Buyer’s guide to payroll systems (June 2009)

As well as tax and NI, payroll systems can include benefits payments in their salary calculations, says Tom Washington

Payroll systems are designed to perform often complicated calculations that make up an individual’s pay for the purposes of tax and national insurance (NI) contributions, and ensure staff are paid on time. Such systems automate these calculations and provide employees with their payslip, fulfilling HM Revenue and Customs’ (HMRC) reporting requirements in the process.

Employers that manage their payroll function in-house using their own administrative system must update this to accommodate any tax changes when they occur, to ensure they remain compliant with HMRC’s requirements. Alternatively, employers can outsource their system, to varying degrees. These range from simply having payslips printed externally to fully outsourcing the entire payroll function to a third-party provider.

Most modern payroll software can report on different elements of remuneration, including benefits. But Simon Parsons, director of payments, benefits and compliance strategies at Ceridian, explains: “Not all payroll systems have the capability of non-payable elements required to operate benefit liabilities through payroll.”

Payroll systems separate out non-cash benefits-in-kind, which are taxable from salary, such as company cars and health cover. These benefits need to be reported at the end of each tax year to enable HMRC to calculate any tax due.

Deductions from net salary, such as pension contributions or share scheme payments, can also be set up with relative ease. Monthly deductions require only one action to program the payroll system to take that payment every month.

Payroll systems can also manage payments for benefits made from gross salary. For example, if staff are paying back an interest-free season ticket loan, payroll systems enable employers to set up a balance and a payback period, automatically taking monthly sums from the employee’s gross pay until the balance is paid off.

The same applies to salary sacrifice perks, for which any deductions are processed before gross pay is taxed. Claire Cockram, a consultant at Towers Perrin, says: “Staff and employers may wish to show the pre-sacrificed salary for reference purposes to be used when calculating salary increases or when an employee applies for a mortgage. In this instance, a payroll system will need to record the pre-sacrifice and sacrificed amount.”

Employers can also link benefits software to payroll systems to run such calculations. For example, those that want to link a flexible benefits scheme to payroll may have to run two pieces of software that join up. This enables employees to select their perks and, in turn, feeds into the payroll system to make the necessary payroll alterations. “For employers, the integration of payroll and benefits data offers greater reliability and visibility of management information,” says Parsons.

The cost of a payroll system depends on the range of benefits employers offer and the type of software they use. As a rough guide, for a simple payroll system for small and medium-sized employers, Ian Fitzgerald, UK payroll operations director at NorthgateArinso, estimates the cost to be up to 50p per payslip. For a larger, more complex outsourced system that can cope with salary sacrifice arrangements and frequently-changing benefits, employers can expect to pay up to £2 to £3 per payslip.

What is a payroll system?

A payroll system automates the process by which employers calculate the salaries of employees and ensure they are paid on time. It must take into account factors such as how much national insurance, tax and other salary deductions are taken from both gross and net pay.

Where can employers get more information?

The Institute of Payroll Professionals ( provides information and support.

More information is also available at

Some of the main providers include:

ADP Employer Services, Agresso, Application Lynx, Bond TeamSpirit, Cascade Human Resources, Ceridian, COA Solutions Crocus, Fluous HR Solutions, ICS, IPPM, Logica, Microsoft, Midland HR, NorthgateArinso, Oracle, SAP, Softworks, Snowdrop, Symatrix and Trace.