Setting up payroll
Before you can pay anyone, you need to be set up as an employer. This means registering with HMRC for PAYE, which is the system used to collect Income Tax and National Insurance from wages. You should do this before your first payday.
Once registered, you will need a way to run the calculations and file your reports. This is done with payroll software that works out deductions, produces payslips and sends the required information to HMRC. You will also need to gather key details for each employee, such as their National Insurance number, tax code and a starter form or their P45 from a previous job.
If you are about to take on your very first member of staff, there are several extra steps to get right, from contracts to insurance. Our guide on hiring your first employee walks through the whole process. For an overview of what running payroll involves, see our payroll services page.
Understanding PAYE
PAYE, which stands for Pay As You Earn, is the framework HMRC uses to collect tax from employees through their wages. As the employer, you are responsible for working out and deducting the right amounts before you pay your staff, then sending those deductions to HMRC.
The main deductions from an employee's pay are Income Tax, calculated using their tax code, and employee National Insurance. On top of this, you as the employer pay employer National Insurance, which is an additional cost on top of the wages themselves. Some employees may also have other deductions such as student loan repayments or pension contributions.
The amounts you deduct are not yours to keep. You hold them and pay them across to HMRC, usually monthly. Getting the tax codes and figures right is essential, because errors can leave employees paying too much or too little tax.
Reporting in real time with RTI
Payroll under PAYE is reported in real time to HMRC. This system is called Real Time Information, or RTI. Rather than reporting once a year, you tell HMRC about every payment on or before the day you pay your staff.
Each payday you send a Full Payment Submission, which sets out what you have paid each employee and the tax and National Insurance you have deducted. Your payroll software generates and submits this automatically. If no one is paid in a particular period, you may need to send a different submission to let HMRC know.
Reporting accurately and on time is important, because late or incorrect submissions can lead to penalties. Our guide explaining payroll and RTI covers how real time reporting works in more detail.
Payslips and records
Every employee is entitled to a payslip, and you must provide one on or before payday. A payslip shows the employee's gross pay, the deductions taken such as tax, National Insurance and pension contributions, and the net pay they actually receive.
You also need to keep payroll records. These include what you paid employees, the deductions you made, the reports you sent to HMRC and any payments you made to HMRC. Good records make your year end straightforward and protect you if HMRC ever asks questions. Payroll software usually stores most of this for you, but it is worth keeping everything organised.
A worked example
A monthly payroll run
A small Manchester cafe employs three staff and runs payroll monthly. On payday the owner uses payroll software to calculate each person's pay. For one employee earning a monthly salary, the software applies the tax code to work out Income Tax, calculates the employee National Insurance, and deducts the employee's pension contribution. It then shows the employer National Insurance and the employer pension contribution as additional costs. The software produces a payslip for each employee showing gross pay, deductions and net pay, and sends a Full Payment Submission to HMRC on payday. The owner pays the staff their net pay, and pays HMRC the tax and National Insurance after the month end.
Because the cafe qualifies for the Employment Allowance, it can reduce its employer National Insurance bill, which we explain next.
The Employment Allowance
The Employment Allowance is a valuable relief for many small employers. It allows eligible businesses to reduce their employer National Insurance bill by up to £10,500 in the tax year.
In practice, this means you pay less employer National Insurance until the allowance is used up. It is claimed through your payroll software, and for a small business with modest staff costs it can wipe out a large part, or even all, of the employer National Insurance for the year. Not every business qualifies, and there are conditions around who can claim, so it is worth checking your eligibility. Because reliefs and figures can change, the current rules should always be confirmed.
Pension duties
As an employer you have automatic enrolment duties. This means you must enrol eligible staff into a workplace pension and contribute towards it. Eligible employees are generally those aged between 22 and State Pension age who earn over £10,000 a year.
The minimum total contribution is 8% of qualifying earnings, of which at least 3% must come from you as the employer, with the rest typically made up by the employee. Your payroll software and pension provider handle the deductions and payments once everything is set up. We cover this in full in our guide to auto enrolment, but the key point is that pensions are a legal duty, not an optional extra, and they need to be built into your payroll from the start.
Common mistakes
Several payroll errors are common among small businesses.
- Missing the RTI deadline. Submissions must reach HMRC on or before payday. Late filing can trigger penalties.
- Using the wrong tax code. An incorrect code means employees pay the wrong tax, which causes problems later.
- Forgetting pension duties. Auto enrolment is a legal requirement, and ignoring it can lead to fines.
- Not claiming the Employment Allowance. Eligible businesses sometimes miss out on reducing their employer National Insurance.
- Paying HMRC late. The tax and National Insurance you deduct must be paid over on time.
What you should do
Register as an employer before your first payday, choose reliable payroll software, and make sure you have accurate details for every employee. Run payroll on a consistent schedule, file your Full Payment Submission on or before each payday, provide payslips, and keep good records. Check whether you can claim the Employment Allowance and set up your workplace pension from the outset.
Payroll is one of those tasks where small mistakes can have real consequences for both you and your staff. Many small businesses prefer to hand it over so it is always accurate and on time. TaxTune runs payroll for employers across the UK, handling PAYE, RTI, payslips and pensions. You can start your quote online, or book a call to talk through what you need.
A practical guide to setting up and running payroll, from registering as an employer to PAYE, real time reporting, payslips, pensions and the Employment Allowance.
Frequently asked questions
Do I need to register as an employer before running payroll?
Yes. You must register with HMRC for PAYE before your first payday so you can deduct and report tax and National Insurance correctly. You will then need payroll software to run the calculations and file your reports.
What is RTI in payroll?
RTI stands for Real Time Information. It is the system through which you report payroll to HMRC on or before each payday, sending a Full Payment Submission that shows what you paid employees and the tax and National Insurance you deducted.
What is the Employment Allowance?
The Employment Allowance lets eligible employers reduce their employer National Insurance bill by up to £10,500 in the tax year. It is claimed through your payroll software, although not every business qualifies and the rules should be checked.
Do I have to provide payslips?
Yes. Employees are entitled to a payslip on or before payday. It must show their gross pay, the deductions taken such as tax, National Insurance and pension, and the net pay they receive.
Do small businesses have to provide a pension?
Yes. Automatic enrolment applies to employers of all sizes. You must enrol eligible staff, generally those aged 22 to State Pension age earning over £10,000, into a workplace pension and contribute at least 3% of qualifying earnings.
Can I run payroll myself?
You can, using payroll software that handles the calculations and RTI submissions. However, because of the deadlines, tax codes and pension duties involved, many small businesses choose to outsource payroll to avoid mistakes and save time.