Payroll Setup UK: A Complete Step-by-Step Guide

Understanding Payroll in the UK

Payroll is both a list of employees receiving payments from a business and the systematic process of calculating, distributing, and reporting their pay and deductions. In the UK, effective payroll management is a legal necessity and ensures your business remains compliant with HMRC standards.

Payroll covers:

• Calculating gross and net pay
• Deductions (tax, NI, pensions, student loans)
• HMRC reporting and remittance
• Recording bonuses, benefits, statutory pay
• Keeping detailed and secure payroll records

"Every business that employs staff has a legal duty to correctly manage payroll in accordance with HMRC regulations."

Essential Steps to Set Up Payroll

1. Register as an Employer with HMRC

• Register before your first payday. You may not register more than two months ahead.
• Registration is online: Register as employer with HMRC.
• HMRC issues your PAYE and Accounts Office References in about 5–10 working days.

Checklist – Information Needed:

• Company legal/trade name
• Companies House registration (Ltd/LLP)
• Trading/correspondence addresses
• UTR (Corporation Tax reference)
• Director details (including at least one NI number)
• Contact details
• Nature of business

2. Choose Payroll Software or a Provider

• Use HMRC-recognised payroll software. Free options exist for very small businesses (<10 staff).
• Good software helps with payslip generation, deductions, RTI submission, and pension integration.
• Alternatively, accountants or payroll bureaus can handle payroll.

Compare Payroll Software Features:

• Auto-enrolment for pensions
• Payslip production
• RTI and compliance reporting
• Scalability & cloud access
• Integration with HR and accounting modules

3. Collect Employee Information

Before the first payday, gather:

• Proof of right to work (passport, visa checks)
• Name, address, NI number, date of birth, gender
• Salary (check against relevant minimum wage)
• Starter declaration form or P45 (tax code & previous pay)
• Student loan/postgraduate loan details if applicable

4. Decide Pay Frequency

• Most businesses pay monthly. Weekly and four-weekly are also acceptable.
• The HMRC tax month runs from the 6th to the 5th. The 2025/26 tax week runs from the Sunday to the Saturday of each week.

5. Set Up Pension & Insurance

• Auto-enrolment is mandatory for employees aged 22+ earning £10,000+ per annum.
• Obtain Employers’ Liability Insurance (minimum £5 million cover) before you hire staff.

Callout:
Starting payroll the right way from day one protects your business and your employees.

Running Payroll: What You Must Do Ongoing

1. Calculate Pay and Deductions

Gross pay includes all taxable components:

• Salary
• Bonuses and commissions
• Overtime
• Statutory payments (e.g., sick pay)

Deductions include:

• Income Tax (per HMRC tax code)
• National Insurance (employee and employer)
• Student/Postgraduate loans
• Pension contributions
• Court orders or salary sacrifice schemes

2. Issue Payslips

Issue each employee a payslip on or before payday showing:

• Gross pay
• Itemised deductions and their amounts
• Net pay (what is paid out)
• Hours worked (if pay varies)

3. Real Time Information (RTI) Reporting to HMRC

• Full Payment Submission (FPS): Sent on or before payday. Reports pay and deductions.
• Employer Payment Summary (EPS): For reporting statutory payments, adjustments, or nil payments, by the 19th following the tax month.
• Year-End: Submit annual summaries, P60s for employees, and P11Ds for expenses/benefits.

4. Remit Payments to HMRC

• Payment deadline: 22nd of the month following payday (19th for cheque).
• Use PAYE Accounts Office reference to ensure correct allocation.
• If PAYE/NI is £1,500/month or less, you may pay quarterly.

"Timeliness and accuracy in RTI submissions and tax payments ensure a smooth relationship with HMRC and your staff."

Payroll Compliance & Record-Keeping

What Payroll Records Should Be Kept

• Failure to keep payroll records can result in fines up to £3,000.

Data Protection Obligations

• Payroll data is subject to UK GDPR/Data Protection Act 2018.
• Employees have rights regarding their data; employers must honour subject access requests.

Special Payroll Cases and Statutory Pay

• Statutory Payments:
• SSP, SMP, SPP, SAP, and Neonatal Care Pay (from 2025). Often reclaimable from HMRC if eligible, and must be correctly recorded and reported.
• Benefits in Kind/Expenses: Some are processed through payroll in real time; others require separate returns (P11D).
• Pensions: Deductions and contributions must match the scheme rules, normally calculated after NI and before tax.
• Student/Postgraduate Loans: Deduct if employee earns above the threshold (which changes annually). Use correct plan type.
• Minimum and Living Wage: Pay at least the legal minimum—visit Minimum Wage rates for up-to-date figures.
• Employment Status: Misclassifying workers as contractors rather than employees can result in penalties under IR35 and employment law.

Common Payroll Mistakes & Best Practice Tips

Common Pitfalls:

• Late or missed RTI submissions (penalties, staff Universal Credit issues)
• Late HMRC payments (interest & fines)
• Calculation errors (affect employee morale and compliance)
• Incomplete/inaccurate records (risk of fines)
• Out-of-date process (e.g., ignoring new pay rates or statutory pay types)

Top Tips:

• Outsource payroll to a qualified accountant/payroll bureau if uncertain
• Always use the latest HMRC-recognised payroll software
• Schedule all critical deadlines (submission dates, payment due dates)
• Review legislative updates regularly
• Match admin/personnel data with payroll for compliance

Staying current with payroll legislation is not only smart—it's required.

Manual Payroll, Payroll Software, or Outsourcing: Which is Best?

If in doubt, professional support is a wise investment.

Payroll Setup: 10-Step Summary Table

Further Resources

• Payroll for employers – GOV.UK
• Payroll software guide
• The Pensions Regulator
• ICO GDPR Guidance
• HMRC Employer Helpline: 0300 200 3200
• Basic PAYE Tools for small firms

Final Thoughts:
The right payroll setup is an investment in your business’s future and legal compliance. With proper planning and attention to detail, payroll can be administered effectively, protecting both your business and your workforce.

Take decisive action today: Register, automate, or seek professional assistance to guarantee payroll compliance and efficiency.

Appendix: Payroll Jargon Buster

• PAYE: The system for income tax and NI collection via payroll
• RTI: Sending payroll info to HMRC in real time
• FPS/EPS: Types of RTI submissions
• P60: Annual employee statement of pay/deductions
• P11D: Report for untaxed benefits/expenses
• Statutory Pay: Minimum legal sick/maternity/paternity/adoption pay