How Is Payroll Calculated?

When you work, you expect to get paid, right? This is a fundamental responsibility that demands proper management, and it is commonly referred to as payroll, a crucial system to get to grips with this unless you want disgruntled employees receiving incorrect paychecks.

To capitalise on the time-saving, cost-effective, and accuracy-enhancing benefits of payroll software, consider some of the leading companies offering payroll software in the UK:

  1. Rippling
  2. Pento
  3. Deel

Payroll is a legal obligation that must be paid to employees, and it is typically managed by the accounting or human resources (HR) department though small-business payrolls may be handled directly by the company owner.

In this guide, we delve into the payroll system. Explore its calculation methods, including the typical formula used and the payroll software options available for accurate calculation


How To Calculate Payroll


Calculating payroll may sound like a simple feat, but there are a few steps to this process and it can become complicated if not properly understood.

Put simply, payroll is the process of paying employees for a set period, typically for one month of work. It is usually dished out on the same day each month and paid via direct deposit into employee bank accounts.

The process aims to accurately track employees’ hours to ensure they are compensated only for the time they’ve worked. However, it’s not merely about tallying up working hours and disbursing payments.

Besides the employees’ pay rate, factors such as sick pay, holiday pay, overtime and bonuses will all come into play in the calculation.

Moreover, employees earning above the current tax threshold are subject to income tax and national insurance (NI) contributions. When paid via PAYE (Pay As You Earn), taxes are automatically deducted from their paychecks and remitted to HMRC.

This may all sound complicated, but these components can be distilled into a straightforward payroll formula.

What Is The Formula For Payroll?


Payroll is responsible for determining the amount an employee is entitled to based on their hours or weeks worked during the pay period and their pay rate.

Your gross pay encompasses your income before any taxes and deductions are withheld, while your net pay, also known as take-home pay, is what remains after deductions such as Income tax and National Insurance contributions are subtracted.

In simple terms, the formula for calculating net pay is outlined as follows:

Gross pay = wage rate x number of hours worked

Net pay = gross paypay deductions (e.g., sick pay) + tax contributions

Can Excel Calculate Payroll?


Once understood, payroll doesn’t have to be complicated. Nevertheless, who wants to be faffing around with figures in our modern age? Many companies opt for software solutions to manage their payroll operations, helping to simplify the process.

Excel is one such management system.

This is a widely used platform for managing payroll. Its user-friendly interface facilitates various functions, including the storage and organisation of employee data, which can be transformed into clear visual representations like charts, offering insights into employee information.

However, Excel is just one option among many, and it’s thoroughly worthwhile considering others to find the best option for you.


What Is The Best Payroll Calculator?


Payroll software is a computer programme or application designed to assist businesses in managing payroll tasks, encompassing everything from bonuses to deductions.

This software proves invaluable by eliminating the necessity for manual calculations and data entry, significantly reducing the occurrence of errors and streamlining the entire process.

User-friendly and customisable, payroll software caters to the specific requirements of businesses. Beyond payroll management, it also maintains employee information and generates employee reports.

Take time to consider the payroll software that is best for you and your company. After all, different providers will offer different features, with some even offering free trial periods and complementary features.

So, make sure you consider your business and its specific payroll needs to determine which provider is most likely to fulfil the needs of your business.