Setting Up Payroll for Small Businesses: A Beginner’s Guide to PAYE in the UK

Hiring your first employee is an exciting step, but it also comes with new responsibilities. In the UK, that means setting up a payroll system and registering for PAYE (Pay As You Earn) with HMRC. Don’t worry—it’s simpler than it sounds.

In this guide, we explain what PAYE is, how to register, and the key steps to running payroll for your small business.

What is PAYE?

PAYE is HMRC’s system for collecting Income Tax and National Insurance from employees’ wages. If you employ staff, you’re legally required to operate PAYE as part of your payroll.

Registering for PAYE

You must register as an employer with HMRC before your employee’s first payday.

• Registration can be done online and typically takes up to 5 working days to process.
• Once approved, HMRC will provide your PAYE reference number.

Running Payroll

Use payroll software (or an accountant) to calculate employee wages, taxes, and deductions.

• Report payments to HMRC on or before payday using a Full Payment Submission (FPS).
• Pay deductions like Income Tax and National Insurance to HMRC, usually monthly or quarterly.

Key Employer Responsibilities

• Provide payslips to employees.
• Keep payroll records for at least 3 years.
• Stay on top of pension auto-enrolment duties if applicable.

Why Payroll Matters

Getting payroll right ensures compliance with the law and builds trust with your employees. With the right systems in place, it’s a straightforward process that keeps your business running smoothly.