Running payroll manually is time-consuming, error-prone, and increasingly out of step with HMRC requirements. If you employ even one person in the UK, you need a reliable system. Here's what small business owners need to know about payroll software what it does, what it costs, and which options are worth considering.
What Does Payroll Software Do?
Payroll software automates the calculations and compliance tasks involved in paying employees. At a minimum, good payroll software will:
- Calculate gross and net pay, tax, and National Insurance contributions
- Generate payslips for employees
- Submit Real Time Information (RTI) reports to HMRC automatically
- Handle statutory payments sick pay (SSP), maternity pay (SMP), paternity pay (SPP)
- Process pension contributions and manage auto-enrolment obligations
- Calculate and submit PAYE to HMRC
Without software, all of this is done manually and HMRC penalties for late or incorrect RTI submissions are applied per employee, per month.
Do Small Businesses in the UK Need Payroll Software?
If you employ anyone including part-time or irregular workers you're required to operate PAYE and submit RTI reports to HMRC every time you pay them. Manual calculations are possible but high-risk. Payroll software removes the compliance burden and saves significant time.
Even if you only employ yourself as a director drawing a salary, payroll software is the cleanest way to manage this correctly.
Best Payroll Software for Small Businesses in the UK
1. Xero Payroll
Xero is primarily an accounting platform, but its built-in payroll is solid for small teams. RTI submissions are automated, and payroll integrates directly with your accounts useful for keeping everything in one place. Payroll is included in Xero's higher-tier plans or available as an add-on.
Best for: Businesses already using Xero for accounting.
2. QuickBooks Payroll
Similar to Xero, QuickBooks Payroll integrates with the QuickBooks accounting suite. It handles RTI, auto-enrolment, and payslips automatically. The interface is clean and well-suited to non-accountants.
Best for: Small businesses wanting an all-in-one accounting and payroll solution.
3. BrightPay
BrightPay is widely used by UK accountants and payrollers, and is available directly to small businesses. It's a desktop-based (or cloud) solution with strong compliance features, including automatic pension enrolment management. Pricing is competitive and it handles complex scenarios well.
Best for: Businesses with more complex payroll needs or multiple pay frequencies.
4. Sage Payroll
Sage is one of the most established payroll providers in the UK. Sage 50 Payroll is widely used by SMEs and accountants alike. It's more feature-rich than most small businesses need, but the support infrastructure and reliability are strong.
Best for: Established businesses wanting a proven, widely-supported solution.
5. FreeAgent
FreeAgent is specifically designed for freelancers, contractors, and small businesses. Payroll is included within the platform, and it's available free with a NatWest, RBS, or Ulster Bank business account. The interface is one of the simplest available.
Best for: Sole traders and very small businesses (1–5 employees).
6. Pento
Pento is a newer, cloud-native payroll platform built specifically for UK startups and SMEs. Automation is its key differentiator once set up, payroll runs itself with minimal input. Pricing is higher than some alternatives but time savings are significant.
Best for: Growing small businesses wanting a fully automated approach.
How Much Does Payroll Software Cost for a Small Business?
| Provider | Typical pricing |
|---|---|
| FreeAgent | Free with eligible bank account; £19/month otherwise |
| BrightPay | From ~£129/year (up to 3 employees) |
| QuickBooks Payroll | From ~£4/month + £1 per employee |
| Xero Payroll | Included in some plans; from £5/month add-on |
| Sage Payroll | From ~£10/month (1–5 employees) |
| Pento | From ~£59/month (1–10 employees) |
For a small business with 1–5 employees, expect to pay £0–£50/month depending on the solution. Factor in the time saved versus manual processing when evaluating cost.
Payroll Services vs Payroll Software: What's the Difference?
Payroll software is a tool you use yourself to run payroll. You enter the data, the software calculates and submits.
Payroll services are outsourced you provide the inputs (hours worked, starters, leavers), and a payroll bureau processes everything on your behalf.
For most small businesses, payroll software is the more cost-effective option. Outsourced payroll services typically cost £5–15 per employee per month, plus setup fees and are more useful when payroll is genuinely complex (multiple pay rates, irregular hours, complex benefits).
HMRC's Free Payroll Software
HMRC maintains a list of approved free payroll software for small businesses with fewer than 10 employees. These are basic tools with limited features, but they meet RTI submission requirements. For a sole director paying themselves a salary with no other staff, this may be sufficient.
Search "HMRC basic PAYE tools" to find the official tool.
Auto-Enrolment: What Payroll Software Needs to Handle
Since the Pensions Act 2008, all UK employers must automatically enrol eligible workers into a workplace pension. Your payroll software must:
- Identify which employees are eligible
- Calculate minimum contribution levels (currently 3% employer, 5% employee)
- Submit contributions to your pension provider
- Manage postponement and opt-out processes
Most modern payroll platforms handle auto-enrolment as standard. If yours doesn't, that's a significant compliance gap.
Summary
For UK small businesses, payroll software is a non-negotiable investment if you have employees. The cost is modest often £0–50/month and the alternative (manual processing with the associated HMRC compliance risk) is not worth entertaining.
Choose software that integrates with your accounting system, handles RTI and auto-enrolment automatically, and generates clear payslips. For most small businesses, FreeAgent, QuickBooks, or BrightPay will cover everything you need.