Setting up payroll: How to set up for success

If you employ staff at your small business, or plan to, setting up payroll is essential.

Setting up payroll helps you pay your employees on time and manage their pensions or benefit schemes. It also helps ensure that everyone pays the correct payroll tax to HMRC through PAYE. 

Below, we explain how to get set up, register and prepare your payroll correctly.

How to set up payroll: In summary

• Setting up payroll is often a legal requirement for businesses that employ staff. Payroll software can help you accurately pay staff, manage deductions and report wages to HMRC and stay on track.

• To establish payroll, you’ll need to register as an employee with HMRC, gather essential employee information, choose a payroll system, establish pay periods and maintain accurate records.

• HMRC-recognised payroll software, like QuickBooks, can simplify the entire process. It helps you remain compliant by automating payslips, tracking deductions and calculating Income Tax, National Insurance, and submitting Real Time Information (RTI) to HMRC.

Internal payroll management explained

Payroll is the process of calculating your employees’ wages correctly and ensuring they’re paid on time. It also handles income tax payments and National Insurance contributions to HMRC. 

Managing payroll internally means you deal with payroll in-house, rather than outsourcing.

Keeping payroll in-house can give you a deeper understanding of your workforce costs. However, it’s important to get it right. Here’s how you can set up your payroll for success.

Why is it important to set payroll up properly?

Payroll processes are essential to ensuring your employees are paid accurately, on time, and that you’re compliant with payroll rules. Fundamentally, payroll is the process of calculating employees’ wages, deductions (taxes, pension, etc.), and informing HMRC and your employees of these payments.

If you don’t bother setting up payroll, you can’t keep a record of salaries or deductions, and you’ll likely make salary-related errors or mistakes. Not only that, but might not be paying your employees in a compliant way, which could end up with you paying out more with penalties.

Step-by-Step Guide to Setting Up Payroll

If you have employees, then setting up payroll is important – as much for you as it is for them. While it’s not a complicated task, it does involve a lot of information and requires you to be honest and accurate.

We’ve put together a simple guide to preparing and then setting up your payroll. We’d recommend taking your time and prioritising precision over speed.

Step 1: Register as an employer with HMRC

Before you can pay staff (or yourself as a director), you need to register as an employer with HMRC. You must do this before your first payday, but no more than two months before. 

Once registered, HMRC will issue a PAYE Reference and an Accounts Office Reference. While these can sometimes arrive in around 5 days, HMRC notes that it can take up to 30 days. Keep these numbers safe — you’ll need them to run payroll and report to HMRC.

Step 2: Gather employee information

When setting up payroll, you’ll need specific information about employees to apply the correct tax code and set them up properly in your payroll software. Some of the information you’ll need are their:

• Date of birth

• Gender

• Address

• Start date

You’ll also need to take information from their P45. If your employee doesn’t have a P45, they’ll need to complete a starter checklist. From their P45, you’ll need following:

• Their full name

• The date they left their previous job

• Their total pay and tax paid to date throughout the current tax year

• Their National Insurance number

• If applicable, their student loan deduction status

• Their current tax code.

You’ll also need their bank details, usually just their sort code, account number and name, to pay them.

Step 3: Enrol for PAYE

If you registered your business online, you’re automatically enrolled with PAYE Online.

This allows you to see how much you owe HMRC, pay bills, access employee tax codes and notices, and send reports. If you registered by phone or post, you need to enrol separately.

Learn more about PAYE for employers.

Step 4: Choose your payroll system

You have multiple options for paying your employees. You can choose from the following payroll systems. 

• Payroll Software: Offering automation and high levels of accuracy, payroll software can simplify the payroll process. With software that’s HMRC-recognised, you get the bonus of support with compliance – giving you reassurance and peace of mind. 

• Outsourcing: Outsourcing means offloading the payroll task to another business. This can be useful if you’re pressed for time or don’t feel comfortable doing the work yourself, but it can be costly in the long run.

• Manual Payroll: Manual payroll is done by you or an employee, usually on spreadsheets. This means making calculations and totting up data independently. While still possible on a very small scale,, it does leave room for ‘human error’ and can lead to costly mistakes.

Step 5: Set up pay periods and payment schedules

A payment schedule determines how often you want to pay your employees. Often, this is based on their employment status and the business you own.

• If employees are salaried, then it’s typical to pay them on a set date, once a month.

• If employees are paid by the hour or shift, then fortnightly is commonly used.

• If employees are temporary, then pay is often weekly. 

There may also be pay frequency expectations based on your industry. For example, it’s common for tradespeople or delivery drivers to be paid weekly. 

Once you’ve decided on your pay frequency, you’ll need to establish clear payment dates. This could mean a set date (e.g., the 28^th of every month) or a more flexible term (e.g., the last Friday of every month).

Step 6: Understand tax codes and deductions

Tax codes are used to determine how much income tax you’re required to pay, and how much should be deducted from your wage or pension.

HMRC decides which code you should use for each employee, and they can be found on their P45, P60 or PAYE Online. Tax Codes consist of numbers and letters; currently, the most common code used is 1257L.

Tax codes can tell you which deductions are required for employee wages; these might include:

• Income Tax (PAYE) – PAYE or Pay As You Earn is the process of deducting your tax before you’re paid. Income tax is paid by everyone earning over £12,750 a year, and the rate at which you’re charged depends on your income.

• National Insurance Contributions (NICs) (both employee and employer contributions) - National Insurance Contributions are obligatory for anyone earning over £242 a week. Paying NIC is required to access state benefits and pensions. How much employees pay for NIC will depend on how much they earn.

• Student loan repayments – If employees took out student loans as part of higher education, they’ll be required to pay them back in small increments. The amount/when your employee has to begin paying their loan back will depend on which student loan plan they’re on and how much they earn. 

• Pension contributions (including auto-enrolment) – Employees must be auto-enrolled in a pension if: 

• They’re between the ages of 22 and the state retirement age

• Earn at least £10,000 a year

• Are classed as a worker

• Ordinarily work in the UK.

The amount you and your employee pay will depend on the type of pension scheme they’re enrolled in and whether they’ve automatically enrolled.  

Other statutory deductions – Employees may also have other payments that they’re required to make. These can include, but aren’t limited to:

• Child maintenance

• Council tax arrears

• Employee benefit schemes, such as health insurance or Cycle to Work

Step 7: Maintain records of payment and deductions

You will need to keep accurate payroll records for at least three years, which should include:

• How much employees are paid. Including basic pay and any benefits or bonuses

• The amount deducted. Including income tax, NICs, pensions, or student loans

• Any employer NICs you pay. Above a threshold, you need to pay secondary NICs

• Information on leave or absence. Including maternity, sickness, and related pay

It’s important to keep these records safe digitally or on paper, as HMRC may inspect them to make sure you’re paying enough tax. If records are missing, you could face a penalty of up to £3,000.

You’ll also need to send payslips to your employees, which we’ll cover in this guide.

Step 8: Report to HMRC and pay what you owe

When you pay staff, you need to send HMRC a Full Payment Submission (FPS) through your payroll software on or before payday. This tells HMRC about payments, taxes, and deductions.

You should also regularly review and reconcile your payroll to ensure everything is correct.

If you need to claim things like statutory payments or Employment Allowance, you must also submit an Employer Payment Summary (EPS) by the 19th of the following tax month.

Your PAYE bill must be paid by the 22nd of each month (or quarter if you pay quarterly) if paying digitally. If payment is made by post the deadline is the 19th of each month.

Step 9: Set up a workplace pension scheme

Setting up a workplace pension scheme is obligatory if your staff are eligible. Eligible staff are:

• Between the ages of 22 and state pension age

• Paid over £10,000 a year (2026/27)

• UK-based workers

If you’re hiring staff for the first time, you must have a workplace pension in place by the time they join the business. 

You should start by choosing a pension scheme that complies with the auto-enrolment rules. If you have a pension scheme and have identified eligible staff, you’ll need to enrol employees. You’ll need to let employees know you’ve auto enrolled them. Once you’ve done this you’ll need to declare your compliance.

Step 10: Prepare for Real Time Information (RTI) submissions

Once you’re set up with payroll, you’ll need to submit Real Time Information (RTI) reports to HMRC. These contain precise, up-to-date information on your employee’s pay, their deductions, and any taxes they’ve paid. You’ll need to send this whenever they’re paid, either on the day or beforehand. You should also note that RTI submissions must be sent from your payroll software.

Step 11. Get ready for the future

At the end of each financial year, it’s important to review your payroll records carefully.

• Send a final FPS (with all payment info) to HMRC in your annual report

• Send your employees their P60 form, showing their salary and tax paid

• Report any business expenses and benefits to HMRC to stay compliant

If you're a director, think carefully about your own pay and dividend options. Also, review any employee benefits or pensions for tax impacts. Hiring an accountant can help with this.

Prepare for the next tax year with our year-end payroll processing checklist.

What to consider before choosing a payroll provider

If you’re considering running payroll in-house, there are many payroll systems out there.

The type of system you choose depends on the size, complexity, and needs of your business. For example, do you need to automatically generate payslips or track time for employees? 

You may decide to outsource your payroll entirely through an accountant or third party. 

Make sure the provider is available when you need them, and compliant with PAYE and HMRC rules. If you’re looking to grow your business, choose easily scalable payroll software.

Whatever you choose, the details you’ll need to provide to HMRC will stay the same.

What payroll details do I need to record for HMRC?

To help you stay compliant with HMRC, you’ll need to keep and send accurate records of the following after you set up your payroll.

National Insurance Contributions

National Insurance helps fund state benefits like the NHS and pensions. As an employer, you’ll need to record how much your employees pay and your own contributions through payroll.

Remember to use the correct National Insurance rate and category for employees

Income tax

Employees must pay Income Tax through the PAYE (Pay as You Earn) scheme, based on their income and tax code. You deduct this from their monthly wages and report it to HMRC.

Pension contributions

As an employer, you must automatically enrol your eligible employees in a pension scheme. You’ll need to record how much your employees pay, and how much you contribute.

Expenses

Business expenses include things like business travel, uniforms, or subscriptions. Some of these expenses are tax-free and can be claimed back, but all must be reported to HMRC.

Using ‘snap and upload’ apps for receipts and mileage trackers can make expenses easier.

Benefits and perks

Business perks like gym memberships, free lunches, events, and entertainment may be taxable. Make sure they’re recorded in your payroll, and included in your regular reports to HMRC.

Statutory Sick Pay

Statutory Sick Pay (SSP) is paid to employees who have been off sick for over four days in a row. SSP is taxed like normal pay and should be recorded in payroll and submitted to HMRC.

Tips and commission

Cash tips, bonuses, and commissions are classed as earnings. It’s down to the employee to make sure these are reported and factored into gross pay, ready for tax and NI.

Deductions

Deductions from your employees' gross pay need to be recorded in your payroll system. 

They can include a range of deductions from salaries, including National Insurance and Income Tax, alongside legal or voluntary deductions like child maintenance or salary sacrifice schemes. 

Student loan repayments

If your employees have been to university, they may need to repay their student loans once their wages go above a certain threshold. This must appear on their monthly payslip too.

HMRC will let you know if they need to start paying, and it should appear on their P45.

The importance of payslips

In addition to reporting wages to HMRC and paying enough tax, payroll helps you to produce payslips.

These are paper or secure digital documents, which must be given to your employees on or before their payday. They include their gross pay, deductions, and hours worked.

Find out more about how payslips work, and what other information they need to include.

Common mistakes when setting up payroll

While setting up payroll can be straightforward, it’s not uncommon to face complications – especially if you're manually managing payroll. Issues can arise from poor timekeeping and missed deadlines, while others may be the result of incorrect calculations. Mistakes you may face include: 

• Not registering as an employer on time.

• Incorrectly calculating Income Tax or National Insurance Contributions.

• Missing RTI submission deadlines.

• Failing to set up a workplace pension scheme.

• Not keeping accurate digital records.

How to avoid fines for payroll mistakes

It’s important to set up payroll correctly to ensure you’re paying employees the proper wage on time. You must also make sure you’re paying HMRC the right amount of tax.

Here’s how to avoid costly penalties from HMRC and stay on top of the legal side of payroll.

Follow minimum wage legislation

Paying below the National Minimum Wage isn’t just unfair, it can get you in trouble.

For example, underpaying an employee could make it impossible for them to cover rent or travel, leading to high turnover, damage to your reputation, or even criminal prosecution.

Understand the employment status of every worker

Employees, contractors, and freelancers all have different tax and legal entitlements.

Make sure you understand the difference between your workers, as misclassifying them may lead to them missing out on holidays, benefits, or sick leave they’re legally entitled to.

Stick to payment deadlines

Late wages can cause real-life stress. If an employee is relying on payday to pay their mortgage or utility bill, a delay or payroll mistake could lead to missed payments and loss of trust.

HMRC also has strict deadlines for PAYE and penalties for late tax submissions.

Track, record and declare everything

Keeping detailed and accurate records can help your business run smoothly. HMRC sometimes audits business financial records, so having all your transactions organised is essential.

Read our guide to how to calculate payroll tax correctly to help you stay compliant.

What if an employee has questions or concerns about their wage or the taxes they’re paying? With good records, you can easily check your past payroll to make sure everything is correct. 

Use software that helps you comply

The right payroll software can help you keep accurate records and pay employees on time.

QuickBooks can help you automate payslips, track deductions, and calculate payroll taxes to help you stay HMRC compliant.

Get a clear picture of your finances and keep track of employee data all in one system.

How QuickBooks Helps with Payroll Setup and Management

Payroll has a lot of moving parts, whether you’re manually setting it up or managing employee wages. One of the easiest ways to remove the stress and complications associated with paying staff is by using payroll software. 

At QuickBooks, we’ve created a system that’s designed to make the process as smooth as possible, regardless of how many employees you have or what stage you’re at. Our HMRC-recognised payroll software is simple to set up and streamlines what can otherwise be a complicated process. Whether you’re looking to stay compliant with accurate payslips or need a simpler way to send RTI submissions, QuickBooks Payroll can help.

FAQs

Setting up payroll FAQs

Is it easy to switch payroll software?

Yes, switching payroll software can be straightforward—especially if you do it at the start of a new tax year or quarter. Most providers (including QuickBooks) offer tools to help you migrate your payroll data securely, including employee information, pay history, and tax details.

How does GDPR affect payroll?

GDPR impacts payroll by requiring employers to protect employees’ data — such as names, addresses, bank details, and National Insurance numbers. You must collect only the data you need, store it securely, and ensure it’s only accessible to authorised people at work.

Your employees also have the right to access or request the deletion of their data.

Do I need to set up payroll for contractors?

Usually, no. Contractors are often self-employed and responsible for their own tax and National Insurance. However, you should confirm their employment status to help you stay compliant.

To note, under the current off-payroll working rules, often called IR35, some contractors may be treated as employees for tax purposes. These rules apply when a worker providing services through their own intermediary would be considered an employee if working directly for the client.

If a contractor falls inside IR35, you may need to operate PAYE and deduct tax and National Insurance just like you would for an employee.

Do I need to set up payroll if I work alone?

If you’re the sole director of a limited company and pay yourself a salary, you’ll still need to run payroll — even if you’re the only employee. This can help ensure you're reporting to HMRC correctly and meeting your tax obligations. Find out more about director-only payroll software here.

What do I need from payroll software?

This depends on your business, but it should at least help record and manage paying your staff and send the correct amount of tax to HMRC. Some payroll software can generate payslips, manage pension or benefit schemes, or even set up an HR portal for employees to access. 

How long does it take to set up payroll with HMRC?

The amount of time it takes to set up payroll with HMRC can vary, but online registration typically takes up to 5 working days. After this, HMRC will send your Accounts Office Reference and Employer PAYE Reference by post. However, if there are delays or busy periods, it can take up to a couple of weeks or more, so be sure to plan.

Do I need to set up payroll if I'm the only employee?

It depends on your business and your role. If you’re a sole trader, you don’t need to set up payroll. If you’re a director in your business, you’ll still need to set up payroll if you take a salary, even if you’re the only one. You’re legally obliged to register if your earnings are above £533 a month.

What happens if I make a mistake when setting up payroll?

If you make errors when setting up your payroll, you’ll likely be able to amend it later. If you’ve underpaid, overpaid, or have failed to include an employee, contacting HMRC will be your best option. Depending on the severity of the mistake, you may need to pay a penalty, but the sooner you fix the mistake, the better.

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