Operating your payroll isn't just about paying your staff the right amount on the right date - as important as that is.

Employers provide the Government with some pretty complicated administrative support. They are unpaid tax collectors responsible for regular deductions of income tax and National Insurance Contributions.

Depending on an individual employee's circumstances they may additionally be responsible for overseeing student loan repayments, child support payments or stakeholder pension contributions.

And they may also have to make payments of tax credits, statutory maternity and statutory sick pay.

Not only does an employer have to calculate an employee's gross and net pay, taking all of this into account, he or she also has to supply a whole range of details - to the Inland Revenue and the employee - at various stages throughout the year.

And then of course there's all the internal stuff - tracking holidays, reimbursing expenses, paying overtime, commission or bonuses, administering staff loans and so on.

This relies on you doing the calculations and the paperwork yourself. Realistically it is only practicable if you have one or two employees. More than that and it will almost certainly be more cost-effective to invest in either software or an outsourced service to help you.

When you first become an employer, your need to inform the Inland Revenue. It will assign you a local Accounts Office which will become your point of contact for all payments, paperwork and queries.

You can download the necessary forms and paperwork to help you comply with tax legislation from the Inland Revenue's website
Although it is tempting to think of manual system as free, don't forget to take into the account the costs of your or your payroll manager's time.

Many PC accountancy packages offer payroll management software as an optional extra. The big advantage of this is that it seamlessly integrates your payroll commitment into your books. So, for example, when you do a cash flow forecast it will take into account your anticipated wages bill.

You will need to take out an annual subscription to keep the software updated with the latest tax codes, limits and regulations. This is usually done via an automatic online connection. Costs vary but they usually start from around £80 a year.

Although payroll software makes handling wages, deductions and so on easy to administer it still relies on you (or your appointed member of staff) sitting down and completing the paperwork every week or month. You will also need a basic understand of how PAYE, National Insurance and so on work.

Managing your payroll isn't just about paying your employees. You also have to meet various legal obligations not only when you pay your staff but also at other key times of the year.

The payslip
Every time you pay an employee, you are legally obliged to give him or her a payslip with at least the following details:

Total gross earnings
This is everything the employee has earned including normal pay, overtime, bonuses, commission, fees, statutory sick pay, statutory maternity pay and so on.

Total deductions
This is everything you've deducted from their pay including tax, National Insurance, occupational pension scheme contributions, student loan repayments etc.

Net pay
This is the employee's take-home pay once their deductions have been subtracted from their gross pay.

Tax and NI
As you administer tax and NIC collection on behalf of the Inland Revenue, you are also required to do the following:

• Notify your Inland Revenue accounts office when an employee starts or leaves, usually via form P45
  
• Work out and deducted PAYE Schedule E income tax and National Insurance Contributions (NICs) every pay day
• Record details of these deductions every pay day on form P11
• Pay the deducted money to the Inland Revenue every month or quarter within 14 days of the end of the tax month
• Submit full deduction details at the end of the tax year (5 April) on forms P14 and P35
• Give each employee a record of their pay and deductions at the end of the tax year on form P60

And where relevant you may also have to:

• Deduct student loan deductions and stakeholder pension contributions each pay day
• Make payments of tax credits, statutory sick pay and statutory maternity pay. If necessary you can apply for funding from your accounts office to make these payments.
  

You will need this if an employee has not got a P45 to give to you
Download form P46

When a new employee joins your business he or she should give you a P45.

They should have received this from their previous employer and it will carry important information such as the leaving date, tax code, National Insurance number and amount of tax paid to date.

There are three parts to a P45 - the new employee should keep page one and give you parts two and three.

You should check that the information on pages two and three are the same and contact your accounts office if there are any discrepancies.

You will use the information it contains to set up the P11 and work through the first pay day. After that you should complete part three and send it in to the Inland Revenue and keep part two for a minimum of three years.

If an employee doesn't have a P45, you should get to him to complete a P46 as soon as possible.