How to set up a new employee in Xero Payroll

Setting up your own start-up can be a time-consuming business. So there will come a time where you need to take that next step and think about your very first hire.

Taking on your first employee is a big step for any entrepreneur. Your business may have started at the kitchen table, but with increasing success comes an increasing workload – and that’s when an extra pair of hands will really make a difference.

But hiring an extra pair of hands also means having to set up your new employee on the payroll AND getting your payroll working correctly. If you’re new to being an employer, this can seem like a daunting prospect. Don’t worry, though: with Xero online accounting software, it couldn’t be easier to set up your new employee and get your payroll running like clockwork.

So here’s our step-by-step guide on how to set up payroll for the first time – and how to run it effectively over time to take the hassle out of paying your new employee.

Setting up PAYE

One of the first things to do is set up the business up for pay-as-you-earn (PAYE).

PAYE is the income tax you’ll take from your new employee’s wages and will then pay to HMRC. As an employer, it’s your legal responsibility to collect this tax and to have your payroll configured to do this.

• The first step is to make sure you’ve enrolled for PAYE services with HMRC. You’ll know if you’ve done this if you already have a PAYE reference and Accounts Office reference.
• To enrol for PAYE services with HMRC, log in to your HMRC account and go to ‘Manage Account’. From this screen you can register for any HMRC service. Follow the on-screen instructions, fill out your details and once this has been done HMRC will send your reference numbers to you in the post.

Setting up Xero Payroll

Right, so we’ve set up your PAYE services. The next thing is to check whether you have the right Xero subscription for running payroll.

• Go into Xero and check that the ‘Payroll services’ box has been selected under subscriptions. The Xero subscription cost you pay will vary depending on how many employees are on the payroll but Xero will charge you automatically.

Once you’ve signed up for the correct subscription, you should see ‘Payroll settings’ in your  ‘Settings’ options. From here you’ll be able to set up your company’s payroll.

In the ‘Payroll Settings’ screen you’ll see several tabs that will need to be filled out before you can start using Xero payroll:

• Organisation – here’s where you tell Xero which account codes you’d like to use when posting the monthly payroll journal. This differs from client to client, so please contact us if you have any questions and we can advise on which account codes to use.
• HMRC – this is where you input your PAYE reference and Accounts Office reference numbers. You may be eligible for Small Employers Relief and Employment Allowances so give us a call and we can let you know if you qualify. You must also enter your HMRC User ID and password as Xero will use these when submitting your Real Time Information (RTI) reports each month
• Pay Calendar – now you need to tell Xero how often you’re going to pay your staff. You may pay some staff weekly and some monthly, but this isn’t a problem with Xero – you just set up a calendar for each group of employees.

And that should be it! Unless we’ve told you about any additional requirements, that will be all the tabs you need to complete to get your payroll up and running.

Setting up an employee in Xero

Now that you’ve set up the company in Xero Payroll, the next step is to set up your employee. This means entering the the information for your new employee into Xero so you can run the payroll and pay them without any hitches.

• To set up your new employee, go to ‘Payroll’ and then ‘Employees’ and from here you can input all the employee information that’s needed.
• You’ll need to click into your employee’s pay details and set up their salary details. To do this go to the ‘Employment’ tab and under ‘Salary & Wages’ select ‘Set New Salary & Wages’ and input the data. To make any regular additions or deductions that are needed to their pay, go into the ‘Pay Template’ tab and you can include these as necessary
• To run the payroll on a monthly basis, go to ‘Payroll’, then ‘Pay Runs’ and create a new pay run.
• From here you can make one-off adjustments such as bonuses or unpaid leave. Simply click into the relevant employee and ‘Add New Earnings’ or ‘Add New Deduction’ as you wish
• Once you’re happy with the pay run, just click ‘Post’ in the ‘Pay Run’ screen and Xero will automatically post the payroll journal and send the RTI information to HMRC. You’ll then have an option to email payslips to everyone you’re paying (cutting down on printed payslip costs and postage).
• To see how much PAYE and National Insurance (NI) you owe to HMRC, just go to Payroll > Taxes & Filings and from here you can also download a P32 form which provides you with all the detail you need

If you need a little more help, this video from Xero walks you through the whole process of setting up your payroll and employees.

Monthly processes to carry out

So, your payroll is ready to go and your new employee is set up with all the relevant details. But there are a few additional tasks you’ll have to look at each month before running your payroll.

How to add an employee:

As you continue to grow, you’ll be taking on more people and expanding the team. So you’ll need to know how to add on another new employee to your existing payroll:

• To add a new employee go to the ‘Payroll’ tab and select ‘Employees’.
• From this screen you’ll be able to select ‘Add Employee’ and then it’s a case of filling out all the same fields you completed for your first employee.
• There are three tabs that are compulsory – ‘Details’, ‘Employments’ and ‘Taxes’. The others are optional but please do pick up the phone to us if you’re unsure which apply.
• If the new employee has a P45 then you can enter their pay-to-date and tax-to-date details in the ‘Opening Balances’ tab.

How to remove an employee:

Over time, you’ll obviously have people who leave the team and move on to other new roles and challenges – and that means removing that person from your payroll.

• When an employee leaves the business and you want to take them off the payroll, go to ‘Payroll’ and select ‘Employees’.
• Select the employee you want to remove from the payroll and go to the ‘Employment’ tab.
• From here you’ll see a red button at the bottom left-hand corner of the screen called ‘End Employment’. Click this button.
• A calendar will then appear on screen where you can enter the employee’s last working day in the business.
• Once you’ve done this you’ll be prompted to say that the employment has been terminated and you’ll be given the option to download their P45.

How to change an employee’s salary:

With luck, all those sales will be translating into a healthy profit and your team will all be meeting their performance targets – and that means it’s time to give your people a pay rise!

• To change an employee’s salary go to ‘Payroll’ and ‘Employees’ and select the employee whose salary you want to change.
• Go to the ‘Employment’ tab and under ‘Salary & Wages’ select ‘Set New Salary & Wages’ and input the data, in the same way as when you set up your first employee.
• If you decide to increase salaries part way through the month – no problem! Xero will automatically calculate employee’s pay based on the dates that you’ve inputted.

Payroll support when you need it

So, there you have it. You’ve set up your payroll and everything’s going to run like clockwork.

With your payroll fully integrated into your Xero accounts, you’ve got a full view of all your payroll costs and a streamlined, modern way to pay your team when payday comes around.

Who are FD Works?

Here at FD Works our team of accountants and business advisors are here to help you understand the numbers behind your business and empower you to make bold decisions. Our team of experts work with clients in Bristol, Bath and the wider South West.