What Is Payroll Software?

Payroll software has become an important tool for most businesses, allowing them to effortlessly track and process payroll and payroll taxes for their employees. If you’re struggling to manage payroll, keep track of expenses, handle deductions and withholdings, and pay taxes for your employees, payroll software might be perfect for you.

In this article, we’ll explore what payroll software is, its key features, and how it works, plus the differences between payroll software and payroll services. We’ll also mention several of our favourite payroll software options.

What Is Payroll Software?

Payroll software is a tool dedicated to managing employees’ payroll information, such as their pay, deductions, tax withholdings, benefits, etc. Good payroll software not only tracks this information for all employees automatically, but also automates paying employees, calculating their benefits, withholding taxes from their payslips, generating tax forms, and more.

Depending on your needs, there’s a solution for all budgets. Payroll software costs can range from £0-5 for a simple package, like the first Xero payroll pricing plan, to well over £1,000 a month for large enterprises.

Payroll software streamlines the entire process from beginning to end, reducing the time, effort, and expense required for payroll administration tasks.

How Does Payroll Software Work?

Payroll software works by organising and tracking all payroll-related information into one central location, allowing companies and business owners to manage payroll-related tasks quickly and easily.

Information is added to the payroll software by business owners, managers, or HR personnel whenever an employee or independent contractor is hired or an employment change occurs. They will include information such as the worker’s name, National Insurance (NI) number, address, contact information like a phone number and email address, and their pay and benefits.

Once this information is added to the payroll software, it automatically tracks each employee’s pay, benefits, deductions, withholdings, bonuses, and more. The payroll software can use this information to pay the employee and withhold taxes and deductions automatically, create payslips and send them to the employee, and even prepare payroll tax returns.

Key Payroll Software Features

The services and features offered by payroll software may vary between products. Some are more general-use, offering payroll solutions for nearly any business type, while others are specialised to specific industries or work arrangements, like remote work, construction, companies operating with independent contractors, nonprofits, restaurants, and more.

Below are some of the most common features of payroll software.

Worker Information Storage and Tracking

While this is one of the most basic features of any payroll software, it’s worth mentioning because of how important it is.

Good payroll software will allow you to easily record worker information and track any changes, such as name, address, NI number, contact information, start and end date, deductions, employment forms, and more. The software should also maintain secure, encrypted backups of this information both in the cloud and on a physical hard drive.

Read tips for enhancing data security for payroll on our page.

Time and Attendance Tracking

Almost all payroll software programs offer time tracking, attendance tracking, or both. This convenient feature allows managers and business owners to easily track how long employees have worked, and how that work translated to productivity.

If employees are paid salaries, this information is useful for determining their output. If they are paid hourly, it helps managers calculate workers’ pay. It also allows managers to track workers’ overtime, if applicable.

Customisable Payroll Processing

This feature allows employers to customize how and when workers are paid, whether by cash, cheque, direct deposit, or something else. It also allows employers to utilise various pay structures, benefits, deductions, and withholdings for any type of employee or contractor.
The best payroll software for you is one that can adapt to the unique needs of your business, workers, geographical/national regions, and more.

Tax Compliance

In addition to managing payroll tasks, payroll software should also track and manage payroll tax compliance. This includes withholding both income taxes and National Insurance Contributions (NICs) from employees’ payslips, calculating employer NICs, preparing tax forms, and helping to file them with HMRC. The best payroll software programs make performing tax compliance tasks as easy as clicking a button.

Self-Service Portals

Most modern-day payroll software allows workers to access their own information through online self-service portals. These portals allow the workers to verify or update their personal information, access information related to hours worked, view payslips, access tax information and previously filed tax forms, view deductions and benefits information, and more. These portals can reduce the administrative burden of handling payroll on employers.


The best payroll software for your business will be one that seamlessly integrates into the software and systems you already use. This means integrating with tax preparation or filing software, project management programs, accounting software, customer relationship management (CRM) software, and more.

This way, when any payroll-related situations take place on any of your pre-existing software platforms, your payroll software can automatically process them.

Industry-Specific Features

If your business operates in a unique industry or you need specialised payroll software features, try searching for payroll software designed specifically for companies in your industry. It’s possible that an option for your industry already exists.

However, if not, you may need to use more general payroll software, or, if you have the budget, commission your own custom payroll software from a software company or a pre-existing payroll software provider.

The Benefits of Using Payroll Software

Payroll software can benefit both your business, in terms of cost and administrative burden, as well as your employees, in terms of accessibility and control of their information.

Let’s look at some specific benefits below.

Benefits for Your Company

  • Improved efficiency: Payroll software can improve efficiency by streamlining the payroll process and reducing the administrative burden on employers and HR teams.
  • Cost and time savings: Automating your payroll processes can significantly reduce the time and administrative costs associated with processing payroll.
  • Accuracy: Payroll software reduces clerical errors, ensuring that your payroll, withholdings, deductions, and tax forms are accurate and complete. This helps to limit penalties and interest charged on late payroll tax payments or missed forms.

Benefits for Your Employees

  • Increased transparency: Self-service portals allow workers to have easier access to information related to their hours, pay, withholdings, deductions, taxes, and more. This gives them a sense of control and ownership over their information.
  • Improved worker satisfaction: Payroll software helps ensure that employees and contractors get paid quickly and on time, reducing errors or missed payments and improving satisfaction and morale.

Incorporating payroll software into your business can revolutionise the way you manage payroll, taxes, and more. It can save time, reduce errors, and improve employee satisfaction, all while making your life easier.

If you’re interested in implementing payroll software into your business, take a look at our guide to the best cloud-based payroll solutions. Or, if you’d prefer to seek external support and outsource your payroll workload, check out our recommended UK payroll service suppliers.


Is payroll software free?
Yes, there are various free payroll software solutions, like IRIS payroll Basics. However, these are typically only suitable for small businesses with no more than 10 employees. They provide the basic features that a small business needs to get started, but you’ll likely need to upgrade to a paid offering as your company grows.
Can you automate payroll?
Yes, many payroll software packages allow you to automate a wide selection of payroll tasks, as well as integrate with your other workforce management tools to offer a number of benefits. Not only can automation save you time and associated costs, but it also enhances data security and minimises the risk of errors.
Can I use Excel for payroll?
It’s entirely possible to manage payroll using Excel spreadsheets, but it’s not a practical solution for the vast majority of businesses. Even small businesses would be better off using free payroll software, as they offer a host of useful, payroll-specific features. Many of these packages also have paid tiers that allow you to unlock more functionality as your business grows.
Written by:
David is a Certified Public Accountant and prolific finance writer, specialising in taxes, business accounting, and corporate finance. He holds a BSc in Accounting and has worked as a CPA, tax accountant, and senior financial accountant for several years. David has written and edited thousands of articles for millions of monthly readers, and has contributed to the likes of Investopedia, The Balance, OnPay, and now Expert Market.