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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 tax to HMRC through PAYE.
Below we explain how this guide can help you to register and set up your payroll correctly.
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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.
How to set up payroll for your business
Here are some key steps to ensure you’re ready to pay both your employees and HMRC.
Register your business 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.
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.
Tell HMRC about your business and employees
You need to tell HMRC about employees in your small business and how much they’re paid.
Check if PAYE applies: most employees must be paid through the PAYE scheme
Check their tax code: this can be worked out from their P45 (or HMRC’s checklist)
Check deductions: including NI contributions, pensions, or student loan payments
Decide what to pay: take into account current National Living Wage regulations
Maintain records of pay and deductions
You will need to keep accurate payroll records for at least three years about the below.
How much employees are paid: including basic pay and any benefits or bonuses
How much is 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 this 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.
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.
Prepare 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 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 do I need to record for HMRC?
To stay compliant with HMRC, you’ll need to keep and send accurate records of the below.
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 treated and taxed like normal payments. They’re classed as earnings and need to be recorded in payroll as 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 loan once their wage goes 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 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 how many hours they work.
Find out more about how payslips work, and what other information they need to include.
How to avoid fines for payroll mistakes
It’s important to set up payroll correctly, to ensure you’re paying employees the correct wage at the correct 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.
Pay your workers with minimal hassle with QuickBooks’ automated Payroll software.
Buy now & saveFAQs
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 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.
The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.
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