Registering as an employer and running PAYE for directors and staff

When Must a Company Register as an Employer?

A UK limited company must register as an employer with HMRC as soon as it anticipates making a payment to an employee or director that triggers PAYE obligations. This isn't determined by the act of hiring someone, but by the level and nature of their pay. The most common trigger is paying someone, including a company director, at or above the National Insurance (NI) Lower Earnings Limit (LEL). Even if no tax or NI is ultimately due, crossing this threshold requires the operation of a payroll to officially record the payment. For the 2024/25 tax year, the LEL was £123 per week; you should always verify the current year's figure on GOV.UK as it is updated annually.

Beyond the primary LEL threshold, several other situations mandate employer registration. You must register if you are paying someone who already has another job or receives a pension, as their tax-free personal allowance may be used elsewhere, requiring tax to be deducted from the first pound of their salary from your company. Another definite trigger is providing employees or directors with 'benefits in kind', such as a company car, private medical insurance, or a beneficial loan. These non-cash benefits have a taxable value and must be reported through a payroll system. Failing to register when required can lead to penalties and a complex process of rectifying historical payroll data, so it is crucial to assess your obligations before making your first payment.

It is a common misconception that a single-director company paying only dividends does not need to worry about PAYE. While dividends are not processed through payroll, as soon as that director decides to take a salary, the rules apply. Many directors opt for a small salary for tax efficiency or to build up qualifying years for the state pension. If this salary is at or above the LEL, a PAYE scheme is mandatory. The registration should be completed online before the first payday, as HMRC requires up to 5 working days to process the application and issue your essential PAYE and Accounts Office reference numbers. Proactive registration prevents compliance issues and ensures a smooth start to employing people.

• Paying any employee or director a salary at or above the National Insurance Lower Earnings Limit.
• The employee or director already has another job or receives a state or company pension.
• You are providing the person with benefits in kind (e.g., a company car, health insurance).
• You have been sent a P45 for a new employee.
• You are hiring agency or casual staff who are not self-employed.

Worth knowing: Registration is triggered by specific pay thresholds and benefit provisions, not just the act of hiring, so you must register before the first qualifying payment is made.

How to Register for PAYE Online

Registering as an employer is a mandatory step that must be completed online via the GOV.UK website. You cannot register more than two months before you start paying people. The process is integrated with your company's Government Gateway account, which you should have set up when you registered for Corporation Tax. Accessing the service requires your Government Gateway user ID and password. Once logged in, you will navigate to the 'add a tax' section and select 'PAYE for employers'. The online form is designed to be completed in one session and will guide you through a series of questions about your business, its directors, and your soon-to-be employees.

Before you begin, it is essential to gather all the necessary information to ensure the process is as smooth as possible. This includes your company's unique taxpayer reference (UTR), your Companies House registration number, and the full name and National Insurance number of at least one company director. You will also need to provide your business's primary address, contact details, and the date you expect to make your first payment to an employee. If you already know who you are hiring, having their details to hand can be useful, though you can complete the registration before you have finalised your first hire. Being prepared prevents delays and ensures the details HMRC holds are accurate from day one.

After submitting the online registration form, HMRC will process your application. This typically takes around 5 working days, but can take longer during busy periods. Upon successful registration, HMRC will send you two important pieces of information by post to your registered office address: your PAYE reference number and your Accounts Office reference number. These are essential for all correspondence with HMRC about payroll and for setting up your payroll software. Do not attempt to run a payroll until you have received these numbers. You should store them securely as they are fundamental to your ongoing PAYE compliance.

• Your company's 10-digit Unique Taxpayer Reference (UTR).
• Your Companies House number.
• The name and National Insurance number of at least one director.
• The date you will make your first payment to an employee or director.
• Your main business address and contact details.
• The total number of people you expect to employ in the tax year (including directors).

1. 1

   Log in to your company's Government Gateway account on the GOV.UK website.

2. 2

   Select the option to add a new tax service and choose 'PAYE for Employers'.

3. 3

   Complete the online registration form with your company, director, and employment details.

4. 4

   Note the date of your first intended payday, as you will need to enter this accurately.

5. 5

   Submit the application and wait for your PAYE and Accounts Office reference numbers to arrive by post within approximately 5 working days.

6. 6

   Once received, use these reference numbers to configure your chosen payroll software and finalise your setup.

Worth knowing: The online PAYE registration is a straightforward but critical process; gather all your company information beforehand and allow at least a week to receive your reference numbers.

Choosing and Setting Up Payroll Software

Once you have your employer reference numbers, you must choose and set up payroll software. It is a legal requirement to report pay and deductions to HMRC in real time, a system known as Real Time Information (RTI). This means you cannot simply use a spreadsheet; you need specialist software that is recognised by HMRC and can submit data directly. The software will automatically calculate income tax and National Insurance contributions for each employee based on their tax code and earnings, generate compliant payslips, and create the necessary FPS and EPS reports for HMRC.

There are three main options for managing your payroll. The first is HMRC's Basic PAYE Tools, a free piece of software suitable for companies with fewer than 10 employees. While functional, it is very basic and does not integrate with accounting software. The second, and most popular option for small businesses, is commercial payroll software from providers like Xero, QuickBooks, or BrightPay. These platforms are user-friendly, automate most processes, integrate with your bookkeeping, and often include features like employee portals and pension auto-enrolment modules. The third option is to fully outsource your payroll to an accountant or a specialist payroll bureau. This is the most hands-off approach but also the most expensive, best suited for larger companies or those with complex payroll needs.

Worth knowing: For most new companies, commercial payroll software provides the best balance of cost, functionality, and compliance, automating complex calculations and reporting.

Running Your First Payroll: A Practical Guide

Running your first payroll can seem daunting, but with the right preparation and software, it is a structured process. The first step is to gather all necessary information for your new employee. This includes their full legal name, date of birth, address, and National Insurance number. Crucially, you need their tax information. If they provide a P45 from their previous employer, you can use the tax code and previous pay/tax details from it. If they do not have a P45, you must ask them to complete a 'starter checklist' (the replacement for the old P46 form). This form's questions will determine which tax code to apply, ensuring the correct amount of tax is deducted from the start and avoiding potential emergency tax situations.

Once the employee is set up in your payroll software, you can run the payroll for the specific pay period (e.g., monthly). You will enter the employee's gross pay for that period. The software will then perform the critical calculations: it will deduct income tax based on their tax code and the pay period's tax-free allowance, and it will deduct the employee's National Insurance contributions based on their NI category letter and the relevant earnings thresholds. It will also calculate the employer's National Insurance contribution, which is a cost to the business. The result is the employee's net pay – the amount they will actually receive. The software will also generate a payslip, which you are legally required to provide to the employee on or before their payday.

• Full legal name and current address.
• Date of birth.
• National Insurance (NI) number.
• A P45 from their most recent previous employer.
• If no P45 is available, a completed 'starter checklist' form.
• Bank account details for payment.
• Signed employment contract confirming their salary and pay frequency.

1. 1

   Collect the new employee's personal details, NI number, and starter information (either a P45 from a previous job or a completed starter checklist).

2. 2

   Enter all employee details accurately into your HMRC-recognised payroll software before their first payday.

3. 3

   For the relevant pay period, enter the employee's gross pay into the software to begin the pay run.

4. 4

   Allow the software to automatically calculate income tax, employee NI, and employer NI deductions.

5. 5

   Review the calculations and generate an official payslip, which must be given to the employee on or before their pay is processed.

6. 6

   On or before the payday, submit the Full Payment Submission (FPS) report for this pay run to HMRC through your software.

Worth knowing: Accuracy is paramount when running payroll; use a starter checklist for new employees without a P45 to ensure the correct tax code is applied from day one.

Director Salaries: A Tax-Efficient PAYE Strategy

For director-shareholders of a limited company, determining salary is a strategic decision that balances tax efficiency with personal financial needs. A widely used strategy is to pay a relatively small salary and extract the majority of profits as dividends. The optimal salary level is often set by National Insurance thresholds. Paying a salary up to the NI Primary Threshold (where employee NI becomes due) but above the Lower Earnings Limit ensures the director receives a qualifying year for the state pension without incurring any employee NI cost. For the 2025/26 tax year, with the employer NI Secondary Threshold at £5,000, paying a salary up to this level would also mean no employer NI is due.

Alternatively, many directors choose to pay a salary equal to the tax-free Personal Allowance (£12,570 in 24/25). This maximises the amount of income that can be taken with zero income tax. While this level of salary would attract both employee and employer NI contributions on the portion above the respective thresholds, the impact can be mitigated. If the company is eligible for the Employment Allowance (£10,500 for 25/26), this can be used to cover the employer's NI liability. The remaining profits can then be distributed as dividends, which are not subject to NI and are taxed at lower rates than salary income, making this combination highly efficient overall. However, dividends can only be paid from post-tax profits, so the company must be profitable.

While this salary-dividend mix is popular, directors must consider the bigger picture. A lower salary might impact applications for mortgages or other personal credit, as lenders often prioritise basic salary income. Furthermore, eligibility for the Employment Allowance is restricted for single-director companies where that director is the only employee. In such cases, the allowance cannot be claimed, making a salary above the Secondary Threshold more costly in employer NI. The 'optimal' salary is therefore not one-size-fits-all and depends on the company's profitability, its number of employees, and the director's personal financial circumstances.

Worth knowing: A small salary combined with dividends is often the most tax-efficient remuneration strategy for directors, but personal circumstances and Employment Allowance eligibility must be considered.

Reporting to HMRC: RTI, FPS, and EPS Explained

Operating PAYE requires you to communicate with HMRC using their Real Time Information (RTI) system. This means you report payments to employees as they happen, rather than just once at the end of the tax year. The backbone of RTI is the Full Payment Submission (FPS). This is a digital report, sent from your payroll software to HMRC, which details all the payments you have made to your employees in a specific pay period, along with the corresponding tax and NI deductions. The rule is simple and strict: you must send the FPS on or before each employee's payday. For a monthly payroll, this means you will submit at least one FPS every month.

The FPS contains a wealth of information for every employee included in that pay run, such as their name, NI number, tax code, gross pay, and all deductions. It also includes year-to-date figures, allowing HMRC to maintain a live record of each individual's employment income. If you make a mistake on an FPS, you can correct it by submitting an additional FPS with the updated year-to-date figures in your next regular payroll run. Consistently late FPS submissions will trigger automatic penalties from HMRC, so integrating this step into your pre-payday process is crucial for compliance.

While the FPS reports what you have paid, the Employer Payment Summary (EPS) is used to report adjustments to the amount of tax and NI you are due to pay to HMRC. You would submit an EPS if you need to reclaim statutory payments made to employees, such as for maternity, paternity, or shared parental leave. The most common use of the EPS for small businesses is to claim the Employment Allowance. You notify HMRC of your eligibility at the start of the tax year via an EPS, and the software then offsets the allowance against the employer NI due each month. You also send an EPS to inform HMRC if you are not paying any employees in a particular tax month, which 'closes' the period and prevents HMRC from expecting a payment that isn't due.

Worth knowing: Timely and accurate RTI reporting is a legal requirement; you must send an FPS on or before every payday and use an EPS to claim allowances or report non-payment months.

Paying HMRC: Deadlines and Liabilities

After running your payroll and submitting your FPS report, your payroll software will calculate your total liability to HMRC for that tax month. It's crucial to understand that this bill is composed of three separate elements: the income tax deducted from all employees' pay, the Class 1 employee National Insurance contributions deducted from their pay, and the Class 1 employer National Insurance contributions, which are a direct cost to your company. Your business is responsible for collecting the employee deductions and paying them, along with its own employer NI contribution, to HMRC in a single monthly payment. A tax month runs from the 6th of one calendar month to the 5th of the next.

The deadline for this payment is strict. If you pay electronically (which is mandatory for most businesses), the payment must clear into HMRC's bank account by the 22nd of the month following the end of the tax month. For example, the liability for the tax month ending 5th May must be paid by 22nd May. If you are one of the very few businesses still eligible to pay by post, the deadline is earlier, on the 19th of the month. Given that bank transfers are not always instantaneous, it is wise to initiate the payment a few working days before the deadline to avoid any issues. Late payments will automatically incur interest charges from HMRC, and persistent lateness will lead to penalties.

Worth knowing: The monthly PAYE payment to HMRC, due by the 22nd, combines deductions from employees' pay with the company's own employer NI contributions.

Reducing Your Bill: Employment Allowance and Other Reliefs

The Employment Allowance is a significant tax relief that allows eligible employers to reduce their annual employer's Class 1 National Insurance liability. For the 2025/26 tax year, the allowance is set at a generous £10,500. This means a company can potentially pay no employer NI at all until its total employer NI bill for the year exceeds this amount. To be eligible, your company's total employer Class 1 NICs liability in the preceding tax year must have been under £100,000. It is not available to public bodies or for personal, household, or domestic work. You must claim the allowance each tax year through an Employer Payment Summary (EPS) submission at the start of the year.

A crucial and often misunderstood rule relates to single-director companies. The Employment Allowance cannot be claimed if the only employee being paid above the NI Secondary Threshold is a director of the company. This is known as the 'sole director' exclusion. However, as soon as the company hires a second employee (who is not a director) and pays them above the Secondary Threshold, the company becomes eligible for the allowance, which can then be used against the total employer NI bill for both the director and the employee. This makes the decision to hire a first employee a significant one, as it can unlock this substantial £10,500 relief. This rule also applies if there are multiple directors but no other employees.

Beyond the Employment Allowance, companies can also reduce their monthly PAYE payments to HMRC by reclaiming a portion of statutory payments they make to employees. This includes Statutory Maternity Pay (SMP), Paternity Pay (SPP), Adoption Pay (SAP), and Shared Parental Pay (ShPP). Most businesses can reclaim 92% of the statutory payments made. However, if your business qualifies for Small Employers' Relief (meaning your total NI contributions in the previous tax year were £45,000 or less), you can reclaim 103% of these payments. This reclamation is processed by reporting the amounts on your monthly EPS, which directly reduces the amount you owe to HMRC for that period.

• Your total employer Class 1 NI liability in the previous tax year was below £100,000.
• You are a business or charity (public bodies are generally ineligible).
• The allowance is not being used for domestic staff (e.g., a nanny).
• Crucial Exclusion: It cannot be claimed if only one employee is paid above the NI Secondary Threshold and that employee is a director.
• You must have at least one employee or two directors paid above the NI Secondary Threshold to qualify.

Worth knowing: The £10,500 Employment Allowance can eliminate your employer NI bill, but you must be eligible and actively claim it, being mindful of the sole-director company exclusion.

Completing Year-End Payroll Duties

The end of the tax year on 5th April triggers a series of final reporting duties for employers. Your regular payroll cycle concludes with the final payment for tax month 12 (March). When you submit your last Full Payment Submission (FPS) for the year, you must ensure you select the 'Final submission for tax year' option within your payroll software. This tells HMRC that you have finished your payroll for the year and they should not expect any more regular submissions. If you forget to do this or need to make a correction after the year has ended, you can submit a final EPS by the 19th of April or an Earlier Year Update (EYU) through your software.

Once the tax year is closed, you have a legal obligation to provide each employee who was on your payroll on 5th April with a P60 form. This must be done by 31st May. The P60 is a crucial document for the employee as it summarises their total pay and the total tax and National Insurance deductions for the tax year. They need it for their personal tax records, for applying for tax credits, or as proof of income for loans or mortgages. Your payroll software will generate these P60s for you, and they can be provided to employees either in paper format or electronically.

The final major year-end task relates to reporting any expenses and benefits in kind provided to employees or directors. This is done using forms P11D and P11D(b). A P11D form must be completed for each individual who received benefits (like a company car or private medical insurance) and must be submitted to HMRC by 6th July. The P11D(b) form summarises the total value of all benefits provided across the company and calculates the Class 1A National Insurance due on them. This Class 1A NI is an employer-only liability, and the payment for it must reach HMRC by 22nd July (or 19th if paying by cheque). Many companies now opt to 'payroll' benefits, meaning the tax is collected through the monthly payroll, which avoids the need for a P11D but still requires the P11D(b) to be filed for the Class 1A NI calculation.

Worth knowing: Payroll responsibilities extend beyond the tax year-end with strict deadlines for issuing P60s to staff and reporting all benefits and expenses to HMRC by early July.

Common PAYE Mistakes and How to Avoid Them

Operating PAYE involves strict deadlines and procedures, and several common mistakes can lead to unwelcome penalties from HMRC. One of the most frequent errors is the late filing of the Full Payment Submission (FPS). The rule is absolute: the FPS must be submitted on or before an employee's payday. HMRC's systems are automated to detect late submissions, and penalties are issued based on the number of employees you have. These can range from £100 to £400 per month. To avoid this, establish a rigid process where submitting the FPS is a non-negotiable step completed just before authorising bank payments. Using payroll software with a clear submission dashboard helps track this.

Another prevalent issue is using an incorrect tax code, often because a starter checklist was not completed properly for a new employee without a P45. This can result in either under or over-taxation, causing problems for the employee and requiring correction later. Similarly, mistakes in calculating National Insurance are common, especially for directors who are often placed on an 'annual' earnings period method. A miscalculation here can affect both employee and employer contributions. The best defence is to use reputable, HMRC-recognised payroll software that automates these complex calculations and guides you through the new starter process, minimising the risk of manual error.

Finally, failing to manage and report benefits in kind correctly is a major pitfall. Forgetting to submit P11D forms for items like private health insurance or a company car by the 6th July deadline will result in penalties. An even bigger error is failing to calculate and pay the associated Class 1A National Insurance on these benefits, which can lead to significant liabilities and interest charges. Keep a detailed log of all non-cash benefits provided throughout the year and set calendar reminders for the July deadlines. Regular reviews with an accountant can also help identify and correctly report all taxable benefits, ensuring full compliance.

• Missing the deadline to submit your Full Payment Submission (FPS).
• Incorrectly processing a new starter without a P45 or a properly completed starter checklist.
• Forgetting to pay the monthly PAYE bill to HMRC by the 22nd.
• Misclassifying a worker as self-employed when they should be an employee on payroll (IR35).
• Failing to report taxable benefits in kind (e.g., company cars, health insurance) on a P11D form.
• Incorrectly calculating NI for directors, who have different calculation methods available.
• Forgetting to claim the Employment Allowance at the start of the tax year via an EPS.

Worth knowing: Simple administrative errors in PAYE, like late FPS filing or incorrect starter details, can trigger automatic HMRC penalties, making meticulous process and good software essential.

Common questions

Official sources & further reading

This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.

• GOV.UK - Tell HMRC you're employing staff for the first time
• GOV.UK - PAYE and payroll for employers
• GOV.UK - Employment Allowance
• GOV.UK - Expenses and benefits for your employees

General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.