Getting payroll right is vital for any UK business, big or small. Payroll ensures your staff (or even you, as a salaried director) are paid accurately and on time, and it keeps the business compliant with HMRC regulations. Mistakes or missed deadlines can lead to unhappy employees and costly HMRC penalties. In the UK, operating PAYE (Pay As You Earn) means deducting the right Income Tax and National Insurance from each employee’s pay and sending that data to HMRC each pay period. This guide walks you through the essential steps: setting up PAYE, running each pay cycle correctly, issuing payslips, and staying on top of compliance.
Getting Started: Register and Plan
Before you pay the first penny in wages, you must register as an employer with HMRC and set up PAYE. HMRC requires you to register for PAYE and obtain a PAYE reference number before the first payday. (Note: you cannot register more than two months before you start paying anyone.) Once registered, set up online PAYE access (Government Gateway login) so you can submit payroll reports and payments.
Next, choose how you will operate payroll. You can either run payroll in-house using HMRC-approved software or hire a payroll provider or accountant to handle it. In either case, HMRC makes clear that you remain legally responsible for PAYE even if someone else does the work. Many small businesses start with basic payroll software (even HMRC’s free Basic PAYE Tools for very small employers) or a low-cost package like Xero, QuickBooks, BrightPay, etc.
Finally, gather and organize your employee data. For each person you’ll pay, record their name, address, National Insurance number, bank account details, start date and salary or hourly rate. If they have a P45 from a previous job, use it; otherwise, get them to complete HMRC’s starter checklist. Also decide your pay frequency (weekly, fortnightly or monthly) and calendar – fix pay dates, cut-off times for timesheets, and who approves any overtime. Having a clear pay schedule in place will help you meet deadlines consistently.
Key setup tasks
- Register for PAYE. Apply on GOV.UK to become an employer and get your PAYE reference.
- Set up payroll software. Use HMRC-recognized software (or hire a bureau) to record pay and make submissions. Even if outsourced, you must supply employee details and remain responsible for accuracy.
- Collect employee info. Record each worker’s NI number, tax code, bank details, salary/hourly rate, and any P45 information.
- Plan your pay schedule. Choose a convenient pay period (e.g. monthly) and set exact paydays, submission dates and payment dates in advance.
By completing these steps before running payroll, you set a solid foundation and avoid last-minute scrambles (and penalties).
Running Payroll: Calculations and Reporting
Each pay period, you must calculate each employee’s pay and deductions and report the results to HMRC via Real Time Information (RTI). Under UK PAYE rules, you are responsible for computing the correct Income Tax and National Insurance for every employee. This usually means:
- Calculate gross pay. For a salaried employee, divide the annual salary by the number of pay periods. For hourly workers, multiply hours worked by the hourly rate. Add any overtime, bonuses or commission. (Always check minimum wage compliance.)
- Apply deductions. From the gross pay, deduct Income Tax (using the employee’s current tax code) and employee National Insurance (NI). Also deduct any pension contributions (if auto-enrolled), student loan repayments, or other agreed deductions. On top of that, you as the employer owe a separate employer NI contribution on each employee’s earnings above the NI threshold. Modern payroll software automates these calculations by pulling in updated tax tables and pension rates.
Small business owners often handle payroll calculations themselves, using software or spreadsheets. In the UK, employers must deduct the correct tax and NI from every pay run. After calculating gross pay and subtracting deductions, you report the pay run to HMRC using the RTI system. Real Time Information (RTI) means sending a Full Payment Submission (FPS) each time you pay staff, on or before the payday. Most payroll software will submit the FPS directly to HMRC for you. (If you have special adjustments like reclaiming statutory payments, claiming Employment Allowance, or telling HMRC you paid no one in a month you would also file an Employer Payment Summary (EPS) by the 19th of the following month.)
Once deductions are reported, make the payments: pay net wages into employees’ accounts (e.g. by BACS) and pay the collected tax and NI to HMRC. Typically, HMRC requires PAYE liabilities to be paid monthly (by the 22nd if you pay electronically). (If you expect to owe under £1,500 per month, you can apply to pay quarterly instead.) Always ensure the HMRC payment is scheduled by the deadline to avoid interest charges.
As a quick reference, consider keeping a payroll checklist each period. For example, experts recommend steps like: verify any new starters or leavers; confirm hours, overtime and other pay elements; run payroll calculations and double-check them; submit your FPS before payday; issue payslips; then pay the employees and HMRC and file the records. A consistent routine prevents slip-ups and missed deadlines.
Payslips and Record-Keeping
By law every paid employee must receive an itemized payslip at or before payday. A payslip shows the breakdown of each pay run: it must include the employee’s gross pay (before deductions), all deductions (tax, NI, pension, etc.), and the net amount paid. Since April 2019, if pay varies by hours or rates, the payslip must also list the number of hours paid. In practice, payroll services software will generate payslips automatically; if doing payroll manually you can handwrite or use spreadsheets, but make sure to deliver them securely (e.g. print or an employee portal emailing can risk data breaches).
Keep all payroll documents carefully. Besides payslips, you’ll issue end-of-year forms: P60s (annual summaries) to current staff by May 31 after the year end, and P45s to any leavers when they leave (showing their total pay and tax for that year). HMRC requires you to keep payroll records – including payslips, FPS/EPS submissions, P45s/P60s and related notes – for at least three years after the end of the tax year they cover. Good filing (digital or hard copy) makes it easy to prove compliance, correct errors later, or respond to any HMRC queries or audit.
Compliance and Common Pitfalls
UK payroll is heavily regulated, so stay on top of deadlines and rules. The key legal requirement is the RTI deadline: send each FPS to HMRC by the payday. Late or missing FPS submissions trigger automatic penalties (even for very small employers) – starting at £100 per late FPS and rising with employer size. Make sure to pay HMRC the total PAYE (tax and NI) by the due date each month. (Reminder: the electronic payment deadline is the 22nd, or 19th if by cheque.) If these dates change (e.g. public holidays), HMRC publishes guidance, so check the official calendar.
Beware of common errors that trip up small businesses. For example, forgetting to update HMRC about a new starter (or to issue a P45 for a leaver) can mess up tax codes. Not enrolling eligible staff into a pension on time can incur fines – by law employees aged 22–65 earning over about £10,000/year must be auto-enrolled in a pension scheme. Failing to account for statutory pay (like SSP or SMP) or miscalculating an employee’s hours can also cause trouble. Using modern payroll software (or a reputable service) helps avoid these mistakes by flagging anomalies and enforcing current tax tables and pension criteria.
Finally, remember data security and GDPR: handle payroll and personal data confidentially. Password-protect electronic payslips or use secure employee portals. Back up your payroll records. On the positive side, once set up, a smooth payroll process boosts trust – paid correctly and on time – and frees you to focus on growing the business.
Conclusion
Running payroll for a small UK business requires careful setup and disciplined routine, but it doesn’t have to be overwhelming. The essential steps are to register with HMRC, gather correct employee information, choose reliable payroll software (or professional help), and stick to a consistent schedule. Each pay run must include accurate calculations of tax, NI and other deductions, an on-time RTI submission, payslips for employees, and payment of liabilities. Employers who get this right keep their staff happy and avoid HMRC fines.
As the UK payroll system evolves (for example, with changing tax codes or pension rules), keep your software updated and stay informed via HMRC channels. If in doubt, many accountants and bureaus specialize in payroll compliance. Ultimately, diligent payroll management builds trust with your team and ensures your small business stays onside with the law, letting you concentrate on what matters most – running your company.
FAQs
Do I need to run payroll if I’m the only employee (company director)?
Yes. Even if you are the sole director taking a salary, you must register for PAYE and run payroll. HMRC makes it clear that a director’s salary must be processed through PAYE and the appropriate RTI submissions made.
How often must I run payroll and submit reports to HMRC?
You should run payroll on your chosen schedule (weekly, monthly, etc.) and send a Full Payment Submission (FPS) to HMRC on or before each payday. Typically, you will pay the accumulated tax and NI to HMRC on a monthly basis (the electronic deadline is the 22nd of the following month). Small employers (owing under £1,500 per month) can apply to pay quarterly instead.
What is Real Time Information (RTI)?
RTI is HMRC’s real-time payroll reporting system. Under RTI, every pay run requires a submission to HMRC with all payments and deductions for each employee. In practice, this means sending an FPS to HMRC on or before each payday. Approved payroll software handles these submissions; you cannot report payroll data to HMRC manually.
What information must a payslip contain?
UK law requires each payslip to show the employee’s gross pay, all deductions (such as tax, National Insurance and pension contributions), and the net pay. If pay varies by hours worked, the payslip must also list the hours paid. Payslips can be printed or electronic (if securely delivered). Remember: issue the payslip at or before paying the wages.
How long should I keep payroll records?
HMRC advises keeping payroll records for at least three years from the end of the tax year to which they relate. This includes payslips, FPS/EPS submissions, P45s, P60s and any other documentation. Good record-keeping makes it much easier to prepare annual reports and handle any future inquiries.