax code (provided by HMRC or based on the P45)

If your charity offers benefits, such as mileage reimbursement or pension contributions, these should also be recorded.

Step 4: Run PAYE Each Month

PAYE is the system used to collect Income Tax and National Insurance contributions from employees. Each time you pay staff, you must:

• Calculate gross pay, including wages, bonuses, or overtime

• Deduct Income Tax, National Insurance, and any other contributions (such as student loans or pensions)

• Report the payment to HMRC through RTI submissions before or on the day employees are paid

• Provide payslips showing earnings and deductions

• Pay employees and transfer the deducted taxes to HMRC by the 22nd of the following month (or the 19th if paying by post)

Payroll software automates these calculations, reducing errors and ensuring deadlines are met.

Step 5: Set Up a Workplace Pension

Under the UK’s auto-enrolment rules, all employers must provide a workplace pension scheme for eligible staff. This applies to charities too.

You must enrol employees who:

• Are aged between 22 and the State Pension age

• Earn more than £10,000 a year

• Work in the UK

You must make employer contributions to their pension and deduct employee contributions from their pay. The minimum contribution rate is currently 8% of qualifying earnings, with at least 3% paid by the employer.

Your charity must also register its pension scheme with The Pensions Regulator and submit a declaration of compliance.

Step 6: Handle Expenses and Benefits Correctly

Charities can reimburse staff for expenses incurred while carrying out their duties, such as travel or materials. These payments are not subject to tax or National Insurance as long as they are genuine business expenses and properly recorded.

If your charity provides benefits such as health insurance or a company vehicle, these may be taxable. You must report them to HMRC using form P11D at the end of the tax year or include them through your payroll if you use payrolling of benefits.

Step 7: Meet Year-End Payroll Obligations

At the end of each tax year (5 April), you must complete several tasks:

• Provide each employee with a P60, showing total pay and deductions for the year.

• Submit your final Full Payment Submission (FPS) to HMRC.

• Report benefits or expenses through P11D forms, if applicable.

• Prepare for the new tax year, updating payroll software and tax codes.

Charities should keep payroll records for at least three years after the tax year they relate to.

Managing Payroll for Part-Time or Grant-Funded Staff

Many charities employ part-time or project-based staff funded through grants. You must still operate PAYE for these employees, even if their hours or funding vary. The key is to ensure:

• Contracts clearly state employment terms and pay rates.

• Payroll systems are flexible enough to handle variable hours.

• You maintain detailed records of how salaries are funded for grant reporting.

If staff are paid from restricted funds, those payments should be tracked separately in your accounting system.

The Role of Volunteers and Trustees

Volunteers are not paid employees, so they do not appear on payroll. However, any expenses reimbursed to volunteers must be for genuine costs only. Payments that could be seen as wages (such as fixed stipends or gifts of value) could unintentionally make them employees in the eyes of HMRC.

Trustees generally cannot be paid unless the charity’s governing document specifically allows it or the Charity Commission grants permission. If payment is permitted, it must go through payroll and be declared in the annual accounts.

Example Scenario

Imagine a small charity called Helping Hands UK that employs three part-time workers and one full-time manager. The trustees register the charity as an employer, set up payroll software, and choose a workplace pension provider.

Each month, they enter the hours worked, approve expenses, and run payroll. The software calculates tax and National Insurance automatically and submits the RTI report to HMRC. The charity pays staff and transfers PAYE deductions to HMRC by direct debit.

By following these steps, the charity stays compliant, avoids penalties, and keeps its financial records accurate for reporting.

Common Mistakes to Avoid

• Paying staff without registering as an employer

• Missing RTI submission deadlines

• Using incorrect tax codes

• Forgetting to enrol staff in a workplace pension

• Mixing volunteer reimbursements with staff wages

• Failing to keep payroll records for the required period

Avoiding these mistakes protects the charity from fines and ensures employees are paid correctly.

How an Accountant Can Help

An accountant with experience in charity payroll can:

• Register your charity with HMRC and The Pensions Regulator

• Set up payroll software and systems

• Calculate and process PAYE, National Insurance, and pensions

• Prepare and submit RTI and year-end reports

• Ensure all staff payments comply with charity and employment law

For growing charities, outsourcing payroll to an accountant can save time and reduce administrative workload, allowing trustees to focus on charitable activities.

Conclusion

Managing payroll for charity staff involves more than simply paying wages. It requires careful planning, compliance with HMRC and pension regulations, and accurate record keeping.

By registering as an employer, setting up proper payroll systems, and following statutory rules, your charity can pay staff confidently and transparently. Professional guidance from an accountant ensures everything runs smoothly, helping you stay compliant while focusing on your charity’s mission.