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How to set up payroll UK for the first time

Setting up payroll for the first time in the UK can feel daunting. There are registrations, deadlines, and compliance requirements that you need to get right from the start. Whether you are hiring your first employee or setting up payroll as a director-only company, this guide explains the process step by step. Getting payroll right from day one saves you time, penalties, and stress later on.

We cover registering as an employer with HMRC, choosing payroll software, running your first payroll, and the ongoing obligations you need to meet. This is for UK limited companies, sole traders, and partnerships taking on their first employee or paying a director's salary.

Do you need to set up payroll?

You need to run payroll if you pay anyone who counts as an employee for tax purposes. That includes:

  • Employees (full-time, part-time, or casual)
  • Directors of a limited company who take a salary (even if it is just you)
  • Some contractors, depending on their employment status

If you are a limited company director paying yourself a salary, even a small one below the tax threshold, you must run payroll and report to HMRC. Many directors take a salary at or near the National Insurance primary threshold (£12,570 for 2025/26) and top up with dividends. Payroll is needed for the salary portion.

If you only pay yourself dividends and no salary at all, you do not need payroll. But most accountants recommend taking at least a small salary for National Insurance qualifying purposes. Our Payroll & PAYE service handles all of this for clients.

Step 1: Register as an employer with HMRC

Before you can run payroll, you must register as an employer with HMRC. You can do this online at GOV.UK. You will need:

  • Your company details (or personal details if you are a sole trader)
  • The date your first employee starts (or the date you want to start paying a director's salary)
  • Your company's UTR (Unique Taxpayer Reference) and Companies House number (if applicable)

HMRC will send you an employer PAYE reference number and an Accounts Office reference. These are used for all payroll submissions and payments. Registration can take up to five working days, so do it in good time before your first pay date.

When to register

Register as soon as you know you will be paying an employee or director. You must register before the first payday. If you leave it too late, you may miss your first RTI submission deadline.

Step 2: Choose payroll software

HMRC requires employers to submit payroll information electronically in real time (RTI). To do this, you need payroll software that is recognised by HMRC.

Popular options for small businesses include:

  • Xero Payroll: Built into Xero, ideal if you already use Xero for bookkeeping. Handles RTI submissions directly.
  • HMRC Basic PAYE Tools: Free software from HMRC. Suitable for businesses with fewer than 10 employees. Functional but basic.
  • FreeAgent: Includes payroll as part of its accounting package. Good for sole traders and small companies.
  • BrightPay / Sage / Moneysoft: Dedicated payroll packages with more features for growing businesses.

Your software must be able to submit Full Payment Submissions (FPS) and Employer Payment Summaries (EPS) to HMRC. Most reputable packages handle this automatically. If you are unsure, ask your accountant. For a broader comparison, see our post on the best accounting software for small businesses UK.

Step 3: Gather employee information

Before running payroll, you need the following from each employee:

  • Full legal name and date of birth
  • National Insurance number
  • Address
  • P45 from their previous employer (if they have one)
  • Starter declaration (if no P45 is available)
  • Student loan details (if applicable)
  • Bank details for payment

For directors, you already have most of this information. Make sure your NI number is recorded correctly and that you have set up the director's tax code correctly in the software (usually through a starter checklist).

Step 4: Run your first payroll

With the software set up and employee details entered, you can run your first payroll. Here is what happens:

  1. Enter pay details. Input the gross salary for the pay period (monthly, weekly, etc.).
  2. Software calculates deductions. The software works out income tax, employee National Insurance, and any student loan deductions based on the employee's tax code and NI category.
  3. Review the payslip. Check the gross pay, deductions, and net pay are correct.
  4. Submit the FPS to HMRC. The Full Payment Submission reports each employee's pay and deductions to HMRC. It must be submitted on or before the payday.
  5. Pay the employee. Transfer the net pay to the employee's bank account.
  6. Record employer costs. Employer National Insurance and any pension contributions are your additional costs on top of gross pay.

Director payroll

If you are paying yourself as a director, you can choose between two NI calculation methods:

  • Annual method: NI is calculated at the end of the tax year based on annual earnings. This can reduce NI if your salary varies month to month.
  • Standard method: NI is calculated each pay period as for any employee.

Most directors with a regular monthly salary use the annual method. Your payroll software or accountant will set this up.

Step 5: Pay HMRC

The tax and NI you deduct from employees, plus employer NI, must be paid to HMRC by the 22nd of the following month (or the 19th if paying by post). For example, deductions from April's payroll are due by 22 May.

If your total monthly payments to HMRC are less than £1,500, you may be able to pay quarterly instead of monthly. HMRC will tell you if you qualify.

You pay using your Accounts Office reference number. Payment methods include direct debit, online banking, and BACS. Direct debit is the easiest way to avoid missing a deadline.

Employment Allowance

Small businesses may qualify for the Employment Allowance, which reduces your employer NI bill by up to £10,500 per year (2025/26). You cannot claim if you are a single-director company with no other employees. If you have at least one other employee, you may qualify. Claim it through your payroll software at the start of the tax year.

Step 6: Auto-enrolment pension

If you have eligible employees (usually those aged 22 to state pension age, earning over £10,000 per year), you must enrol them in a workplace pension scheme. This is called auto-enrolment.

You must:

  • Choose a qualifying pension scheme (e.g. NEST, The People's Pension, or a provider recommended by your accountant)
  • Enrol eligible employees within the deadline
  • Make minimum contributions (currently 3% employer, 5% employee, totalling 8% of qualifying earnings)
  • Manage opt-outs and re-enrolment

Even if you only have one employee, auto-enrolment applies. Our Payroll & PAYE service manages pension enrolment alongside payroll.

Ongoing obligations

Once payroll is running, you must:

  • Submit FPS on or before each payday. Every time you pay an employee.
  • Submit EPS if needed. An Employer Payment Summary is used to report things like Employment Allowance claims, CIS deductions, or months with no employees paid.
  • Issue payslips. Employees must receive a payslip on or before payday, showing gross pay, deductions, and net pay.
  • Year-end reporting. After 5 April each year, submit your final FPS and issue P60s to employees. P60s summarise their pay and deductions for the tax year.
  • P11D reporting. If you provide benefits in kind (e.g. company car, private medical insurance), you must report them on a P11D by 6 July after the tax year.

Missing RTI deadlines can trigger late filing penalties. HMRC uses a penalty points system for repeated late submissions. Staying on top of deadlines is essential.

UK tax and legal accuracy

The NI thresholds, Employment Allowance, and pension contribution rates described here apply to the 2025/26 tax year. Rates and thresholds can change at each Budget. RTI submission requirements apply to all UK employers. This article is for informational purposes only and does not constitute professional tax or financial advice. Please speak to a qualified accountant before taking action.

Frequently asked questions

Do I need payroll if I am the only director and take no salary?

No. If you only take dividends and no salary, you do not need to run payroll. However, most accountants recommend a small salary for NI qualifying year purposes.

Can I run payroll myself or do I need an accountant?

You can run payroll yourself using software like HMRC Basic PAYE Tools or Xero Payroll. Many small businesses outsource payroll to their accountant to save time and avoid errors.

How often do I need to run payroll?

That depends on your pay frequency. Monthly is most common for salaried employees. Weekly is used for some hourly workers. You must submit an FPS each time you pay.

What happens if I miss an RTI submission?

HMRC may issue a late filing penalty. Under the penalty points system, you accumulate points for each late submission, and a financial penalty is triggered once you hit the threshold. Submitting on time every period keeps your points at zero.

What is the difference between PAYE and payroll?

PAYE (Pay As You Earn) is the system HMRC uses to collect income tax and NI from employees through their employer. Payroll is the broader process of calculating pay, deductions, and reporting to HMRC. They go hand in hand.

Summary and next steps

Setting up payroll in the UK means registering with HMRC, choosing software, gathering employee details, running your first pay, and meeting ongoing RTI obligations. Get it right from the start and you avoid penalties and admin headaches down the line.

If you would rather hand payroll over to someone who does it every day, we are here. At Figures we run payroll, handle RTI, manage auto-enrolment, and deal with HMRC on your behalf. Book a discovery call or see our Payroll & PAYE service.