Tax Returns

Payroll & PAYE for Small Businesses in the UK: A Practical 2026 Guide

What is PAYE?

PAYE stands for Pay As You Earn. It is the system employers normally use to deduct Income Tax and National Insurance from employees’ wages.

Your payroll software uses information including an employee’s pay, tax code and National Insurance category to calculate the appropriate deductions. Employers then report payroll information to HMRC and pay the amounts due.

PAYE payroll can involve much more than simply calculating someone’s net salary. Depending on the business and employee, payroll may also need to deal with:

Income Tax and National Insurance
Employer’s National Insurance
workplace pension deductions
student and postgraduate loan deductions
statutory payments
bonuses, overtime and commissions
benefits and expenses
new starters and leavers
Construction Industry Scheme deductions in relevant cases

Getting the underlying payroll information right is therefore important from the first payday.

Do small businesses need to register for PAYE?

You normally need to register as an employer with HMRC when you start employing staff. A limited company may also need to register where the only employee is its director.

HMRC says registration should be completed before the first payday, and businesses cannot normally register more than two months before they start paying employees.

After registration, HMRC provides the employer PAYE details needed to operate the scheme.

This is an area where new limited companies can easily make mistakes. Paying a director from the company bank account is not necessarily the same thing as correctly processing a director’s salary through payroll.

PAYE and National Insurance rates for 2026/27

For the tax year 6 April 2026 to 5 April 2027, the standard employee Class 1 National Insurance primary threshold remains £12,570 a year.

For a standard Category A employee, employee National Insurance is generally:

2026/27 earnings Employee NI rate
Up to the primary threshold 0%
Above £12,570 to £50,270 8%
Above £50,270 2%

Employer National Insurance is a particularly important cost when budgeting for staff. The standard employer Class 1 National Insurance rate is 15%, with the standard secondary threshold at £5,000 per year for 2026/27. Different rules and thresholds can apply to certain categories of employee.

This means businesses should consider the total employment cost, rather than looking at gross salary alone.

Don’t forget the £10,500 Employment Allowance

One of the first things we consider when reviewing a small-business payroll is whether the employer qualifies for Employment Allowance.

For 2026/27, eligible employers can reduce their employer Class 1 National Insurance liability by up to £10,500 for the tax year. The reduction applies as payroll is run until the allowance has been used or the tax year ends.

Not every business qualifies. For example, special restrictions apply to a company where the only employee liable for secondary Class 1 National Insurance is also its sole director. Connected companies also need to consider which company can claim.

For an eligible small employer, however, overlooking Employment Allowance could mean paying substantially more employer National Insurance than necessary.

What is an FPS?

Most businesses operating PAYE need to report payroll information to HMRC through Real Time Information (RTI).

The principal submission is the Full Payment Submission (FPS).

It tells HMRC information about employees’ pay and deductions.

Crucially, an FPS normally needs to be submitted on or before the employee’s payday.

For example, if your normal monthly payday is 30 September, your payroll should be processed and the relevant FPS reported to HMRC on or before that payday.

Repeatedly running payroll retrospectively can therefore create compliance problems.

What is an EPS?

An Employer Payment Summary (EPS) is used in circumstances where information needs to be reported to HMRC that is not dealt with solely through the FPS.

Examples include certain statutory payment recoveries, claiming Employment Allowance and reclaiming CIS deductions where applicable to a limited company.

An EPS may also be required where no employees were paid during a particular tax month. Where an EPS is being used to reduce the amount due to HMRC, the normal deadline is the 19th following the relevant tax month.

FPS and EPS submissions are therefore different, and businesses should not assume that sending one automatically deals with every PAYE reporting requirement.

When must PAYE be paid to HMRC?

For employers paying monthly, electronic PAYE payments generally need to reach HMRC by the 22nd of the following tax month.

If payment is made by post, the deadline is normally the 19th.

Some smaller employers that usually pay less than £1,500 per month to HMRC may be able to arrange quarterly rather than monthly PAYE payments.

It is important to distinguish between the payroll reporting deadline and the PAYE payment deadline.

The FPS is normally reported on or before payday. The resulting PAYE liability is paid separately according to the relevant HMRC payment deadline.

Workplace pensions and automatic enrolment

Payroll compliance does not stop with HMRC.

Employers also have workplace pension responsibilities. Automatic enrolment duties generally begin when the first member of staff starts working for the business.

Eligible workers normally need to be automatically enrolled where they are aged between 22 and State Pension age, earn at least £10,000 per year, and ordinarily work in the UK.

For many automatic enrolment schemes, the minimum total contribution remains 8%, normally consisting of at least 3% from the employer with the balance coming from the employee and tax relief, subject to the scheme’s basis and rules.

Pension assessments should therefore form part of the regular payroll process rather than being considered only when an employee asks about a pension.

National Minimum Wage rates from April 2026

Employers should also make sure employees are being paid at least the applicable National Minimum Wage.

From 1 April 2026, the rates include:

Worker Minimum hourly rate
Age 21 and over £12.71
Age 18–20 £10.85
Under 18 £8.00
Apprentice rate £8.00

The apprentice rate is subject to eligibility conditions, including age and apprenticeship year.

Employers should be particularly careful where employees have unpaid working time, deductions from wages or salary-sacrifice arrangements, as simply looking at the headline annual salary may not always be enough to establish minimum-wage compliance.

How long should payroll records be kept?

HMRC requires employers to maintain records covering matters including employee pay and deductions, reports made to HMRC, payments to HMRC, tax-code notices, leave and sickness, and taxable expenses or benefits.

PAYE records generally need to be retained for three years from the end of the tax year to which they relate. HMRC states that failure to maintain adequate records can result in a penalty of up to £3,000.

Other employment rules can require records to be retained differently, so businesses should have a proper payroll record-retention process.

Common payroll mistakes small businesses make

In our experience, payroll problems often arise from administration rather than complicated tax calculations.

Typical issues include putting a new employee onto payroll too late, using incorrect starter information, missing an FPS deadline, applying an incorrect tax code, failing to process a leaver correctly, forgetting pension assessment, paying HMRC late, overlooking Employment Allowance, or assuming that no payroll activity means nothing needs to be reported.

A particularly common problem for owner-managed companies is deciding on a director’s salary without considering the interaction between Corporation Tax, employer National Insurance, Employment Allowance eligibility, personal tax and the director’s wider remuneration strategy.

The cheapest-looking salary is not automatically the most appropriate salary.

Should a small business outsource payroll?

For a business with only a few employees, running payroll yourself can appear economical.

But the real question is whether the time spent checking HMRC notices, processing starters and leavers, calculating statutory payments, managing pension deductions and resolving discrepancies is the best use of the owner’s time.

Outsourcing can become particularly valuable when a business has multiple employees, variable hours, overtime, bonuses, workplace pension contributions, statutory pay, directors’ payroll or frequent starters and leavers.

A professional payroll service also gives the business owner someone to speak to when something unusual happens rather than discovering the answer after payroll has already been submitted.

Payroll support from SV & Co Accountancy

At SV & Co Accountancy, we help small businesses and owner-managed companies manage payroll alongside their wider accounting and tax obligations.

Our approach is not simply to produce payslips. We can help businesses understand the payroll figures, PAYE liabilities and wider tax implications of employing staff.

Whether you are employing your first member of staff, setting up a director’s payroll, or want to move an existing payroll away from your current provider, we can help you establish a compliant and practical process.

Need help with payroll or PAYE?

Speak to Sandip Vadher PhD FCCA at SV & Co Accountancy.

Contact SV & Co Accountancy

Frequently Asked Questions

Do I need PAYE if I only have one employee?
Possibly. HMRC says businesses normally need to register when they start employing staff, and this can include a limited company employing only its director. The precise requirement depends on how the individual is paid and the circumstances.

When do I submit payroll to HMRC?
The FPS normally needs to be submitted on or before the employee’s payday.

When is PAYE due to HMRC?
For monthly employers paying electronically, payment is generally due by the 22nd of the following tax month.

How much is employer National Insurance in 2026/27?
The standard employer Class 1 rate is 15%, with a standard secondary threshold of £5,000 per year. Different thresholds and reliefs can apply to particular employee categories.

How much is Employment Allowance in 2026/27?
Eligible employers can reduce their employer Class 1 National Insurance liability by up to £10,500 for the tax year. Eligibility conditions apply.

Can my accountant run payroll for me?
Yes. Many small businesses outsource payroll so that calculations, payslips, HMRC submissions and related payroll administration are managed alongside their accounting and tax affairs.

Important: Tax and payroll rules depend on individual circumstances and can change. This article reflects HMRC guidance for the 2026/27 tax year available at the time of writing and is general information rather than personalised tax advice.