Payroll is one of the most critical—and complex—functions in any business, and a lot of responsibility lies in getting it right. After all, employees expect to be paid correctly and on time, and governments expect employers to comply with ever-changing tax and employment laws.
That is where payroll software comes into play. A piece of software built to give you all the tools you need to manage your payroll efficiently, cutting down on time-consuming tasks and potential errors. In short, payroll software works by calculating, distributing, and reporting employee pay accurately and in compliance with the law.
But how does payroll software work? We’ll walk you through the process step by step, so you know what to expect from your in-house software and if it’s time to consider changing payroll software providers or making the switch to payroll software from outsourcing.
How does payroll software work?
So now we’ve outlined what it is, let’s get to grips with how payroll software works exactly.
Step 1: Data collection
The process begins with collecting data. But this isn’t just collecting all the core data like employee records, bank details, and tax codes, it also brings in variable data like timesheets, overtime, holiday and sick pay, bonuses, and deductions, to create a complete, unified dataset. This is either done manually or imported via an API to connected systems.
For extra peace of mind, some platforms will also carry out pre-checks—like validating tax codes against format rules, ensuring there’s no duplicate records, or flagging outliers—to ensure accuracy from the outset.
Step 2: Automated calculations
Next comes the calculations. This is where the software shines, as it automatically does the work that used to be done painstakingly by payroll professionals. Firstly, the software will use information on salaries, overtime, and bonuses to calculate gross pay for your employees. It will then determine statutory deductions based on their individual tax code, National Insurance contributions, student finance, and any other deductions using HMRC thresholds. The final net pay is then determined.
Advanced software can also handle more complex scenarios, such as multiple pay frequencies, salary sacrifice arrangements, tax code changes, and employees on different pay schedules or in multiple countries.
Step 3: Compliance checks
Before payroll is finalised, the system runs compliance checks, which are vital for avoiding costly mistakes. All of your data will be checked against the rules set out by HMRC, such as tax thresholds, NI bands, and any other statutory requirements like SSP, to ensure all calculations align with the current legislation.
At this stage, any other errors will also be flagged, like duplicate entries or negative net pay and suggest any corrections. After all, good payroll software doesn’t just calculate payroll, it cross-examines it against legislature to ensure all errors are flagged early in the process.
Your software will also complete pre-checks, ready for your Real Time Information (RTI) filings—validating the format and content before FPS/EPS filing.
Step 4: Approvals & adjustments
Once these checks are complete, human oversight is introduced. Managing user access and permissions is essential at this point of the payroll process to ensure that the right people have access to the payroll data they need to keep sensitive information secure.
Typically, your payroll administrator or authoriser will have full autonomy over your payroll data and be alerted to review the payroll run with other members of the team delegated for lower-access areas.
Reconciliation features such as side-by-side pay comparison of the previous pay period help to aid auditors in ensuring the information is correct, with an audit trail logging who makes changes and when.
At this stage, any necessary last-minute adjustments can be made. This could include correcting an error, approving an emergency advance, or updating an employee’s hours. Some systems will even allow partial re-runs without disrupting the rest of the pay group.
Once approved, the payroll is ready to run!
Step 5: Payment
The ultimate goal of payroll software is to pay your employees correctly, on time, and with full traceability—and payroll software makes this a guarantee.
Once all payroll data is approved, your software will produce output files that compile all information regarding payments into the correct format. This will typically be integrated directly with BACS, creating a BACS file in standard 18 format that is ready for direct upload to the bank or sent via direct integration.
It may also use Faster Payments which will be automatically initiated once you have all the necessary employee data finalised. This will be sent to your bank which will then verify, authorise, and process the payment in near real time.
Before payments are sent to employees, the software will validate the payment data, checking the sort code and account number before submission and flag any errors.
Once everything is correct, payments are then sent directly to employees’ bank accounts alongside a generated payslip (either in a PDF or directly through a secure self-service portal)—accurately and on time.
Step 6: Reporting
Good payroll software will come with built-in functionality to produce reports for a variety of purposes, including statutory reports like FPS, EPS, P11Ds, and student loan notices, helping you to demonstrate your compliance with payroll legislation. Your software will also produce year-to-date summaries at both employee and company levels.
Most software will also have functionality to provide custom reporting, allowing you to filter your data by date, department, or pay type to ensure you can find whatever information you need in one place and export if necessary.
Perhaps most importantly, it will also securely archive all records for up to 6 years, a crucial step for audits, tribunal claims, or any internal reviews. This final stage ensures that everything is organised, accessible, and ready for whenever you need it.
And that’s it! How does payroll software work—answered!
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Why is payroll software important?
So, now you understand how payroll software works, let’s delve into why it’s important for businesses looking to streamline their payroll processes.
Guaranteed compliance
A major part of the modern payroll function is ensuring compliance with a mountain of legislation rules; otherwise, you’ll have to face the hefty fines for non-compliance.
The best software comes with statutory rates, reporting requirements, and GDPR compliance built in, with most providers providing regular updates to meet new requirements. Gov.uk has a list of HMRC-recognised payroll software available on their website to make your search easier and ensure payroll and compliance go hand-in-hand from the outset.
More security
Using software for your payroll processes provides greater security than if you do so manually—after all, there’s no risk of paper documents going missing or falling into the wrong hands. Software, especially cloud–based software, ensures that your data is stored and managed in professional data centres that are protected by rigorous security systems. Reputable providers—like Cintra—will be accredited with ISO27001/9001, HMRC recognition, and the CIPP Payroll Assurance Scheme.
Greater accuracy
Good software increases payroll accuracy massively as it doesn’t make the silly arithmetical mistakes that can sometimes fall through the net if done manually! Many packages come with built-in reporting functions that can help spot any errors resulting from human input and correct or flag them.
Advanced analytics
A great benefit of having all your data in a sophisticated system is that it can crunch the numbers to provide tailored insights into trends like absence or overtime, as well as generate reports on pension details and pay variance—the list goes on. In addition to pre–built reports, the best software can create custom reports for you, too.
Different types of payroll software
Before you can decide what software provider is best for your company, it’s important to understand what types of payroll software there are. With so many kinds of software on the market, it can be difficult to get your head around what exactly your company requires.
Luckily for you, there are essentially only two different types of payroll software to know:
On-premises software
On-premises software very much does as it says on the tin—it’s software that is installed directly on your own business servers or computers. As your data is stored locally, it’s accessible only within your workplace; while that in itself provides security, it’s not always effective if you have a remote or global team.
As your software is internal, you’re always responsible for any manually updating your software, which might require support from your IT team. An IT team who will also be responsible for securing your data and completing regular backups and maintenance. So, while initially, it might look like a great way to keep control over your payroll information, it comes at the cost of employee time and restrictive access.
Cloud-based software
Compared to on-premises software, cloud-based software is hosted online from remote servers. This makes it a great option for any businesses that needs to access information anywhere at any time, as long as you have an internet connection. Which is a requirement for every business, right?
Cloud-based solutions also get automatic updates and new features as soon as they are released, making sure you are always up to date with the latest legislation laws. Your data is also stored on encrypted, secure servers hosted by your provider, giving you peace of mind that your details are safe.
In the long run, it’s a more cost-effective option for most as it doesn’t require the same resources as on-premises software, all while still providing flexibility, security, and scalability at a greater level without disruption.
How to choose the best payroll software for you
Not all payroll software is created equal—just as no two businesses have identical payroll needs. So, while every payroll software works the same way, they won’t always be aligned with your business’s specific needs.
We’ve got the guides you need to find the best software provider for you. No matter if it’s a standalone payroll provider or a provider who brings together HR and payroll, our Best Payroll Software or Best HR and Payroll Systems have you covered! Whether you’re looking for small business payroll software or a UK-based option with the ability to manage a mid-to-large-sized business with global offices and multiple pay schedules, we’ve picked out the providers you should look at (although we do recommend Cintra for any of your software needs).
No more questioning how payroll software works!
Payroll is crucial—but it doesn’t have to be complicated. The right software streamlines the process, improves accuracy, ensures compliance, and protects sensitive data, freeing you to focus on your business.
And that’s exactly what you can expect from Cintra. With Cintra, you’ll have cloud-based software that does the heavy lifting for you; with everything you need to run your payroll with peace of mind. Every time.
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