Paying your employees correctly and on time sounds straightforward enough. In practice, payroll is one of the most compliance-heavy tasks a UK small business faces. Miss a deadline, submit incorrect figures, or misclassify a worker, and you can expect penalties, interest charges, and a very unwelcome letter from HMRC. The good news? Once you understand the process from end to end, it becomes far more manageable. This guide walks you through each step — from first registration to monthly submissions — so you can run payroll with confidence.
Step 1: Register as an Employer with HMRC
Before you pay a single employee, you must register as an employer with HMRC. You can do this online via the Government Gateway, and you should register before your first payday — HMRC advises doing so at least two weeks in advance, though it can take up to five working days to receive your PAYE reference number and Accounts Office reference.
These two references are essential. Your PAYE reference identifies you to HMRC, and your Accounts Office reference is what you quote when making payments. Keep them somewhere safe — you will need them constantly.
Note that you only need to register if you are paying employees at or above the Lower Earnings Limit (£123 per week in 2024/25), or if you are paying anyone through PAYE even if they earn less. If you are a sole trader paying yourself, you do not need to register for PAYE — your earnings are dealt with through Self Assessment instead.
Step 2: Gather the Right Information for Each Employee
Before processing your first payroll run, you need key information for every employee. Missing details lead to incorrect tax codes, emergency tax deductions, and frustrated staff. Collect the following from each new starter:
- National Insurance number — mandatory for RTI submissions
- Date of birth — relevant for National Insurance category letters and pension auto-enrolment
- Completed starter checklist (or P45) — determines the correct tax code to apply from day one
- Bank account details — for BACS payments
- Student loan status — employees may have Plan 1, Plan 2, Plan 4, or Postgraduate Loan deductions due
If an employee cannot provide a P45, ask them to complete HMRC's starter checklist. Their answers determine whether you apply a 1257L cumulative code, a week 1/month 1 code, or the emergency BR code. Getting this wrong means your employee pays too much or too little tax from the outset — neither is ideal.
Step 3: Calculate Pay, Deductions, and Employer Costs
Once your data is in order, you can calculate what each employee is owed and what deductions apply. For most small businesses, this involves four core calculations:
- Gross pay — their contractual salary or hourly rate multiplied by hours worked, plus any bonuses, commission, or statutory payments such as Statutory Sick Pay (SSP) or Statutory Maternity Pay (SMP).
- Income tax — deducted via PAYE based on the employee's tax code and cumulative earnings in the tax year.
- Employee National Insurance contributions (NICs) — Class 1 employee NICs at 8% on earnings between the Primary Threshold (£242/week) and Upper Earnings Limit, and 2% above that in 2024/25.
- Employer NICs — currently 13.8% on earnings above the Secondary Threshold (£175/week). Don't forget the Employment Allowance, which lets eligible employers reduce their employer NIC bill by up to £5,000 per tax year — a meaningful saving for many small businesses.
You may also need to deduct pension contributions if auto-enrolment applies, student loan repayments, and any salary sacrifice arrangements. Net pay — what lands in the employee's bank account — is gross pay minus all employee deductions.
Step 4: Submit Real Time Information (RTI) to HMRC
This is the step many small business owners find most daunting, but it is non-negotiable. Under RTI, you must report payroll information to HMRC on or before each payday using a Full Payment Submission (FPS). There are no exceptions for monthly payroll — if you pay on the 25th, your FPS must reach HMRC by the 25th.
The FPS contains details of every employee paid, their gross earnings, tax and NIC deductions, and year-to-date figures. If you have no employees to pay in a given month (for example, during a period of unpaid leave), you must submit an Employer Payment Summary (EPS) instead to avoid HMRC raising a debt for the missing FPS.
Late or missing submissions attract automatic penalties. For employers with 1–9 employees, the penalty is £100 per month the FPS is late. That adds up quickly if payroll is consistently delayed.
Platforms like BizHub365 handle RTI submissions directly via HMRC's API — no bridging software, no manual uploads. You run payroll, review the figures, and submit the FPS in a few clicks, with a confirmation returned from HMRC in real time. For small business owners doing this themselves, removing that manual step significantly reduces the risk of a missed deadline.
Step 5: Pay HMRC and Manage Year-End Obligations
Collecting tax and NICs on behalf of your employees creates a liability to HMRC that must be settled promptly. Payments are due by the 19th of each month if paying by post, or the 22nd if paying electronically (Faster Payments or BACS). The payment covers income tax, employee NICs, employer NICs, and any student loan deductions for the previous tax month (which runs 6th to 5th).
Always quote your Accounts Office reference when making the payment, and keep a record. HMRC's online account should show the payment allocated correctly within a few days.
At the end of the tax year (5 April), you have additional obligations:
- Submit your final FPS for the year, marking it as the last submission
- Issue P60s to all employees still in your employment by 31 May
- Submit P11D forms by 6 July if any employees received benefits in kind (company cars, private medical insurance, etc.)
- Update employee records ready for the new tax year, including any changes to tax codes issued by HMRC
Auto-Enrolment: Don't Overlook Your Pension Duties
Payroll and pensions are closely linked. Under auto-enrolment legislation, most employers must automatically enrol eligible workers into a qualifying workplace pension scheme. Eligible workers are those aged between 22 and State Pension age who earn more than £10,000 per year.
Minimum contributions in 2024/25 are 3% employer and 5% employee (total 8%) on qualifying earnings. You must pay the employer contributions to the pension provider on time — typically within 19 days of the end of the pay period — and maintain records proving you have done so. The Pensions Regulator (TPR) takes a dim view of non-compliance and has issued significant fines to employers who ignore their duties.
If you are new to auto-enrolment, check your staging date or duties start date on The Pensions Regulator's website. Many small businesses use NEST (National Employment Savings Trust) as their scheme, as it is free to set up and has no employer charges.
Conclusion: Build a Payroll Process That Works Every Month
Payroll is not a task you can afford to treat casually. The penalties, employee dissatisfaction, and regulatory scrutiny that follow errors are simply not worth it. But with a clear process — register early, collect the right data, calculate accurately, submit on time, and pay HMRC promptly — it becomes a repeatable, manageable routine rather than a monthly panic.
Whether you are handling payroll manually, using a dedicated bureau, or managing it yourself with software, the key is consistency. If you want to bring payroll, RTI submissions, auto-enrolment tracking, and your broader accounting under one roof, BizHub365 was built precisely for UK small businesses and accountants who need everything connected and HMRC-compliant without the complexity of enterprise-grade platforms. Visit bizhub365.co.uk to see how it fits your business.