The Basics of Payroll Management for Small Businesses
Payroll is one of those business jobs that feels “admin-ish” right up until it goes wrong – then it becomes urgent, expensive, and oddly emotional.
The good news: UK payroll is very doable for small businesses once you understand the moving parts (PAYE, National Insurance, RTI reporting, pensions, and deadlines). This post walks you through the essentials, plus the common traps that catch first-time employers.
Quick note: This is practical guidance for UK small businesses. Rates and thresholds change, so always cross-check official sources (linked throughout).
What “payroll” actually includes in the UK
In the UK, payroll is not just about paying wages. It’s a structured compliance process that links employee pay, tax, pensions, and reporting directly to HMRC.
For small businesses and first-time employers, payroll typically involves the following core responsibilities:
- Calculating pay – this includes salaries, hourly wages, overtime, bonuses, commissions, statutory payments, and holiday pay.
- Applying deductions correctly – such as Income Tax through PAYE, employee and employer National Insurance, student loan or postgraduate loan repayments, and attachments of earnings where applicable.
- Submitting payroll information to HMRC in real time (RTI) – usually via a Full Payment Submission (FPS) sent on or before each pay date.
- Paying HMRC on time – covering Income Tax, National Insurance, and any other payroll liabilities by the relevant monthly or quarterly deadline.
- Producing compliant payslips – employees must receive a payslip on or before payday, showing gross pay, deductions, and net pay.
- Keeping payroll records – including pay calculations, deductions, RTI submissions, and employee details, typically for at least three years.
- Managing workplace pension duties – assessing staff for automatic enrolment, enrolling eligible employees, handling contributions, and completing ongoing compliance.
While payroll software or an outsourced provider will handle the calculations and submissions, the legal responsibility always sits with the employer. Understanding what’s included helps you spot errors early and avoid compliance issues.
Official guidance: HMRC’s PAYE employer hub provides a clear overview of employer payroll responsibilities, reporting requirements, and payment deadlines. It’s a useful reference point if you want the official “map” of how payroll fits together.
Getting these fundamentals right from the start makes payroll predictable and low-stress. Most payroll problems arise not from complex rules, but from missed steps, late submissions, or a lack of visibility over what payroll actually involves.
Step 1: Register as an employer (don’t leave it late)
If you’re paying anyone through payroll – including your first employee or yourself as a director via PAYE – you will usually need to register as an employer and set up PAYE before your first payday.
Once registered, HMRC will issue you with an employer PAYE reference and an Accounts Office reference. These are essential for running payroll, submitting RTI reports, and paying tax and National Insurance to HMRC.
You register online through HMRC’s PAYE for employers service: https://www.gov.uk/paye-for-employers/register-for-paye
Key practical point: You cannot register as an employer more than two months before you start paying staff. If you leave it too late, you may not receive your PAYE references in time to run your first payroll correctly.
For limited company directors, this step is often missed because there’s no “traditional” employee involved. However, if you’re paying yourself a salary (even a small one), PAYE registration is still required.
HMRC’s PAYE employer hub explains when you need to register, what details you’ll need, and how PAYE fits into your wider payroll responsibilities: https://www.gov.uk/paye-for-employers
Registering on time sets everything else up properly. It avoids rushed payroll runs, late RTI submissions, and the knock-on penalties that tend to follow when PAYE is set up after the fact.
Step 2: Choose how you’ll run payroll
Once you’re registered as an employer, the next decision is how you’ll actually run payroll. For UK small businesses, this usually comes down to one of three approaches.
Option A: Payroll software (most common)
Most small businesses use payroll software. Modern tools handle the heavy lifting by calculating tax and National Insurance, generating compliant payslips, and submitting RTI reports to HMRC on your behalf.
You still need to understand what’s happening and review the figures, but software removes a lot of manual risk and significantly reduces errors caused by miscalculations or missed submissions.
HMRC maintains a list of recognised payroll software providers (including free and low-cost options): https://www.gov.uk/guidance/find-payroll-software-that-is-recognised-by-hmrc
Best for: Sole directors paying themselves a salary, small teams, and businesses that want control without complexity.
Option B: HMRC Basic PAYE Tools (free, but basic)
HMRC provides Basic PAYE Tools for businesses with fewer than 10 employees. It can calculate PAYE and National Insurance deductions and submit RTI information directly to HMRC.
It’s a legitimate option, but it’s very functional and lacks the automation, reporting, and integrations found in commercial software.
https://www.gov.uk/basic-paye-tools
Best for: Very small employers with simple, fixed pay and minimal changes month to month.
Option C: Outsource payroll
Outsourcing payroll to an accountant or specialist provider is common once you have multiple employees, variable pay, statutory payments, pension complexity, or you simply want payroll off your plate.
A good provider will run payroll, manage RTI submissions, handle pension reporting, and flag issues before they become problems – while keeping you informed and compliant.
Important: Even if you outsource payroll, the legal responsibility remains with you as the employer. Make sure you understand the reports you’re given and keep visibility over deadlines and payments.
There’s no single “right” choice. The best setup is the one that matches your business size, pay complexity, and how hands-on you want to be – while still keeping payroll accurate, timely, and compliant.
Step 3: Understand the core deductions (PAYE & National Insurance)
Even when you use payroll software or outsource the process, it’s important to understand the two main deductions that sit at the heart of UK payroll: PAYE Income Tax and National Insurance.
PAYE Income Tax
PAYE is how HMRC collects Income Tax from employment income. The amount deducted from each employee’s pay depends on several moving parts, including:
- Tax codes issued by HMRC, which determine how much tax-free pay an employee is entitled to.
- Taxable pay, including salary, overtime, bonuses, and certain benefits processed through payroll.
- Year-to-date values, which ensure tax is spread correctly across the tax year rather than recalculated from scratch each month.
Payroll software performs the calculations automatically, but accuracy depends on you keeping employee records up to date and applying HMRC tax code notices (P6 or P9) as soon as they are issued.
HMRC guidance on PAYE tax codes for employers is available here: https://www.gov.uk/tax-codes
National Insurance (NI)
National Insurance contributions are split between:
- Employee NIC – deducted from the employee’s pay.
- Employer NIC – an additional cost paid by the employer on top of gross wages.
How much NI is due depends on earnings levels, NI thresholds, and the employee’s NI category letter (for example, standard employees, under 21s, apprentices, or pensioners).
HMRC publishes the official rates and thresholds each tax year, including the key Class 1 NI thresholds used in payroll calculations: https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2025-to-2026
Employers also rely on HMRC’s NI category letter guidance to ensure the correct contribution rates are applied: https://www.gov.uk/national-insurance-rates-letters
Practical tip: NI errors are common when staff move between age thresholds or change employment status. Reviewing NI category letters as part of your payroll checks can prevent underpayments or unexpected HMRC adjustments.
Understanding these core deductions helps you sense-check payroll reports, budget accurately for employer costs, and spot issues early – even if you’re not running the calculations yourself.
Register your company for PAYE quickly and correctly
