Managing UK Small Business Payroll – Beginner’s Guide 2025

Taking on your first employee marks an exciting milestone in your business journey. The thrill of growing your team comes with new responsibilities though, and payroll sits right at the heart of them. Let’s walk through everything you need to know about handling payroll for your small business.

If you’re after payroll software, check out our guide to the best UK payroll software.

If you’re considering outsourcing your payroll to a managed payroll company, check our guide to the best payroll services companies.

Getting started with PAYE

You’ll need to set up PAYE (Pay As You Earn) before you can start paying employees. Think of PAYE as your direct line to HMRC – it’s how you’ll collect and send income tax and National Insurance from your employees’ wages. Head over to HMRC’s website to register as an employer and get your PAYE login details. If this sounds daunting, don’t worry – many payroll providers can handle the setup process for you.

When your new employee starts, ask them for their P45 from their previous job or have them complete HMRC’s starter checklist. You’ll use this information to work out their tax code. Make sure to get their National Insurance number too – you can’t process payroll without it.

The monthly payroll cycle

Payroll follows a steady rhythm. Every payday, you’ll need to calculate your employee’s pay and work out any deductions. These might include income tax, National Insurance, student loan repayments, or pension contributions.

You’ll need to report these payments and deductions to HMRC through what’s called Real Time Information (RTI). This means sending a Full Payment Submission every time you pay an employee – no delays or batching allowed. Think of it as keeping HMRC in the loop as things happen, not after the fact.

For monthly payments, you’ll need to send the money you’ve deducted to HMRC by the 22nd of the following tax month. If you’re paying quarterly, mark your calendar for the 22nd after the quarter ends.

National Insurance and Employment Allowance

As an employer, you’ll need to pay employer’s National Insurance contributions for your staff. The rates change from year to year – for 2024/25, you can find the current rates on the government website. Here’s some good news though: the Employment Allowance lets eligible employers reduce their National Insurance bill by up to £10,000 in the 2025/26 tax year. This can make a real difference to your bottom line.

Workplace pensions/autoenrolment

Setting up a workplace pension isn’t optional anymore – even if you only have one employee. If they’re eligible, you’ll need to enroll them automatically. The rules around workplace pensions can feel complex, but getting it right matters. The Pensions Regulator can issue fines if your scheme isn’t up to scratch.

Got seasonal workers or temporary staff? You can use something called postponement to delay enrolling them for up to three months. This can save you some administrative headaches if you’re taking on short-term workers.

Keeping the correct payroll records

Think of your payroll records as your safety net. Keep track of everything: what you’ve paid your employees, what you’ve deducted, reports to HMRC, employee sick days, tax codes – the works. You’ll need to hang onto these records for three years after the tax year they relate to. HMRC might want to check them during a PAYE compliance check.

Speaking of compliance checks, HMRC might pop by to make sure everything’s in order. They’ll typically want to visit your premises and look through your payroll records. If you’re a member of the Federation of Small Businesses, you can get help with these investigations through their Tax Investigation Protection service.

What to do when an employee leaves

When an employee leaves, you’ll need to tell HMRC straight away. Update their payroll record with their leaving date, make any final deductions in your next Full Payment Submission, and give them their P45. Don’t forget about any holiday pay they’ve accrued – you’ll need to either let them take it or pay them for it.

UK National Insurance categories for payroll

Category A covers most of your regular employees. If you’ve got someone earning more than £242 a week and they’re under state pension age, they’ll fall into this group. Simple enough, right? Well, hang on, because it gets more interesting.

Category B doesn’t see much action these days. It’s for married women and widows who opted for reduced rates before 1977. Yes, 1977! A few people still qualify for this, though they’re getting pretty rare now.

Then there’s Category C – you’ll use this for employees over state pension age. They don’t pay NI contributions anymore, but you still need to record them under this category. Makes sense when you think about it – they’ve paid their dues.

Category F is where things get maritime. It covers merchant navy crew members, because apparently sailors need their own special category. Honestly, I’ve processed payroll for years and never once used this one, but it exists!

Category M is interesting – it’s for employees under 21. The government introduced this to make it cheaper for employers to hire young people. Smart move really, saves businesses some cash while giving young folks a leg up.

Category H works like Category M but for apprentices under 25. The government really wants to encourage businesses to take on apprentices, so they created this special rate. You’ll need to keep an eye on their 25th birthday though – that’s when they usually bump up to Category A.

If you’ve got someone serving in the armed forces, they’ll fall under Category N. Not something most payroll folks deal with, but worth knowing about.

And then there’s Category X – this one’s a bit sneaky. It covers employees who don’t have to pay NI (like certain religious groups), but you still need to report their earnings.

The rates change pretty regularly (thanks, Chancellor!), but the categories themselves tend to stick around. You’d think they might simplify it all one day, but I wouldn’t hold my breath. At least knowing these categories helps make sense of all those letters HMRC keeps throwing at us.

Hey, I should mention Category V and Category Z too – they’re for company directors. Z is for directors under 21, and V is for any other age. Can’t forget about the bosses, right? Though why directors need their own categories is anyone’s guess. One of those HMRC mysteries, I suppose.

Remember when they introduced Category L for deferment cases? No? That’s because hardly anyone ever uses it. But it’s there, lurking in the background like that one obscure tax rule everyone forgets about until audit time.

Making payroll easier to manage

Running payroll can eat up your time if you try to handle everything yourself. Many small business owners find that working with a payroll provider frees them up to focus on growing their business. These providers can handle the technical bits while you focus on what you do best – running your company.

Remember, getting payroll right isn’t just about ticking boxes – it’s about taking care of your team and keeping your business running smoothly. Take your time to set things up properly from the start, and don’t be afraid to ask for help when you need it.

Have questions about specific aspects of payroll? Just remember that HMRC and professional payroll providers are there to help you get it right. You’re not alone in figuring this out – every successful business has been exactly where you are now.

UK payroll calendar dates to remember

UK payroll process flow chart

flowchart TD
    A[Hire First Employee] --> B[Register as Employer]
    B --> C[Get PAYE Reference]
    C --> D[Choose Payroll Method]
    
    D -->|Software| E[Pick Compatible System]
    D -->|Basic Tools| F[HMRC Basic PAYE]
    E & F --> G[Set Up Employee]
    
    G --> H[Get Tax Code]
    G --> I[Check NI Category]
    G --> J[Student Loan Status]
    
    H & I & J --> K[Monthly Tasks]
    K --> X{New Starter?}
    X -->|Yes| Y[Get P45]
    X -->|No P45| Z[Use New Starter Checklist]
    
    Y & Z --> L[Run Payroll]
    L --> M[Generate Payslips]
    M --> N[Submit RTI]
    N --> O[Pay HMRC by 22nd]
    
    L --> AA{Employee Leaving?}
    AA -->|Yes| AB[Process Final Pay]
    AB --> AC[Issue P45]
    AA -->|No| O
    
    K --> P{Any Changes?}
    P -->|Salary| Q[Update Records]
    P -->|Benefits| R[Adjust Tax Code]
    P -->|Details| S[Update Employee Info]
    
    Q & R & S --> T[Annual Tasks]
    T --> U[P60s by 31st May]
    T --> V[P11D by 6th July]
    T --> W[Update Tax Codes]
    
    T --> AD[Review]
    AD --> AE[Benefits in Kind]
    AD --> AF[Salary Review]
    AD --> AG[NI Categories]