Are you considering managing payroll on your own instead of outsourcing it? You’re not alone. Many UK small business owners and sole traders choose to take control of their payroll to save money and better understand their business’s financial responsibilities.

However, navigating payroll in the UK can seem daunting at first, especially with HMRC requirements, employee deductions, and legal obligations.

The good news is, with the right tools and guidance, doing your own payroll is absolutely achievable, even if you have no prior experience.

This step-by-step guide will walk you through everything from registering with HMRC to paying your staff and keeping accurate records.

You’ll gain clarity on PAYE, deductions, software options, and common pitfalls to avoid. Let’s dive in and help you confidently handle your payroll without needing to hire an accountant.

Why Should You Consider Doing Your Own Payroll?

 

Choosing to manage your own payroll can provide significant advantages, especially for startups, freelancers, and small businesses. First and foremost, it’s cost-effective.

Hiring an accountant or outsourcing to a payroll provider can incur monthly fees that quickly add up. Doing it yourself can save hundreds of pounds annually. It also offers better visibility into your cash flow and employee costs, empowering you to make smarter financial decisions.

There’s also a control factor, when you manage payroll internally, you gain a clearer understanding of tax responsibilities, payment cycles, and real-time adjustments.

This can enhance accuracy and reduce the risk of late submissions or compliance issues. Additionally, with modern HMRC-approved payroll software, the process is far more streamlined than it used to be. These tools simplify everything from calculating deductions to submitting reports digitally.

While there is a learning curve, mastering payroll can strengthen your confidence as a business owner. With consistent practice, it becomes a routine task that brings long-term value to your operation.

When Do You Need to Register as an Employer with HMRC?

If you pay anyone in your business, including yourself as a director, you’ll likely need to register as an employer with HMRC. Operating under the PAYE (Pay As You Earn) system is legally required when certain thresholds or conditions apply.

You must register for PAYE if any of the following apply to one or more of your employees during the current tax year:

Even if your employee earns below these thresholds, it’s still important to maintain full payroll records for auditing purposes.

Registration is necessary before your first payday and should ideally be done at least two weeks in advance.

This allows HMRC time to process your application and send you the necessary PAYE references. If you delay your registration or fail to register on time, it may lead to missed submissions or penalties for non-compliance.

Remember, even if you only have one employee, you are still considered an employer in the eyes of HMRC.

How Do You Register for PAYE and Get Your References?

Registering with HMRC is the essential first step to running payroll in the UK. The process is entirely online and should be completed as early as possible.

To register:

Once submitted, HMRC will issue two key references:

These references are essential when submitting payroll reports and paying tax or National Insurance.

Important points to note:

Keep these references safe, as they’ll be used every time you interact with HMRC regarding payroll duties.

What Payroll Software Should You Use?

Choosing the right payroll software is crucial for managing payroll efficiently and remaining compliant with HMRC rules. Your software should be recognised by HMRC, as only approved software can report PAYE figures accurately.

Popular software options include:

HMRC’s Basic PAYE Tools – A free solution suitable for very small businesses (usually fewer than 10 employees)

What your software must be able to do:

Some tools offer automation for pension contributions and employee onboarding, making life easier. Choose one based on your business size, tech comfort level, and whether you already use integrated accounting software.

What Employee Information Must You Set Up?

Before running your first payroll, it’s vital to collect complete and accurate information for each employee. This ensures your deductions, tax submissions, and records are all compliant with HMRC standards.

You must gather the following details:

You should also collect optional but recommended info:

All employee records should be securely stored and only accessed by authorised personnel. Use digital storage solutions or encrypted files to stay GDPR-compliant.

Payroll software will typically prompt you to enter this information during setup. Make sure each field is double-checked to avoid incorrect deductions or rejected RTI reports.

Accurate records aren’t just good practice, they’re a legal requirement under UK payroll regulations.

How Do You Calculate Gross Pay Accurately?

Before you can make deductions or issue payslips, you need to calculate each employee’s gross pay, the total amount they earn before any taxes or contributions are taken out. Understanding how to calculate this figure is the foundation of accurate payroll management.

Gross pay varies depending on whether an employee is salaried or hourly paid. For salaried employees, divide the annual salary by the number of pay periods in a year.

For example, if someone earns £36,000 per year and you pay monthly, their gross monthly pay is £3,000. For hourly staff, multiply the hours worked during the pay period by their hourly rate. Always include any bonuses, overtime, or statutory pay such as sick or maternity leave pay.

To ensure accuracy:

Reliable payroll software can automate most of these calculations. It will apply correct rates, time records, and pay categories, ensuring employees are paid fairly and that the data is correctly transmitted to HMRC under Real Time Information (RTI) reporting.

 

What Deductions Do You Need to Make From Employee Pay?

Once you’ve calculated gross pay, the next step is applying deductions to arrive at the employee’s net pay, the amount that reaches their bank account. These deductions are essential for compliance with HMRC regulations and include mandatory and optional components.

PAYE Income Tax

PAYE (Pay As You Earn) is HMRC’s system for collecting income tax from employees’ wages. The amount of tax deducted depends on the employee’s tax code, which reflects their personal allowance and financial circumstances.

The standard personal allowance for 2025/26 is £12,570. You’ll only deduct tax on income above this threshold. Payroll software automatically applies HMRC’s tax tables to calculate this, ensuring you stay compliant with changing tax rates.

National Insurance Contributions

Employees and employers both pay National Insurance (NI), which funds state benefits and pensions. For employees, Class 1 contributions apply once their earnings exceed £1,048 per month.

Payroll software determines the correct rates based on earnings and category letters (such as A, B, or C). Employers must also pay their portion of NI on top of wages, which should be reported and paid monthly or quarterly.

Pension Auto-Enrolment

If your employees meet eligibility criteria (aged 22–66 and earning over £10,000 per year), you must automatically enrol them into a workplace pension scheme.

Contributions are typically 8% of qualifying earnings, split between employer and employee. Payroll software helps manage enrolments, calculate contributions, and send reports directly to your pension provider.

Student Loan Repayments

For employees with outstanding student loans, repayments start once earnings exceed the threshold for their plan type. The software identifies the correct repayment plan from HMRC and deducts a fixed percentage (usually 9% for Plan 1 or Plan 2).

Salary Sacrifice Agreements

Under salary sacrifice, employees agree to reduce their gross pay in exchange for benefits such as additional pension contributions. This can reduce taxable income and NI liability. Payroll software must handle these agreements carefully to ensure correct reporting and accurate payslips.

When all deductions are complete, the resulting figure is the net pay, which represents what employees take home after taxes and contributions.

How Do You Generate and Distribute Payslips?

How Do You Generate and Distribute Payslips

Every employer in the UK is legally required to provide payslips to employees each payday. Payslips serve as a record of income, deductions, and tax, ensuring transparency between you and your staff.

Legal Requirements

Employers must issue a payslip on or before payday. It can be electronic or printed, but it must be accessible to each employee. Failing to provide payslips can result in penalties or complaints lodged with employment tribunals.

What a Payslip Must Include?

A payslip must display:

You may also include voluntary details such as accrued holiday pay or remaining leave balances.

Automating Payslip Creation with Payroll Software

Modern payroll software like Xero, QuickBooks, and Sage can automatically generate payslips as part of the payroll run. These tools pull data from pay records, deductions, and employee information to produce compliant documents instantly.

Payslips can then be securely emailed to employees or uploaded to an online portal. Automation reduces the risk of manual errors and ensures that every payslip aligns with HMRC reporting.

Before finalising payroll, always verify that all pay data, deductions, and benefits are correct. Errors in payslips can cause confusion and may require amendments or resubmissions.

How Do You Pay Your Employees and HMRC?

Paying employees and HMRC accurately and on time is the final stage of each payroll cycle. Your chosen payroll software will calculate what each person is owed and what you must pay HMRC for tax and National Insurance.

Paying Employees Through BACS or Direct Deposit

Most UK businesses use BACS (Bankers’ Automated Clearing System) to pay staff directly into their bank accounts. BACS payments take three working days to clear, so schedule accordingly.

Some payroll systems also support Faster Payments, allowing same-day transfers. Always verify employee bank details and payroll dates to avoid delays or duplicate payments.

Real Time Information (RTI) Submissions to HMRC

Under HMRC’s Real Time Information system, every payroll run must be reported digitally on or before payday. This ensures taxes and contributions are recorded instantly. Missing RTI submissions can trigger penalties, so it’s vital to report promptly using HMRC-approved software.

FPS vs EPS

Both are submitted electronically through payroll software. Ensure the correct reporting type is selected each time to maintain compliance.

Paying Tax and NI Monthly or Quarterly

Once payroll is processed, you must pay the deducted tax and NI to HMRC. Payments are due by the 22nd of each month (or the 19th if paying by post). Small employers who pay less than £1,500 monthly can request to pay quarterly instead.

Payments can be made by:

Keep digital records of every transaction for at least three years. On-time payments not only maintain compliance but also prevent late fees or interest charges.

What Payroll Records Do You Need to Keep?

What Payroll Records Do You Need to Keep

Accurate record-keeping is a cornerstone of payroll compliance. Employers are legally required to retain payroll records for three years from the end of the tax year they relate to.

You must keep:

Best practices include storing records digitally through secure payroll software or encrypted backups. If your records are lost or destroyed, inform HMRC immediately and try to reconstruct them. Failure to maintain records can result in estimated charges and penalties of up to £3,000.

Additionally, adhere to data protection rules under the UK GDPR when storing or processing employee data. Only authorised staff should access these files, ensuring confidentiality and integrity.

Do You Need to Set Up a Workplace Pension?

If you employ eligible workers, setting up a workplace pension is not optional, it’s a legal duty. The UK’s auto-enrolment scheme ensures that employees save towards retirement through employer-supported contributions.

Eligible staff are typically aged between 22 and the State Pension age and earn at least £10,000 annually. As an employer, you must automatically enrol them and make minimum contributions. Currently, the total minimum contribution is 8% of qualifying earnings, with employers paying at least 3%.

Payroll software can simplify this by automatically calculating contributions and sending reports to pension providers. You can set up payments via direct debit to make the process more efficient.

Even if you have no eligible staff, you should still document your compliance decision to demonstrate to The Pensions Regulator that you’ve assessed your workforce.

Should You Use a Payroll Provider or Do It Yourself?

Running payroll yourself offers more control and cost savings, but it also comes with responsibility. If you choose to use a payroll provider, such as an accountant or bureau, they’ll handle tasks like calculating pay, sending RTI reports, and submitting payments. However, you remain legally responsible for ensuring all data and reports are accurate.

Doing it yourself means you have full visibility over your finances and can make quick updates when staff changes occur. For many small businesses, the learning curve is manageable thanks to intuitive payroll software. On the other hand, outsourcing may be beneficial if your workforce grows or your time is limited.

The best choice depends on your comfort level with technology and financial admin. Whether DIY or outsourced, maintaining compliance and accuracy should always be the top priority.

How Can You Make Payroll Easier Every Month?

How Can You Make Payroll Easier Every Month

Managing payroll consistently can feel overwhelming, but with a few smart strategies, you can simplify the process and avoid costly mistakes. The key is preparation, automation, and staying informed about compliance updates.

Start by using payroll software that integrates with your accounting system. This enables automatic updates for financial records, reducing manual entry and improving accuracy. Scheduling your payroll dates and setting automated reminders will ensure you never miss a submission or payment deadline.

Use a standardised checklist every pay cycle to confirm all steps are completed, calculating gross pay, applying deductions, generating payslips, reporting to HMRC, and making payments. A checklist helps avoid overlooked tasks or errors that may lead to penalties.

Here are more ways to make payroll easier:

Finally, consider attending HMRC webinars or using their online learning resources. These can keep you current on payroll legislation and help avoid compliance issues.

Conclusion

Doing your own payroll in the UK may seem complex at first, but it’s entirely achievable with the right tools, knowledge, and structure. From registering with HMRC and selecting software, to calculating pay and submitting reports, each step builds your confidence and control as a business owner.

The process doesn’t just help you save on outsourcing costs; it gives you a clearer view of your finances and ensures your employees are paid accurately and on time.

By understanding PAYE requirements, tracking deductions, generating compliant payslips, and staying up to date with HMRC guidelines, you’ll manage your payroll with ease and avoid costly penalties. Whether you choose to keep payroll in-house or eventually outsource, the knowledge you gain from doing it yourself provides lasting value.

Now that you know how to do your own payroll step-by-step in the UK, you’re well-equipped to take control and run it confidently, efficiently, and legally.

FAQs

What is PAYE and why do I need it?

PAYE (Pay As You Earn) is HMRC’s system for collecting tax and National Insurance from employees. It’s mandatory if you pay employees above the weekly threshold or offer benefits.

Can I use free payroll software in the UK?

Yes, HMRC offers Basic PAYE Tools for free. It’s ideal for small businesses with fewer than 10 employees.

When should I submit payroll to HMRC?

You must submit your payroll reports (FPS) to HMRC on or before each employee payday to stay compliant.

How do I pay HMRC after running payroll?

Use online banking, direct debit, or credit/debit card payments. Payments are typically due by the 22nd of each month.

Do I need to auto-enrol employees in a pension?

Yes, if they are eligible, aged 22 to State Pension age, and earning over £10,000 a year. Auto-enrolment is a legal duty.

What happens if I make a mistake on payroll?

You may need to submit an adjustment or correction through your payroll software. HMRC may charge penalties for consistent errors.

How long should I keep payroll records?

You must retain payroll records for at least three years from the end of the tax year they relate to.

Can I stop being an employer if I no longer have staff?

Yes, you can deregister with HMRC once you stop employing anyone. You’ll need to send a final FPS and close your PAYE scheme.