Last Updated on 12.08.2026

Are you considering managing payroll on your own instead of outsourcing it? You’re not alone.

Many UK small business owners choose to run payroll themselves to save money and better understand their employment costs.

Sole traders can run PAYE payroll for employees they hire, but a sole trader is self-employed and is not normally paid personally through PAYE.

A director of a limited company, by contrast, can be an employee of their company and may need to be paid through payroll.

However, navigating payroll in the UK can seem daunting at first, especially with HMRC requirements, employee deductions, and legal obligations.

The good news is, with the right tools and guidance, doing your own payroll is absolutely achievable, even if you have no prior experience.

This step-by-step guide will walk you through everything from registering with HMRC to paying your staff and keeping accurate records.

You’ll gain clarity on PAYE, deductions, software options, and common pitfalls to avoid. Let’s dive in and help you confidently handle your payroll without needing to hire an accountant.

Why Should You Consider Doing Your Own Payroll?

Choosing to manage your own payroll can provide significant advantages, especially for startups, freelancers, and small businesses. First and foremost, it’s cost-effective.

Hiring an accountant or outsourcing to a payroll provider can incur monthly fees that quickly add up. Doing it yourself can save hundreds of pounds annually. It also offers better visibility into your cash flow and employee costs, empowering you to make smarter financial decisions.

There’s also a control factor, when you manage payroll internally, you gain a clearer understanding of tax responsibilities, payment cycles, and real-time adjustments.

This can enhance accuracy and reduce the risk of late submissions or compliance issues. Additionally, with modern payroll software recognised by HMRC, the process is far more streamlined than it used to be. These tools simplify everything from calculating deductions to submitting reports digitally.

While there is a learning curve, mastering payroll can strengthen your confidence as a business owner. With consistent practice, it becomes a routine task that brings long-term value to your operation.

When Do You Need to Register as an Employer with HMRC?

If you pay anyone in your business, including yourself as a director, you’ll likely need to register as an employer with HMRC. Operating under the PAYE (Pay As You Earn) system is legally required when certain thresholds or conditions apply.

You must register for PAYE if any of the following applies to an employee during the current tax year:

• They’re paid £96 or more per week
• They receive expenses or company benefits
• They’re receiving a pension
• They’ve had another job
• They’ve received Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit
• If none of these conditions applies and you do not need to register, you should still keep appropriate payroll records.
• Even if your employee earns below these thresholds, it’s still important to maintain full payroll records for auditing purposes.

You must register as an employer before the first payday. However, HMRC does not allow employers to register more than two months before they start paying employees.

If the first payday arrives before your employer PAYE reference has been received, HMRC says you should still run payroll, store the Full Payment Submission (FPS), and send a late FPS once you are able to report it.

Remember, even if you only have one employee, you are still considered an employer in the eyes of HMRC.

How Do You Register for PAYE and Get Your References?

Registering with HMRC is the essential first step to running payroll in the UK. The process is entirely online and should be completed as early as possible.

To register:

• Visit the official HMRC website and navigate to the ‘Register as an Employer’ section
• Use your Government Gateway ID or create one if you don’t already have it
• Complete the registration form with your business details, company type, and planned first payday
• Submit the registration online

Once submitted, HMRC will issue two key references:

• Employer PAYE Reference Number
• Accounts Office Reference Number

These references are essential when submitting payroll reports and paying tax or National Insurance.

Important points to note:

• Your employer PAYE reference is sent by HMRC after registration, and HMRC provides an online service for checking current response times.
• If you register as an employer online, you are automatically enrolled for PAYE Online.
• HMRC says the PAYE Online activation code should be sent by post within 10 days.
• You must activate PAYE Online within 28 days of the date shown on the activation letter.
• HMRC can close a new employer’s PAYE scheme if the employer does not send a payroll report or make a payment to HMRC within 120 days.
• The 120-day rule is especially important because your current article says two months.

Keep these references safe, as they’ll be used every time you interact with HMRC regarding payroll duties.

What Payroll Software Should You Use?

Choosing the right payroll software is crucial for managing payroll efficiently and remaining compliant with HMRC rules. Your payroll software should support PAYE reporting to HMRC. HMRC publishes a list of payroll products that it recognises for sending PAYE information online, although HMRC does not recommend one commercial product over another.

Popular software options include:

HMRC’s Basic PAYE Tools – A free solution suitable for very small businesses (usually fewer than 10 employees)

What your software must be able to do:

• Record employee details and tax codes
• Calculate gross and net pay
• Deduct PAYE tax, National Insurance, and pensions
• Submit Real Time Information (RTI) reports to HMRC
• Generate payslips
• Maintain compliance with auto-enrolment and minimum wage requirements

Some tools offer automation for pension contributions and employee onboarding, making life easier. Choose one based on your business size, tech comfort level, and whether you already use integrated accounting software.

What Employee Information Must You Set Up?

Before running your first payroll, it’s vital to collect complete and accurate information for each employee. This ensures your deductions, tax submissions, and records are all compliant with HMRC standards.

You must gather the following details:

• Full name and address
• National Insurance number
• Date of birth
• Start date and job title
• Tax code and previous employment details (via P45 or a new starter checklist)
• Bank details for payment

You should also collect optional but recommended info:

• Contact information (email and phone number)
• Pension scheme enrolment preferences
• Student loan or post-graduate loan status

All employee records should be securely stored and only accessed by authorised personnel. Use digital storage solutions or encrypted files to stay GDPR-compliant.

Payroll software will typically prompt you to enter this information during setup. Make sure each field is double-checked to avoid incorrect deductions or rejected RTI reports.

Accurate records aren’t just good practice, they’re a legal requirement under UK payroll regulations.

How Do You Calculate Gross Pay Accurately?

Statutory Sick Pay also changed significantly from 6 April 2026. Eligible employees can now receive SSP from the first full day of sickness absence, rather than after three waiting days, and the previous Lower Earnings Limit eligibility requirement has been removed.

For 2026/27, SSP is the lower of £123.25 per week or 80% of the employee’s average weekly earnings.

Before you can make deductions or issue payslips, you need to calculate each employee’s gross pay, the total amount they earn before any taxes or contributions are taken out. Understanding how to calculate this figure is the foundation of accurate payroll management.

Gross pay varies depending on whether an employee is salaried or hourly paid. For salaried employees, divide the annual salary by the number of pay periods in a year.

For example, if someone earns £36,000 per year and you pay monthly, their gross monthly pay is £3,000. For hourly staff, multiply the hours worked during the pay period by their hourly rate. Always include any bonuses, overtime, or statutory pay such as sick or maternity leave pay.

Employers should also check that gross pay complies with the current National Minimum Wage. From 1 April 2026, the National Living Wage is £12.71 per hour for workers aged 21 and over.

The rate is £10.85 for workers aged 18 to 20 and £8.00 for workers under 18 and qualifying apprentices. Payroll calculations should take the worker’s age and apprenticeship status into account.

To ensure accuracy:

• Verify working hours or contracted salary details.
• Record bonuses or commissions clearly.
• Review pay structures if employees work irregular shifts.
• Maintain up-to-date employment contracts.

Reliable payroll software can automate most of these calculations. It will apply correct rates, time records, and pay categories, ensuring employees are paid fairly and that the data is correctly transmitted to HMRC under Real Time Information (RTI) reporting.

What Deductions Do You Need to Make From Employee Pay?

Once you’ve calculated gross pay, the next step is applying deductions to arrive at the employee’s net pay, the amount that reaches their bank account. These deductions are essential for compliance with HMRC regulations and include mandatory and optional components.

PAYE Income Tax

PAYE (Pay As You Earn) is HMRC’s system for collecting income tax from employees’ wages. The amount of tax deducted depends on the employee’s tax code, which reflects their personal allowance and financial circumstances.

The standard Personal Allowance for the 2026/27 tax year remains £12,570, equivalent to £242 per week or £1,048 per month. However, employers should not simply assume that every employee can earn £12,570 tax-free, because the amount of PAYE deducted depends on the employee’s tax code and taxable pay.

Payroll software applies the appropriate HMRC tax code and tax tables automatically. Employers should also remember that Scotland has separate Income Tax bands and rates from the rest of the UK.

National Insurance Contributions

Employees and employers can both have Class 1 National Insurance liabilities, but different thresholds apply to each.

For 2026/27, the employee Primary Threshold is £242 per week, £1,048 per month or £12,570 per year. A standard category A employee normally pays 8% on earnings above the Primary Threshold up to £50,270 per year, and 2% above the Upper Earnings Limit.

Employer National Insurance starts at the lower Secondary Threshold of £96 per week, £417 per month or £5,000 per year for a standard category A employee. The standard employer Class 1 rate is 15% above the Secondary Threshold.

Different rules and rates can apply to other National Insurance category letters, including apprentices, employees under 21, veterans and certain Freeport or Investment Zone employees, so payroll software should apply the correct category automatically.

Pension Auto-Enrolment

Employees generally need to be automatically enrolled if they are aged 22 to State Pension age and earn more than £10,000 per year, subject to the automatic-enrolment rules.

The £10,000 automatic-enrolment earnings trigger remains unchanged for 2026/27. For schemes using qualifying earnings, the 2026/27 qualifying-earnings band remains £6,240 to £50,270 per year.

Under the standard qualifying-earnings approach, the total minimum pension contribution is normally 8% of qualifying earnings, with the employer contributing at least 3%. The employee generally makes up the remaining amount, including applicable tax relief.

Student Loan Repayments

Employers must make student or postgraduate loan deductions when HMRC instructs them to do so or when the appropriate information is provided through the employee starter process.

For the 2026/27 tax year, the annual repayment thresholds are:

• Plan 1: £26,900
• Plan 2: £29,385
• Plan 4: £33,795
• Plan 5: £25,000
• Postgraduate Loan: £21,000

Employees repay 9% of earnings above the relevant threshold for Plans 1, 2, 4 and 5. Postgraduate Loan deductions are 6% above the applicable threshold. Payroll software should identify the correct plan and calculate the deduction for each pay period.

Salary Sacrifice Agreements

Under salary sacrifice, employees agree to reduce their gross pay in exchange for benefits such as additional pension contributions. This can reduce taxable income and NI liability. Payroll software must handle these agreements carefully to ensure correct reporting and accurate payslips.

When all deductions are complete, the resulting figure is the net pay, which represents what employees take home after taxes and contributions.

How Do You Generate and Distribute Payslips?

Every employer in the UK is legally required to provide payslips to employees each payday. Payslips serve as a record of income, deductions, and tax, ensuring transparency between you and your staff.

Legal Requirements

Employers must issue a payslip on or before payday. It can be electronic or printed, but it must be accessible to each employee. Failing to provide payslips can result in penalties or complaints lodged with employment tribunals.

What a Payslip Must Include?

A payslip must display:

• Gross pay and net pay amounts
• PAYE tax and National Insurance deductions
• Pension contributions
• Any additional deductions (e.g., student loans)
• Pay period and date of payment
• Employer’s name and contact details
• Hours worked (if paid hourly)

You may also include voluntary details such as accrued holiday pay or remaining leave balances.

Automating Payslip Creation with Payroll Software

Modern payroll software like Xero, QuickBooks, and Sage can automatically generate payslips as part of the payroll run. These tools pull data from pay records, deductions, and employee information to produce compliant documents instantly.

Payslips can then be securely emailed to employees or uploaded to an online portal. Automation reduces the risk of manual errors and ensures that every payslip aligns with HMRC reporting.

Before finalising payroll, always verify that all pay data, deductions, and benefits are correct. Errors in payslips can cause confusion and may require amendments or resubmissions.

How Do You Pay Your Employees and HMRC?

Paying employees and HMRC accurately and on time is the final stage of each payroll cycle. Your chosen payroll software will calculate what each person is owed and what you must pay HMRC for tax and National Insurance.

Paying Employees Through BACS or Direct Deposit

Most UK businesses use BACS (Bankers’ Automated Clearing System) to pay staff directly into their bank accounts. BACS payments take three working days to clear, so schedule accordingly.

Some payroll systems also support Faster Payments, allowing same-day transfers. Always verify employee bank details and payroll dates to avoid delays or duplicate payments.

Real Time Information (RTI) Submissions to HMRC

Under HMRC’s Real Time Information system, every payroll run must be reported digitally on or before payday. This ensures taxes and contributions are recorded instantly. Missing RTI submissions can trigger penalties, so it’s vital to report promptly using HMRC-approved software.

FPS vs EPS

• Full Payment Submission (FPS): Sent each payday and includes details of employee earnings, tax, and NI contributions.
• Employer Payment Submission (EPS): Sent when you need to reclaim statutory payments or inform HMRC about adjustments.

Both are submitted electronically through payroll software. Ensure the correct reporting type is selected each time to maintain compliance.

Paying Tax and NI Monthly or Quarterly

Once payroll is processed, you must pay the deducted tax and NI to HMRC. Payments are due by the 22nd of each month (or the 19th if paying by post). Small employers who pay less than £1,500 monthly can request to pay quarterly instead.

Payments can be made by:

• Online bank transfer
• Direct debit via HMRC
• Corporate credit or debit card

Keep digital records of every transaction for at least three years. On-time payments not only maintain compliance but also prevent late fees or interest charges.

What Payroll Records Do You Need to Keep?

Accurate record-keeping is a cornerstone of payroll compliance. Employers are legally required to retain payroll records for three years from the end of the tax year they relate to.

You must keep:

• Employee pay details and deductions
• Tax and NI calculations
• Pension contributions and reports
• RTI submissions
• Leave, absence, and statutory pay information
• Tax code notices and payroll giving forms

Best practices include storing records digitally through secure payroll software or encrypted backups. If your records are lost or destroyed, inform HMRC immediately and try to reconstruct them. Failure to maintain records can result in estimated charges and penalties of up to £3,000.

Additionally, adhere to data protection rules under the UK GDPR when storing or processing employee data. Only authorised staff should access these files, ensuring confidentiality and integrity.

Do You Need to Set Up a Workplace Pension?

If you employ eligible workers, setting up a workplace pension is not optional, it’s a legal duty. The UK’s auto-enrolment scheme ensures that employees save towards retirement through employer-supported contributions.

Eligible staff are generally aged between 22 and State Pension age and earn more than £10,000 per year. The automatic-enrolment earnings trigger remains £10,000 for 2026/27, while the standard qualifying-earnings band remains £6,240 to £50,270.

For schemes using qualifying earnings, the normal statutory minimum is 8% in total, with the employer contributing at least 3%.

Payroll software can simplify this by automatically calculating contributions and sending reports to pension providers. You can set up payments via direct debit to make the process more efficient.

Even if you have no eligible staff, you should still document your compliance decision to demonstrate to The Pensions Regulator that you’ve assessed your workforce.

Should You Use a Payroll Provider or Do It Yourself?

Running payroll yourself offers more control and cost savings, but it also comes with responsibility. If you choose to use a payroll provider, such as an accountant or bureau, they’ll handle tasks like calculating pay, sending RTI reports, and submitting payments. However, you remain legally responsible for ensuring all data and reports are accurate.

Doing it yourself means you have full visibility over your finances and can make quick updates when staff changes occur. For many small businesses, the learning curve is manageable thanks to intuitive payroll software. On the other hand, outsourcing may be beneficial if your workforce grows or your time is limited.

The best choice depends on your comfort level with technology and financial admin. Whether DIY or outsourced, maintaining compliance and accuracy should always be the top priority.

How Can You Make Payroll Easier Every Month?

Managing payroll consistently can feel overwhelming, but with a few smart strategies, you can simplify the process and avoid costly mistakes. The key is preparation, automation, and staying informed about compliance updates.

Start by using payroll software that integrates with your accounting system. This enables automatic updates for financial records, reducing manual entry and improving accuracy. Scheduling your payroll dates and setting automated reminders will ensure you never miss a submission or payment deadline.

Use a standardised checklist every pay cycle to confirm all steps are completed, calculating gross pay, applying deductions, generating payslips, reporting to HMRC, and making payments. A checklist helps avoid overlooked tasks or errors that may lead to penalties.

Here are more ways to make payroll easier:

• Use cloud-based payroll software for access anywhere
• Enable auto-enrolment features for pensions
• Set up direct debits for HMRC and pension payments
• Keep employee data updated at all times
• Regularly review payroll reports and reconcile with your bank statements
• Stay informed about HMRC changes, such as new tax codes or contribution rates

Finally, consider attending HMRC webinars or using their online learning resources. These can keep you current on payroll legislation and help avoid compliance issues.

Conclusion

Doing your own payroll in the UK may seem complex at first, but it’s entirely achievable with the right tools, knowledge, and structure. From registering with HMRC and selecting software, to calculating pay and submitting reports, each step builds your confidence and control as a business owner.

The process doesn’t just help you save on outsourcing costs; it gives you a clearer view of your finances and ensures your employees are paid accurately and on time.

By understanding PAYE requirements, tracking deductions, generating compliant payslips, and staying up to date with HMRC guidelines, you’ll manage your payroll with ease and avoid costly penalties. Whether you choose to keep payroll in-house or eventually outsource, the knowledge you gain from doing it yourself provides lasting value.

Now that you know how to do your own payroll step-by-step in the UK, you’re well-equipped to take control and run it confidently, efficiently, and legally.

FAQs

What is PAYE and why do I need it?

PAYE (Pay As You Earn) is HMRC’s system for collecting tax and National Insurance from employees. It’s mandatory if you pay employees above the weekly threshold or offer benefits.

Can I use free payroll software in the UK?

Yes, HMRC offers Basic PAYE Tools for free. It’s ideal for small businesses with fewer than 10 employees.

When should I submit payroll to HMRC?

You must submit your payroll reports (FPS) to HMRC on or before each employee payday to stay compliant.

How do I pay HMRC after running payroll?

Use online banking, direct debit, or credit/debit card payments. Payments are typically due by the 22nd of each month.

Do I need to auto-enrol employees in a pension?

Yes, if they are eligible, aged 22 to State Pension age, and earning over £10,000 a year. Auto-enrolment is a legal duty.

What happens if I make a mistake on payroll?

You may need to submit an adjustment or correction through your payroll software. HMRC may charge penalties for consistent errors.

How long should I keep payroll records?

You must retain payroll records for at least three years from the end of the tax year they relate to.

Can I stop being an employer if I no longer have staff?

Yes, you can deregister with HMRC once you stop employing anyone. You’ll need to send a final FPS and close your PAYE scheme.