How to Do Payroll for a Small Business: A First-Time Setup Guide

You've hired your first employee and picked a start date. Then someone asks how you're going to pay them, and suddenly you need a PAYE scheme, a tax code, a pension, and a report to HMRC. Don't panic. Learning how to do payroll for a small business is mostly a matter of doing things in the right order, before that first payday arrives.

Step 1: Register as an employer with HMRC

This is the step people leave too late, and it's the one that causes the most stress. You must register before your first payday: HMRC sends your employer PAYE reference by letter, and you need it to run payroll. You can't register more than two months before you start paying people, so do it as soon as the start date is fixed.

You need to register if any employee is paid £96 or more a week in 2026/27. That includes yourself if you're the only director of a limited company and you pay yourself a salary at or above that level. Register online through GOV.UK; you'll also get an Accounts Office reference for paying HMRC.

If the letter hasn't arrived by payday, don't delay paying your employee. HMRC's own guidance says to run payroll anyway, store your full payment submission, and send it late once your reference arrives.

What you'll need to register

Have these to hand: your business name and address, company number if you're a limited company, Unique Taxpayer Reference, planned start date, and expected headcount.

Step 2: Choose how and when you'll pay

Monthly pay is the simplest pattern for most small businesses: one payday a month, one report a month, one payment to HMRC a month. Weekly pay means four times the admin, so only choose it if your industry genuinely needs it.

Pick a fixed payday and stick to it. Your payroll calendar hangs off that date.

Step 3: Pick your payroll software

You could run payroll on a spreadsheet, but for a first-timer it's a false economy. Good payroll software works out tax and National Insurance, applies the right tax code, produces payslips, and sends HMRC's report in the right format. HMRC lists free software for employers with fewer than ten employees, including its own Basic PAYE Tools.

Whatever you choose, set it up before the first pay run, not during it. Enter your employer references, your pay date pattern, and each employee's details, then run a test calculation. A mistake found in a test run costs minutes; a mistake found after payday costs apologies.

Step 4: Get the starter details from each employee

For every new starter you need their full name, address, date of birth, National Insurance number, and a starter declaration. The declaration covers three situations: first job since last April, another job or pension, or no P45 from their last job. That plus their tax code decides the tax on their first pay.

If they hand you a P45, use the tax code on it. If they don't have one, the starter declaration gives you an emergency-style code to use until HMRC sends the correct one. Keep the document either way: HMRC can ask how you arrived at a tax code.

Don't forget the workplace pension

Payroll and pensions arrive together. As an employer, you have automatic enrolment duties from your employee's first day. Staff aged 22 to State Pension age who earn over £10,000 a year must be automatically enrolled into a workplace pension, and you must contribute alongside them. Choose a pension scheme during setup, not after the first payday.

Step 5: Run your first payday

On payday itself, the routine is the same every time:

1. Work out gross pay, including overtime, bonuses, and deductions like student loan repayments.
2. Let the software deduct Income Tax and employee National Insurance, and calculate your employer National Insurance on top.
3. Give every employee a payslip on or before payday, showing gross pay, deductions, and net pay.
4. Send HMRC a Full Payment Submission (FPS) on or before payday — the real-time report of who you paid and what you deducted. Sending it late is a common small-employer mistake.

Then pay your employees, and diarise the HMRC bill: deductions plus employer National Insurance are usually due by the 22nd of the following month electronically (19th by post). Small employers whose monthly bill is usually under £1,500 may be able to pay quarterly instead.

The mistakes that trip up first-time employers

Most payroll problems come from the same handful of slips. Registering too late is number one. Number two is missing the FPS deadline — the report goes on or before payday, not when you get round to it. Number three is treating the pension as an afterthought. And number four is paying someone "off payroll" for a few weeks while you get set up. That mess is far harder to untangle than doing it properly from day one.

Keep payroll records for at least three years from the end of the tax year they relate to, including starter declarations, P45s, and HMRC letters.

Your first-payday checklist

If you do nothing else this week, do these five things: register as an employer if you haven't already; choose your payday and your software; collect starter details and P45s; pick a pension scheme; and run a test calculation before the real one. Get those five right and payroll becomes a monthly routine rather than a monthly worry.

If the whole thing still feels like a lot on top of running the business, that's exactly what we're here for. Our bookkeeping and payroll services cover the full monthly run, so payday just happens. Get in touch with any setup question, and browse more practical guides on our blog.

For the official steps, HMRC's guide to registering as an employer is the place to start.