Setting Up Payroll as a Small Business
If you take on your first employee (or start paying yourself a salary as a company director), you need to set up PAYE (Pay As You Earn) with HMRC. PAYE is the system HMRC uses to collect income tax and National Insurance contributions from employees via their employer.
How to Register as an Employer
Register as an employer with HMRC online at gov.uk before your first payday. HMRC will send you a PAYE reference and Accounts Office reference. Register at least two weeks before the first payment date.
RTI (Real Time Information) Reporting
Under RTI, employers must submit a Full Payment Submission (FPS) to HMRC on or before every payday. The FPS details each employee's pay, tax deducted, and NIC. Late or inaccurate RTI submissions attract automatic penalties. Payroll software handles RTI submission automatically.
National Insurance Contributions
From April 2025, employers pay Class 1 Employer NIC at 15% on employee earnings above the Secondary Threshold (currently 5,000 GBP per year — reduced from 9,100 as part of the Autumn 2024 Budget changes). Employees also pay Class 1 Employee NIC. Small employers with a total NIC bill under 100,000 GBP per year benefit from the Employment Allowance (currently 10,500 GBP from April 2025), which reduces the employer NIC bill significantly.
Auto-Enrolment Pension
All employers must automatically enrol eligible employees into a workplace pension scheme. Eligible employees are aged 22-66 earning above 10,000 GBP per year. Minimum total contributions are 8% of qualifying earnings (3% employer, 5% employee). You must declare your compliance to The Pensions Regulator. NEST is the government-backed pension provider many small employers use.
Best Payroll Software for Small Businesses
Xero Payroll, QuickBooks Payroll, Sage Payroll, and BrightPay are the most widely used options. Many are included or available as add-ons to accounting software subscriptions. Free payroll software (HMRC Basic PAYE Tools) is available for employers with fewer than 10 employees.
FAQ
Do I have to pay myself through PAYE as a company director?
Company directors are employees of their company and should normally be on the payroll. Many owner-directors pay themselves a small salary (below the NIC threshold) and take additional income as dividends, which are taxed at lower rates. This structure requires an accountant to ensure it is tax-efficient and compliant.
Further Reading
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Learnsignal Education Team
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