Taking on your first employee is a milestone, and it comes with a new responsibility: running payroll correctly. PAYE is the system you will use to deduct the right tax and other amounts from your staff's pay and send them to HMRC. It can feel daunting at first, but once you understand the moving parts it becomes a manageable monthly routine.
This guide explains the basics of PAYE and payroll for first-time employers, so you know what is involved before you press go.
This article is general information only and is not financial advice. Tax rules can change, so always confirm the details that apply to you on GOV.UK or speak to a qualified accountant.
What PAYE is
PAYE stands for Pay As You Earn. It is the system HMRC uses to collect Income Tax and National Insurance from employees' wages as they are paid, rather than in one lump sum later. As the employer, you act as the collector: you work out the deductions, take them from each employee's gross pay, and pass them to HMRC.
PAYE generally applies once an employee earns above certain thresholds, but you may still need to operate it and keep records even for lower-paid staff in some situations. The employee receives their net, or take-home, pay, while you handle the rest behind the scenes. Getting this right is part of being a responsible employer and keeps both you and your staff on the right side of the rules.
Registering as an employer with HMRC
Before you pay anyone, you usually need to register as an employer with HMRC and set up a PAYE scheme. It is best to do this in good time, as registration can take a little while to come through and you will need your details before the first payday.
When you register, you will receive the references and online access you need to report and pay. You will also take on duties such as keeping payroll records and reporting to HMRC each time you pay staff. The exact steps and timing can change, so follow the current guidance on GOV.UK when you set up your scheme. If payroll feels like a lot on top of everything else, this is a common point at which small employers bring in an accountant or payroll provider.
Real Time Information and the FPS
Payroll in the UK runs on Real Time Information, usually shortened to RTI. This means you report pay and deductions to HMRC on or before each payday, rather than once a year. The main report is the Full Payment Submission, or FPS, which tells HMRC what you have paid each employee and what you have deducted.
In some circumstances you may also send an Employer Payment Summary, for example to reflect certain adjustments or to tell HMRC that no payments were made in a period. The practical upshot is that payroll is a regular rhythm: each pay run produces a submission. Good payroll software handles these filings for you in the background, which is one of the biggest reasons to use it.
Tax codes
Each employee has a tax code that tells you how much tax-free pay they are entitled to and therefore how much tax to deduct. HMRC issues and updates these codes, and you apply whatever code is current for each person.
A few practical points are worth knowing:
- New employees should provide details of previous employment, often via a starter checklist or their P45, which helps you use the right code from the start.
- Codes can change during the year, and HMRC will tell you when they do; apply changes promptly.
- A wrong or emergency code can mean an employee pays too much or too little tax, which then has to be corrected.
You do not have to understand the maths behind every code, but you do need to apply the codes HMRC gives you accurately and on time.
National Insurance and other deductions
Alongside Income Tax, you will usually deduct National Insurance contributions from employees who earn above the relevant threshold, and you as the employer normally pay employer's contributions on top. National Insurance is a significant part of the cost of employing someone, so it is worth understanding before you set salaries. Our guide on National Insurance for small businesses goes into this in more detail.
Other amounts may also pass through payroll, including:
- Pension contributions under automatic enrolment, covered in our guide to auto-enrolment pensions for small businesses.
- Statutory payments such as sick pay or family-related pay, where due.
- Student loan repayments, where HMRC tells you they apply.
- Any voluntary deductions the employee has agreed to.
Because the thresholds and rates for these change, always check the current figures on GOV.UK rather than relying on last year's numbers.
Payslips and statutory payments
Employees are entitled to an itemised payslip, showing their gross pay, the deductions made and their net pay. Providing clear payslips is both a legal requirement and good practice, because it helps staff understand and trust their pay.
You may also need to make statutory payments in certain situations, such as when an employee is off sick or on family leave. The rules and amounts for these are set nationally and can change, so check the current detail before you process them. Our guide to statutory sick pay and leave for small employers explains how these fit into payroll.
Payroll is not a once-a-year chore but a steady monthly rhythm, and the right software turns it from a worry into a routine.
Choosing payroll software and meeting deadlines
Because RTI requires you to file electronically each pay run, most small employers use payroll software or a payroll provider. When choosing software, look for something that is recognised by HMRC, handles RTI submissions, calculates deductions automatically, supports automatic enrolment and produces payslips. Ease of use matters more than fancy features when you are doing this yourself.
Whichever route you choose, deadlines are central to PAYE. You must report pay on or before payday, and pay what you owe HMRC by the relevant deadline each period. Late filing or late payment can lead to penalties and interest. Set reminders, build payroll into your monthly calendar, and keep your records tidy. The specific dates and any penalty rules can change, so confirm them on GOV.UK and consider asking an accountant to help you set things up correctly the first time.
Frequently asked questions
Do I need to run PAYE if I only have one part-time employee?
Possibly. Whether PAYE applies depends on earnings and circumstances, but even for lower-paid staff you may still have reporting and record-keeping duties. The safest approach is to check the current rules on GOV.UK before you assume you are exempt, because getting it wrong can lead to penalties.
Can I run payroll myself or should I outsource it?
Both are common. With good software, many small employers run payroll themselves, especially with only a few staff. Others prefer to outsource to an accountant or payroll bureau to save time and reduce the risk of mistakes. The right choice depends on your confidence, your time and how complex your payroll is.
What happens if I make a mistake on a submission?
Mistakes can usually be corrected, often through a later submission or adjustment, but it is best to fix them promptly. Persistent or uncorrected errors can lead to penalties or incorrect tax for your employees. If you are unsure how to put something right, check the guidance on GOV.UK or ask an accountant.
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