The Ultimate PAYE Guide for Small Business Payroll in the UK

Managing payroll is one of the most important administrative responsibilities for any small business. Whether you are hiring your first employee or expanding a growing team, understanding your PAYE obligations is essential.

This guide explains how the UK PAYE system works and what employers need to do to remain compliant with payroll regulations. From registering as an employer to submitting Real Time Information reports, we cover the key steps businesses need to understand.

Many companies eventually choose to outsource payroll as they grow. If you would prefer expert support, our payroll services in London team can manage the entire process and ensure your business remains compliant.

Understanding the PAYE System

PAYE (Pay As You Earn) is the system used by HM Revenue & Customs to collect Income Tax and National Insurance contributions from employee wages.

Rather than paying tax in a lump sum at the end of the year, PAYE ensures that tax is collected gradually throughout the tax year.

Under this system, employers act as tax collectors. You must deduct tax and National Insurance before paying employees their net wages.

Employers must also report payroll information every payday using Real Time Information (RTI), which keeps HMRC updated in real time.

Registering as an Employer

Before paying employees, you must register as an employer with HMRC. This should be completed before your first payday and can take several days.

Once registered, you will receive:

• PAYE reference number
• Accounts Office reference

These are required when submitting payroll reports and paying HMRC.

Limited companies must register even if the director is the only employee.

Payroll Records and Payslip Requirements

Employers must keep accurate payroll records for at least 3 years from the end of the relevant tax year. In practice, many businesses retain records for up to 6 years to align with HMRC enquiry time limits.

Keeping accurate records helps ensure compliance and protects your business if HMRC reviews your payroll.

Payslip Requirements

Employees must receive a payslip each time they are paid.

A compliant payslip must include:

• Gross pay
• Income Tax deductions
• National Insurance contributions
• Other deductions (e.g. student loans, pensions)
• Net pay
• Pay period

Where an employee’s pay varies based on hours worked, the number of hours must also be shown on the payslip.

Calculating Pay, Tax and National Insurance

Calculating payroll correctly requires accurate employee data and correct tax codes.

The process generally includes:

1. Calculating gross pay
2. Applying the tax code
3. Calculating Income Tax
4. Calculating employee National Insurance
5. Adding employer National Insurance
6. Applying other deductions

Using payroll software helps automate these calculations and reduce errors.

National Insurance and Employment Allowance

National Insurance contributions help fund state benefits such as the state pension.

Each employee is assigned a National Insurance category, which determines their contribution rate.

Some businesses qualify for Employment Allowance, which allows eligible employers to reduce their annual National Insurance liability. This is currently up to £10,500 per year.

Employment Allowance is not available where the only employee paid above the secondary threshold is a director.

Workplace Pensions and Automatic Enrolment

Employers must provide a workplace pension through Workplace Pension Automatic Enrolment.

This involves:

• Assessing employee eligibility
• Enrolling qualifying staff
• Making employer contributions

The scheme is regulated by The Pensions Regulator.

Statutory Payments

Employers must manage statutory payments when employees are absent.

Common examples include:

• Statutory Sick Pay (SSP)
• Statutory Maternity Pay (SMP)
• Statutory Paternity Pay (SPP)
• Statutory Adoption Pay (SAP)

Employers can usually recover statutory payments through their Employer Payment Summary (EPS). Small employers may be able to reclaim 103% of certain payments, depending on eligibility.

Submitting Payroll Reports to HMRC

Payroll data must be submitted using Real Time Information.

Full Payment Submission (FPS)

The FPS is the main payroll report and must be submitted on or before payday.

Late submissions can lead to automatic HMRC penalties. These are charged monthly and vary depending on the number of employees, with additional interest applied to late PAYE payments.

Employer Payment Summary (EPS)

The EPS is used to:

• Claim Employment Allowance
• Recover statutory payments
• Report periods with no employees paid

The EPS must be submitted by the 19th of the following tax month.

Missing this deadline can delay relief claims such as Employment Allowance or statutory payment recovery.

Paying HMRC

After running payroll, employers must pay HMRC the tax and National Insurance collected.

For most businesses paying electronically, the deadline is the 22nd of the following tax month.

Employers with average monthly PAYE liabilities of £1,500 or less may qualify to pay quarterly instead of monthly.

Key Payroll Thresholds (2025/26)

Understanding key thresholds helps ensure payroll is compliant and tax-efficient:

• Personal Allowance: £12,570 (frozen)
• Basic rate band: £50,270
• PAYE payment deadline: 22nd of following tax month
• FPS submission: on or before payment
• Quarterly PAYE eligibility: up to £1,500 average monthly liability
• Employment Allowance: up to £5,000 (subject to eligibility)

Choosing Payroll Software

Payroll software simplifies calculations and reporting.

It can:

• Calculate tax automatically
• Generate payslips
• Submit RTI reports
• Store records securely

HMRC provides Basic PAYE Tools for small employers, though many businesses prefer more advanced software.

Correcting Payroll Errors

Mistakes should be corrected as soon as possible.

If errors relate to a previous tax year, they are typically corrected by submitting an amended Full Payment Submission (FPS) with updated year-to-date figures. Earlier Year Updates (EYUs) are now largely obsolete in modern payroll systems.

Payroll for Limited Companies

Company directors are treated as employees for PAYE purposes.

Many choose a combination of salary and dividends for tax efficiency. This approach can reduce tax liabilities while maintaining entitlement to state benefits.

Common Payroll Mistakes Small Businesses Make

Even with payroll software, errors are common. Some of the most frequent issues include:

• Missing FPS deadlines, leading to automatic penalties
• Applying incorrect tax codes
• Failing to claim Employment Allowance
• Incorrect director salary levels
• Not submitting EPS when required

Payroll Checklist

To keep payroll running smoothly:

1. Update employee data
2. Apply tax codes
3. Calculate deductions
4. Review payroll
5. Issue payslips
6. Submit FPS
7. Submit EPS if required
8. Pay employees
9. Pay HMRC
10. Maintain records

When to Consider Professional Payroll Support

Managing payroll involves strict deadlines, detailed compliance requirements, and ongoing legislative changes.

Many growing businesses choose to outsource payroll to reduce risk and free up time.

If you would like expert support, our payroll services in London team can manage everything for you and ensure full compliance with HMRC requirements.

‍