PAYE is the bit of running a business most founders are most scared of, and least often regret learning. Once it’s set up and running, it takes about 30 minutes a month for a small payroll. Once it isn’t, it’s the single biggest source of HMRC penalty letters in the country. This guide walks through how to set it up in 2026 without making any of the errors that get small employers fined.
What PAYE is
Pay As You Earn – the system for collecting income tax and NIC from employees through their pay. The employer’s responsibilities are to calculate, deduct, report, and pay HMRC. Real-Time Information (RTI) has been mandatory since 2013, which means the employer submits to HMRC on or before each pay date rather than once a year. PAYE is software-led; manual PAYE is technically possible but rare and unforgiving.
Step-by-step: registering as an employer
- Sign in to your HMRC business tax account (or create one).
- Register as an employer – free, 2–5 working days.
- HMRC issues an Employer PAYE Reference (e.g. 123/AB12345) and an Accounts Office Reference.
- Choose payroll software (free for fewer than 10 employees; paid is usually worth it).
- Configure the software with your references and employee details.
- Run your first payroll on or before the first pay date.
- Submit a Full Payment Submission (FPS) on or before the pay date.
- Pay HMRC by the 22nd of the following month (electronic).
Choosing payroll software
HMRC Basic PAYE Tools is free, basic, fewer than 10 employees, and deeply unforgiving when something goes wrong. BrightPay – popular, ~£100–£200/year. Moneysoft Payroll Manager – robust, ~£90/year. Sage Payroll – widely supported, more expensive. The FasCash payroll module is integrated with cash flow and accounts. For one or two employees, Basic PAYE Tools is reasonable; for more, paid software saves time and embarrassment when you make a mistake.
Class 1 NIC — what gets deducted
Two slices. Employee primary NIC at 8% on earnings between the Primary Threshold (£12,570) and the Upper Earnings Limit (£50,270), and 2% above. Employer secondary NIC at 15% on earnings above the Secondary Threshold (£5,000). Calculated per pay period, not annually (with a director-specific cumulative annual rule that smooths irregular pay). For a £30,000 salary the rough monthly numbers are about £117 employee NIC and £260 employer NIC.
Employment Allowance
A reduction of up to £10,500 in your annual employer NIC bill. Not available to single-director companies with no other employees on payroll. Tick the box in your payroll software to claim. Reset annually – it doesn’t roll over automatically in some software, so check at the start of each tax year. For most small businesses with 1–2 employees, EA absorbs the entire year’s employer NIC. See our EA guide for the eligibility rules.
Real-Time Information (RTI) submissions
Two main submissions. Full Payment Submission (FPS): submit on or before each pay day with that period’s pay and deductions. Employer Payment Summary (EPS): submit by the 19th of the following month if claiming Employment Allowance, recovering statutory pay (SMP, SSP), or you haven’t paid anyone in that period (a “no payment” period). Software handles the actual transmission.
Paying HMRC
Monthly: by the 22nd of the following month (electronic) or 19th (post). Quarterly: only if your average monthly PAYE/NIC is under £1,500 – pay by the 22nd of the month after quarter-end. Late payment carries interest and possibly penalties. Set up a recurring payment or direct debit to avoid missing deadlines; the easiest way to get an HMRC penalty is a once-a-year manual transfer that you forgot about.
Year-end forms
P60 – issued to each employee by 31 May summarising their pay and tax for the year. P11D – for any benefits in kind, by 6 July. P11D(b) – the Class 1A NIC summary, by 6 July, with payment due by 22 July (electronic). See our P11D guide for the BIK detail.
Common mistakes
Forgetting to submit FPS on or before pay day (each late submission carries penalty potential). Not claiming Employment Allowance when eligible (free £10,500 left on the table). Miscalculating director salary tax position – directors are on a cumulative basis annually, employees are pay-period-based. Using a personal bank account to pay HMRC – always use the company’s. Ignoring HMRC letters – they’ll escalate.
Frequently asked questions
The questions UK small employers ask most often when setting up PAYE.
How long does it take to register as an employer with HMRC?
2-5 working days for HMRC to send your PAYE reference. Don't run payroll until you have it. You can register as an employer up to 4 weeks before the first pay date — do it early so the references arrive in time.
Can I pay myself a director's salary without registering for PAYE?
No. Even a salary of £6,708 (the LEL) requires PAYE registration if it's processed through payroll. The exception: drawing a director's loan or dividends, which don't go through PAYE. For most directors taking even a small salary, register.
How much does payroll software cost?
HMRC Basic PAYE Tools is free for under 10 employees. BrightPay and Moneysoft are around £100/year. Sage and Xero Payroll are typically £15-£30/month. FasCash payroll module is included with FasCash subscription. For your first employee, paid software is usually worth it — Basic PAYE Tools is functional but unforgiving.
What's the difference between a Full Payment Submission (FPS) and an Employer Payment Summary (EPS)?
FPS is the per-payday report of pay and deductions for each employee. EPS is a separate monthly summary you submit if claiming Employment Allowance, recovering statutory pay (SMP, SSP), or reporting that you didn't pay anyone (e.g. dormant period). Most months you submit FPS only; EPS is occasional.
When do I pay HMRC the PAYE I've collected?
By the 22nd of the following month (electronic) or 19th (post). For example, December's payroll deductions are paid to HMRC by 22 January. If your average monthly PAYE/NIC is under £1,500, you can pay quarterly instead.
Do I need to give every employee a P60?
Yes, by 31 May after the end of the tax year, for every employee on the payroll on the last day of the tax year (5 April). The P60 summarises their pay and tax for the year. Most payroll software generates these automatically.
I'm a one-person Ltd company. Do I still need PAYE?
If you take any salary through the company, yes. If you take only dividends and director's drawings (no salary), no PAYE is required. Most directors take at least a small salary (£6,708-£12,570) for State Pension and Corporation Tax efficiency, so PAYE registration is the norm.
What if I make a payroll error?
For corrections in the same tax year, run an additional FPS in your software. For corrections after year-end, file an Earlier Year Update or contact HMRC. Most errors (over- or under-paid tax/NIC) wash through when reconciled at year-end. Persistent errors trigger HMRC letters — fix them promptly.
