How to set up payroll for your limited company

Before you pay anyone: register with HMRC

Any company paying employees — including a sole director paying themselves a salary — must register as an employer with HMRC before the first pay day. You do this online through the HMRC website, and HMRC will issue you a PAYE reference number and an Accounts Office reference, both of which you'll need to make payments. Allow a few days for the reference to arrive; it does not come instantly. If you're taking on a first employee soon, register straight away rather than waiting until pay day is imminent.

Director-only payrolls are extremely common for small limited companies. Many directors pay themselves a salary up to the National Insurance threshold (to preserve a qualifying year for the State Pension without incurring NIC) and take the remainder as dividends. This is a tax planning decision — confirm the current thresholds and the most tax-efficient structure for your circumstances with your accountant, as the figures change each April.

Choose payroll software

HMRC requires all employers to submit payroll information in real time using RTI-compliant software. You cannot submit on paper. The options are:

• Basic PAYE Tools — HMRC's free software, suitable for very small payrolls (typically under ten employees). It calculates tax and NIC and submits RTI directly.
• Commercial payroll software — Xero, QuickBooks, Sage, BrightPay and many others. Most integrate with your accounting software, automate deductions, generate payslips, and handle auto-enrolment pension contributions automatically.
• Outsourced payroll bureau — a bookkeeper or accountant runs payroll for you and handles submissions, leaving you to review a payslip summary each period.

For a director-only payroll, HMRC's free tool is perfectly adequate. Once you have two or more employees or need auto-enrolment calculations, commercial software is usually simpler and less error-prone. Whichever route you choose, set it up and test it before the first pay run — not on the day you need to pay people.

What payroll actually calculates each period

For each employee each pay period, payroll software works out:

1. Gross pay — the agreed salary or wages before any deductions.
2. Employee Income Tax — deducted via PAYE, using the tax code issued by HMRC for that employee. New starters who haven't provided a P45 are placed on an emergency code until HMRC issues the right one.
3. Employee National Insurance contributions (NIC) — deducted from their pay above the primary threshold.
4. Employer NIC — paid by the company on top of gross pay above the secondary threshold. This is a direct cost to the business, not deducted from the employee.
5. Pension contributions — both the employee's contribution (deducted from gross pay) and the employer's contribution (an additional cost to the business), calculated once auto-enrolment duties apply.
6. Net pay — what the employee actually receives.

The software totals everything and tells you exactly what to pay the employee and what to pay HMRC.

Submitting RTI and paying HMRC on time

Under Real Time Information, you must submit a Full Payment Submission (FPS) to HMRC on or before each pay day — not monthly, not afterwards: on or before. The FPS tells HMRC what each employee was paid and what was deducted. If you pay nothing in a period, you submit an Employer Payment Summary (EPS) instead.

HMRC then sends you a statement of what you owe, and payment is due by the 19th of the following month (22nd by electronic transfer). This covers all Income Tax and NIC (employee and employer) due for the previous tax month. Auto-enrolment pension contributions go directly to your pension provider on a separately agreed schedule, typically monthly. Miss either deadline and HMRC charges automatic late-payment penalties. Set both as recurring reminders from day one.

Auto-enrolment and year-end obligations

Auto-enrolment begins when you take on your first eligible employee — broadly, someone aged 22 to State Pension age earning above the earnings trigger (confirm the current figure with The Pensions Regulator). You must enrol them into a qualifying workplace pension, contribute at least the minimum employer rate, and inform The Pensions Regulator within five months of your staging date or employee start date.

At the end of the tax year (5 April), you must:

• Issue each employee a P60 by 31 May.
• Submit a final FPS or EPS for the year, confirming it is the last submission.
• Complete any P11D forms for expenses and benefits in kind by 6 July if applicable.

These deadlines are fixed. Get them into your calendar at the start of each tax year. Payroll is one area where the administrative framework is rigid and the penalties for lateness are automatic — but once the system is running smoothly it is genuinely low effort to maintain.