Payroll for Small Businesses: PAYE, RTI and Pensions Explained

Taking on your first employee is exciting — right up until someone mentions small business payroll. Then the questions start: do I need to register with HMRC? What happens if I file late? What's this 15% employer charge everyone's talking about? Here's the straight answer: payroll is a compliance routine with a deadline attached to every step. Miss the routine and HMRC fines you. Get it right and it's ten quiet minutes a month.

What running payroll actually involves

Payroll means working out what each employee is owed, deducting what HMRC is owed, and telling HMRC about both. Three moving parts: PAYE (deducting income tax and employee National Insurance through their tax code), employer National Insurance (what you pay on top), and RTI (Real Time Information — reporting everything to HMRC as it happens).

PAYE and tax codes

When you register as an employer, HMRC gives you a PAYE reference and an Accounts Office reference. Before your first payday, you register online — and you must do it if any employee is paid £96 or more a week, gets expenses or benefits, or has had another job. HMRC then issues each employee's tax code, and your payroll software uses it to work out how much tax to deduct. Get the code wrong and the employee overpays or underpays tax — both of which land on your desk to fix.

RTI: the "on or before payday" rule

This is the deadline most small employers miss. Every time you pay someone, you must send HMRC a Full Payment Submission (FPS) on or before payday — not the day after, not at the end of the week. Late FPS filings attract penalties, and they escalate with the number of employees and how often you're late in the tax year. You also have to pay HMRC what you owe: usually by the 22nd of the following month if you pay electronically (the 19th by post), or quarterly if your bill is under £1,500 a month.

Small business payroll, step by step: your monthly routine

Once you're set up, the routine is straightforward. Check hours, overtime and bonuses for the period. Run the payroll in your software — it calculates PAYE, National Insurance and pension deductions. Send the FPS to HMRC on or before payday. Issue payslips (every employee must get one on or before payday — it's a legal right, not a courtesy). Pay HMRC by the 22nd, then pay your pension contributions to the scheme on time. Do that in order, every month, and payroll never bites you.

Setting up: register and get pensions ready

Before the first payday, register as an employer with HMRC — it isn't instant, so don't leave it to the week you need to pay someone. At the same time, choose a workplace pension scheme: your pension duties begin when your first worker starts, and enrolment can't be backdated. Free software exists for very small employers, but most businesses outgrow it quickly — commercial payroll software typically costs a few pounds a month and handles auto-enrolment properly.

The costs most owners forget to budget for

Here's where payroll surprises people. For 2026/27, employer National Insurance is 15% on earnings above £5,000 a year — on one employee paid £30,000, that's £3,750 a year from your cash flow, not theirs. The good news: the Employment Allowance knocks up to £10,500 off your employer NI bill, claimed through your payroll software — many small employers never realise they're eligible and leave it on the table. (One exception: companies with a single director and no other staff can't claim it.)

Pensions: auto-enrolment without the panic

Eligible workers must be automatically enrolled in a qualifying workplace pension. Minimum contributions are 8% of qualifying earnings in total, with at least 3% coming from you as the employer. That means assessing each worker's eligibility, enrolling them, and paying your share on time. The part that trips people up is the declaration of compliance — miss it and The Pensions Regulator fines you. The paperwork takes minutes; the fine runs into the hundreds.

The mistakes that actually cost money

After years of untangling payroll for small firms, the same errors come up again and again. Late FPS filings are number one — set a calendar reminder for the day before payday, not the day itself. Wrong tax codes are number two — if an employee hands you a P45 from their last job, get it into the software before you pay them. Forgetting year-end duties is number three: final FPS by 19 April, P60s by 31 May, P11Ds for benefits in kind by 6 July. And number four: not claiming the Employment Allowance — if you pay employer NI and haven't claimed it, check this week.

Run payroll yourself or get help?

You have three options, and HMRC's PAYE for employers guide lays them out plainly: run it yourself with software, use a payroll bureau, or have your accountant handle it. DIY works with one or two employees and a simple monthly cycle. A bureau or accountant pays off once you have variable hours, bonuses, or starters and leavers. One thing to know either way: you stay legally responsible for all PAYE tasks even if someone else runs the numbers.

If payroll is eating your week or you're not sure your setup is right, that's exactly what we help with. See our payroll and bookkeeping services, read our FAQs, or get in touch — we'll review your current setup and tell you plainly what's working and what isn't. And if you're weighing this up alongside the rest of your finances, our blog covers the other compliance headaches small businesses face.

What to do this week: if you have staff, check the Employment Allowance is claimed and pension contributions are paid. If you're hiring your first employee, register as an employer with HMRC today and pick a pension scheme before the first payday. Ten minutes now saves a fine later.