How to Set Up Payroll as a Small UK Employer
If you are taking on your first employee or paying yourself a salary as a director, you need to set up PAYE payroll. HMRC requires employers to deduct income tax and National Insurance from employees' pay and report this in real time. Setting up correctly from the start saves a lot of trouble later.
Step 1: Register as an Employer with HMRC
Register at gov.uk/register-employer before your first pay date. You will need your business details, including your UTR or Company Registration Number. HMRC will issue you with an Employer PAYE Reference (in the format 123/AB12345) and an Accounts Office Reference. You may need to wait up to 5 working days to receive these, so register early.
Step 2: Choose Payroll Software
You must use payroll software to calculate deductions and submit Real Time Information (RTI) to HMRC. HMRC provides free Basic PAYE Tools software for up to 10 employees — sufficient for most very small businesses. Commercial options include Xero Payroll, QuickBooks Payroll, Sage Payroll, BrightPay, and many others. For Making Tax Digital compliance and integration with your accounting software, a commercial option is often preferable. Ensure the software is on HMRC's approved list at gov.uk/payroll-software.
Step 3: Collect Employee Information
Before the first pay run, collect from each employee: their full name, date of birth, National Insurance number, address, P45 from their previous job (or complete a starter checklist if no P45 is available), bank account details for payment. Set up their record in your payroll software.
Step 4: Apply the Correct Tax Code
Use the tax code from the employee's P45 or the code HMRC notifies you of. In the absence of any information, use code 1257L on a cumulative basis if the employee has declared they have no other jobs or pensions, or 1257L on a week1/month1 basis if their situation is unclear. HMRC will update you with revised codes electronically — check for these regularly in your payroll software.
Step 5: Run Payroll and Submit RTI
On or before each pay day, run your payroll, calculate deductions, and submit a Full Payment Submission (FPS) to HMRC. The FPS must be submitted before employees are paid — late submissions trigger penalties. If you pay no employees in a period, submit an Employer Payment Summary (EPS) to tell HMRC there is no FPS due and to claim any reductions (such as the Employment Allowance).
Step 6: Pay HMRC
Pay the PAYE and NI you have collected to HMRC by the 19th of each month (by cheque) or the 22nd (electronically). Use your Accounts Office Reference. Set up a BACS payment or standing order to ensure you never miss a payment date.
Year-End Obligations
Submit a final FPS marked as the last of the tax year by 19 April. Issue P60s to all employees still in employment by 31 May. If any employees received benefits in kind, submit P11D forms by 6 July. Register for and pay Class 1A NI on benefits in kind by 19/22 July.
