1. Register as an Employer with HMRC
Before paying employees in the UK, you must register as an employer with HM Revenue and Customs (HMRC). This allows you to:
- Run payroll
- Deduct Income Tax and National Insurance
- File Real Time Information (RTI) reports
You should register at least 4 weeks before your first payday.
2. Set Up a Payroll System
You can choose to:
- Use payroll software (e.g., QuickBooks, Xero, Sage)
- Hire a payroll provider or accountant
- Run payroll manually (only for very small businesses)
Software helps automate tax calculations, payslips, and submissions to HMRC.
3. Collect Employee Information
Before the first payday, gather:
- Full name and address
- National Insurance number
- P45 from previous employer or starter checklist
- Bank details for salary payments
- Contract and agreed pay rate
This ensures accurate and legal payroll setup.
4. Decide on a Pay Frequency
Choose how often you’ll pay employees:
- Weekly
- Bi-weekly
- Monthly
Ensure it’s consistent and clearly stated in employment contracts.
5. Calculate Gross Pay
Gross pay is the total salary or wage before deductions. It includes:
- Hourly wages or annual salary
- Overtime
- Bonuses and commissions
- Holiday pay
Track working hours carefully if employees are paid by the hour.
6. Deduct Tax and National Insurance
As an employer, you must:
- Deduct Income Tax using the employee’s tax code
- Deduct employee National Insurance
- Pay employer National Insurance contributions
- Enrol eligible employees into a pension scheme and make contributions
These are calculated automatically through most payroll software.
7. Issue Payslips
By law, you must give employees a payslip showing:
- Gross pay
- Deductions (tax, NI, pension)
- Net pay
- Pay period
- Any bonuses or expenses
Payslips can be digital or printed.
8. Pay Your Employees
Transfer net wages to each employee’s bank account. Set up direct deposit (BACS) payments for secure and timely salary delivery.
9. Submit Payroll Information to HMRC
Using Real Time Information (RTI), report to HMRC on or before each payday. This includes details on pay, tax, and NI for each employee.
10. Keep Accurate Payroll Records
You must retain payroll records for at least 3 years, including:
- Employee pay and deductions
- PAYE reports
- National Insurance payments
- Holiday and sick pay records
Accurate records help during audits or when responding to queries from HMRC.
Frequently Asked Questions
Q1: Do I need to run payroll if I only have one employee?
Yes. Even if you have one staff member, you must register with HMRC and process payroll properly.
Q2: Can I do payroll myself without software?
Yes, but it’s riskier and more time-consuming. Payroll software ensures compliance and accuracy.
Q3: What is PAYE?
PAYE (Pay As You Earn) is the system by which employers deduct tax and NI contributions from employee pay and send it to HMRC.
Q4: What happens if I make a payroll mistake?
You must correct it as soon as possible and inform both the employee and HMRC. Late submissions may incur penalties.
Q5: Can I outsource payroll to an accountant?
Yes. Many small businesses use accountants or payroll services to manage compliance and reduce admin.
Q6: When do I pay HMRC the tax I deduct?
PAYE payments to HMRC are due monthly, or quarterly if you qualify as a small employer.
Conclusion
Knowing how to pay employees correctly ensures compliance, builds trust, and keeps your business running smoothly. By following these 10 steps—from registration to tax deductions—you can set up a reliable payroll system and meet your employer obligations with confidence.
Leave a Reply