How to Run Payroll for a Small Business in the UK

If you're a UK small business owner about to take on your first employee — or you've been winging payroll and want to do it properly — this guide covers everything you need to know. We'll walk through the process step by step: registering with HMRC, understanding PAYE and National Insurance, running a pay cycle, issuing compliant payslips, filing RTI submissions, and handling year-end obligations.

Payroll isn't complicated once you understand the rhythm. But it is precise — HMRC expects the right amounts deducted, reported, and paid on time. Let's get it right from the start.

Step 1: Register as an employer with HMRC

Before your first employee's payday, you must register as an employer with HMRC. You can do this online at GOV.UK up to two months before you start paying people — but not earlier.

Once registered, HMRC will send you two key references by post:

• Employer PAYE Reference — a unique identifier for your business (format: 123/AB45678). You'll need this for all payroll submissions.
• Accounts Office Reference — used when making PAYE payments to HMRC.

Allow time for postal delivery. If you need to pay staff before your references arrive, run your payroll, calculate the deductions, and store the FPS. Submit it as a late filing once you have your PAYE reference — HMRC won't penalise a genuine first-time late submission.

Step 2: Understand PAYE and how tax codes work

PAYE stands for Pay As You Earn — HMRC's system for collecting income tax and National Insurance from employees' wages before they receive them. As the employer, you are responsible for deducting the correct amounts and paying them to HMRC on your employees' behalf.

Each employee has a tax code that tells you how much tax-free income they're entitled to. The most common code is 1257L, which means a tax-free personal allowance of £12,570 per year. The "L" suffix means it's a standard code based on the personal allowance.

Income tax rates for 2025/26 (England, Wales & Northern Ireland)

Band	Taxable income	Rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 – £50,270	20%
Higher rate	£50,271 – £125,140	40%
Additional rate	Over £125,140	45%

Scotland has its own income tax bands (starter, basic, intermediate, higher, advanced, and top rates). If an employee has a Scottish tax code (prefixed with "S"), use the Scottish rates instead.

Your payroll software handles these calculations automatically based on the employee's tax code and cumulative earnings. You don't need to calculate tax manually — but understanding how it works helps you spot errors and answer employee questions.

Step 3: Understand National Insurance contributions

National Insurance (NI) is a separate deduction from income tax. Both the employee and the employer pay NI — and the rates and thresholds are different for each.

Employee NI (Category A — standard employee, 2025/26)

Earnings band	Rate
Up to £12,570/year (Primary Threshold)	0%
£12,571 – £50,270 (Upper Earnings Limit)	8%
Above £50,270	2%

Employer NI (2025/26)

Earnings band	Rate
Up to £5,000/year (Secondary Threshold)	0%
Above £5,000	15%

The employer NI rate increased to 15% from April 2025, and the secondary threshold dropped to £5,000. This is a significant cost — on a £30,000 salary, employer NI is £3,750 per year. Factor this into your hiring budget and your cash flow forecast.

NI category letters

Most employees fall under Category A (the standard category). Other common categories include:

• Category C — employees over State Pension age (no employee NI, reduced employer NI)
• Category H — apprentices under 25 (no employer NI up to £50,270)
• Category M — employees under 21 (no employer NI up to £50,270)
• Category V — armed forces veterans in their first civilian job (no employer NI up to £50,270)

Assigning the right category matters — it determines how much NI you and your employee pay. Your payroll software will apply the correct rates based on the category you select.

Step 4: Collect employee information

Before adding someone to your payroll, you need:

1. Their P45 from their previous employer — this shows their tax code and year-to-date earnings and tax. If they don't have a P45 (first job, returning to work, or lost it), they complete a starter checklist instead.
2. National Insurance number
3. Bank details for paying their salary
4. Student loan plan type (if applicable) — Plan 1, Plan 2, Plan 4, Plan 5, or Postgraduate Loan
5. Date of birth — affects NI category (under 21, under 25 for apprentices)

Enter these details into your payroll software. The software will assign the correct tax code — either from the P45 or from the starter checklist (which uses statement A, B, or C to determine the initial code).

Step 5: Choose payroll software

You need HMRC-recognised payroll software to run payroll legally in the UK. The software must be able to:

• Calculate PAYE income tax and National Insurance deductions
• Calculate statutory payments (SSP, SMP, paternity pay, shared parental pay)
• Generate itemised payslips that meet legal requirements
• Submit RTI reports (FPS and EPS) directly to HMRC
• Produce P60s and P11Ds at year end

HMRC publishes a list of recognised software on GOV.UK. Some options are standalone payroll tools (see our comparison of UK accounting and business software); others — like mybizopz — include payroll as part of a broader all-in-one business management platform alongside HR, leave management, and employee records.

The advantage of an integrated platform is that your employee data, leave records, and payroll are all in one place. When an employee takes sick leave, for instance, it flows directly into the payroll calculation for SSP — you don't need to re-enter anything or reconcile between separate systems.

Step 6: Run the pay cycle

A pay cycle is the process of calculating and paying your employees for a given period. Most small businesses run monthly payroll (the 25th or last working day of each month is common), though some industries use weekly or fortnightly cycles.

For each pay run, your software calculates:

1. Gross pay — the employee's salary for the period, plus any overtime, bonuses, or commission
2. Income tax (PAYE) — calculated from the employee's tax code and cumulative earnings for the year
3. Employee NI — calculated from the earnings bands and NI category
4. Pension contributions — the employee's auto-enrolment contribution (minimum 5%)
5. Student loan deductions — 9% of earnings above the relevant plan threshold (6% for Postgraduate Loans)
6. Other deductions — attachment of earnings orders, payroll giving, salary sacrifice schemes
7. Employer NI — your cost as the employer (15% above the secondary threshold)
8. Employer pension — your contribution (minimum 3% of qualifying earnings)
9. Net pay — what the employee actually receives after all deductions

Your payroll software does all of this automatically. You review the results, approve the pay run, and pay your employees by bank transfer (BACS) on payday.

Step 7: Issue payslips

UK law requires you to provide every employee and worker with an itemised payslip on or before payday. This can be printed or electronic (email or accessed through a portal).

A compliant payslip must show:

• Gross pay (before deductions)
• Net pay (take-home amount)
• Each variable deduction itemised separately — income tax, National Insurance, pension, student loan
• Hours worked — required if the employee's pay varies depending on time worked

Fixed deductions (such as a fixed pension amount) can be shown as a total if you provide a separate written statement listing each fixed deduction. This statement must be updated at least annually.

Step 8: Submit RTI reports to HMRC

RTI stands for Real Time Information — HMRC's system for receiving payroll data as it happens, rather than at year end. You must submit two types of report:

Full Payment Submission (FPS)

Submit an FPS on or before every payday. The FPS reports each employee's pay and deductions for that period. Your payroll software generates and submits this automatically — you just need to approve the pay run before the deadline.

If you miss the deadline, HMRC has a three-day grace period before penalties apply. However, habitual late filing accumulates penalties:

Number of employees	Monthly penalty
1 – 9	£100
10 – 49	£200
50 – 249	£300
250+	£400

The first default in each tax year is penalty-free — but don't rely on that. Build the FPS submission into your payday routine.

Employer Payment Summary (EPS)

Submit an EPS by the 19th of the following tax month if you need to claim reductions — such as statutory pay recovery, Employment Allowance, or CIS deductions. If you have nothing to claim, you don't need to file an EPS unless you had no employees paid in a period (where it acts as a nil return).

Step 9: Pay HMRC what you owe

Each month you must pay HMRC the total PAYE income tax and National Insurance (both employer and employee shares) you've deducted, minus any Employment Allowance or statutory pay recoveries. These are non-deferrable deadlines — build them into your cash flow planning.

Payment method	Deadline
Electronic (bank transfer, Direct Debit, CHAPS)	22nd of the following month
Cheque by post	19th of the following month

If your average monthly PAYE liability is less than £1,500, you may qualify to pay quarterly instead of monthly — contact HMRC's payment helpline to arrange this.

Statutory payments you need to know about

As an employer, you're responsible for paying several statutory entitlements when employees are absent due to illness, maternity, paternity, or other qualifying reasons. Your payroll software calculates these, but you should understand the basics:

Payment	2025/26 rate	Duration
SSP (Statutory Sick Pay)	£118.75/week	Up to 28 weeks (3 waiting days before payment starts)
SMP (Statutory Maternity Pay)	90% of AWE for 6 weeks, then £187.18/week for 33 weeks	39 weeks
SPP (Statutory Paternity Pay)	£187.18/week or 90% of AWE (lower)	Up to 2 weeks
ShPL (Shared Parental Pay)	£187.18/week or 90% of AWE (lower)	Up to 37 weeks (shared between parents)

"AWE" means Average Weekly Earnings, calculated over a reference period before the absence begins. Most small employers can recover 103% of statutory payments from HMRC (for those with total NI liability under £45,000), and all other employers can recover 92%. You claim the recovery through your EPS.

Auto-enrolment: workplace pensions

Every UK employer must enrol eligible employees into a workplace pension scheme. This is a legal obligation — not optional.

• Eligible employees: aged 22 to State Pension age, earning over £10,000/year
• Minimum contributions: 8% of qualifying earnings total — at least 3% from the employer and 5% from the employee (including tax relief)
• Qualifying earnings: the slice of earnings between £6,240 and £50,270 per year

Employees can opt out within one month of being enrolled, but you must re-enrol them every three years. You cannot encourage employees to opt out — this is a criminal offence.

Popular pension providers for small businesses include NEST (the government-backed scheme), The People's Pension, and Smart Pension. Your payroll software should calculate pension deductions automatically and generate the data files your pension provider needs.

Year-end obligations

After your final pay run of the tax year (the tax year runs 6 April to 5 April), you have several deadlines to meet:

Date	Obligation
On final payday	Submit your final FPS for the tax year (tick the "final submission" indicator)
19 April	Submit final EPS (if claiming reductions for March tax month)
31 May	Provide P60s to all employees employed on 5 April
6 July	Submit P11D and P11D(b) for employee benefits in kind
22 July	Pay any Class 1A NI on benefits in kind (electronic payment deadline)

A P60 is a summary of an employee's total pay and deductions for the tax year. Every employee on your payroll on 5 April must receive one by 31 May. Employees who left during the year receive a P45 at their departure — they don't get a P60. If you're also VAT-registered, your year-end payroll obligations overlap with Making Tax Digital deadlines — plan both together.

A P11D reports benefits in kind provided to employees — company cars, private medical insurance, interest-free loans over £10,000, and similar. If you don't provide any benefits in kind, you won't need to file P11Ds. However, if you do, filing late incurs penalties of £100 per 50 employees for each month the P11D(b) is overdue.

The payroll calendar: key dates at a glance

Pin this to your wall or set reminders in your calendar:

When	What
Every payday	Run payroll, issue payslips, submit FPS to HMRC
19th of each month	EPS deadline (if claiming reductions); PAYE payment deadline (post)
22nd of each month	PAYE payment deadline (electronic)
6 April	New tax year — update software, apply new tax codes and rates
19 April	Final EPS for previous tax year
31 May	P60 deadline — give to all employees employed on 5 April
6 July	P11D and P11D(b) submission deadline
22 July	Class 1A NI payment deadline on benefits

How mybizopz handles payroll

mybizopz includes a built-in payroll module that handles the entire process described in this guide — within the same platform you already use for HR, leave management, employee records, and finance.

• Automatic PAYE and NI calculations. Enter each employee's details once. The system applies the correct tax code, NI category, and deduction rates for every pay run — no manual calculation required.
• Compliant payslips. Payslips are generated automatically with all legally required information. Employees can access them digitally through the platform.
• RTI submissions to HMRC. FPS and EPS reports are generated and submitted directly to HMRC from within mybizopz. No separate HMRC login or third-party submission tool needed.
• Statutory payment calculations. SSP, SMP, paternity pay, and shared parental pay are calculated automatically based on the employee's absence and earnings records — which are already in the system because mybizopz handles leave management too.
• Year-end reporting. P60 generation, P11D support, and year-end FPS submission are handled within the platform.
• Pension integration. Auto-enrolment calculations and pension contribution reports are built in, so you can generate the data your pension provider needs without exporting to spreadsheets.

Because payroll, HR, leave, and finance all live in one place, there's no re-keying data between systems. When someone joins your company, takes sick leave, or gets a pay rise, it flows through to payroll automatically.

Frequently asked questions about UK small business payroll

What is the PAYE threshold for 2025/26?

The PAYE personal allowance for 2025/26 is £12,570 per year. Employees only start paying income tax on earnings above this threshold. The basic rate of 20% applies from £12,571 to £50,270, the higher rate of 40% from £50,271 to £125,140, and the additional rate of 45% above £125,140.

How much National Insurance does an employer pay in 2025/26?

From April 2025, employers pay 15% National Insurance on employee earnings above the secondary threshold of £5,000 per year. The Employment Allowance of £10,500 per year can offset this liability, and is now available to all eligible employers regardless of their previous NI bill.

What must be included on a payslip by law?

UK law requires payslips to show gross pay, net pay (take-home), each variable deduction itemised separately (income tax, National Insurance, pension, student loan), and hours worked if pay varies by time. Fixed deductions can be shown as a total if a separate written statement is provided annually.

What is an FPS in payroll?

An FPS (Full Payment Submission) is the report you send to HMRC every time you pay your employees. It lists each employee's pay and deductions for that period. It must be submitted on or before each payday through your payroll software. Late FPS submissions can result in penalties starting at £100 per month.

When do I need to give employees a P60?

You must provide a P60 to every employee who is on your payroll on 5 April (the last day of the tax year). The deadline is 31 May. The P60 summarises total pay and deductions for the entire tax year. Employees who left during the year receive a P45 instead.

Do I need to set up a workplace pension?

Yes. Under auto-enrolment, you must enrol eligible employees into a workplace pension scheme. Eligible employees are aged 22 to State Pension age and earn over £10,000 per year. The minimum total contribution is 8% of qualifying earnings — at least 3% from the employer and 5% from the employee.

Can I run payroll myself or do I need an accountant?

You can run payroll yourself using HMRC-recognised payroll software, which handles the tax and NI calculations, generates payslips, and submits RTI reports to HMRC automatically. Many small business owners manage payroll in-house with software rather than paying for an accountant or payroll bureau.

Does mybizopz include payroll?

Yes. mybizopz includes a built-in payroll module that calculates PAYE and National Insurance, generates compliant payslips, submits RTI reports (FPS and EPS) directly to HMRC, and handles statutory payments including SSP, SMP, and paternity pay — all within the same platform you use for HR, finance, and operations.