If you are the only director of your limited company and have no other employees, you still need a payroll system. Many directors assume that because they are the sole shareholder and director, they can simply take money from the business bank account without reporting it. That is not correct.

Running payroll for one employee in the UK is straightforward once you understand the process. You need to report your salary to HMRC in real time through RTI (Real Time Information), deduct any tax and National Insurance due, and submit the right returns on time. This guide walks through exactly how to do it for the 2025/26 tax year.

Do You Actually Need to Run Payroll?

Yes. If you pay yourself a salary through your limited company, you must operate payroll. The company is your employer, and you are the employee. Even if your salary is below the tax and NI thresholds, you still need to report it to HMRC.

There is no exemption for director-only companies. HMRC expects an RTI submission every time you pay yourself, even if no tax or NI is due. Failing to submit means the company gets a penalty for late or missing payroll reports.

If you take dividends instead of a salary, you do not need payroll for those. Dividends are a distribution of profit, not earnings. But most directors take a small salary for National Insurance credit purposes and then top up with dividends. That salary requires payroll.

What Is the Most Efficient Salary for a Director in 2025/26?

The standard advice for a director running payroll for one employee in the UK is to set your salary at or near the personal allowance threshold. For 2025/26, that is £12,570 per year.

Here is why that figure works:

  • You pay no income tax on earnings up to £12,570.
  • You pay no employee National Insurance on earnings up to £12,570 (the primary threshold is also £12,570 in 2025/26).
  • The company pays no employer National Insurance on earnings up to the secondary threshold of £9,100 per year. Above that, employer NI is 13.8%.

If you set your salary at £12,570, the first £9,100 is free of employer NI. The remaining £3,470 attracts employer NI at 13.8%, which is £479. But if your company qualifies for the Employment Allowance (up to £10,500), that £479 is wiped out entirely. Most director-only companies with no other employees qualify for the Employment Allowance, provided the director is not the sole employee earning above the secondary threshold. In practice, many do qualify, but check the conditions carefully.

The net effect: you take £12,570 salary, the company deducts £0 tax and £0 employee NI from your pay, and the company pays £0 employer NI (if the Employment Allowance covers it). You get a full year of Class 1 National Insurance credits, which protect your state pension and benefit entitlements.

If you prefer to avoid employer NI entirely without relying on the Employment Allowance, set your salary at £9,100. You lose some NI credits but keep the payroll simple.

How to Set Up Payroll for One Employee

You cannot just write yourself a cheque and call it a salary. HMRC requires you to operate payroll through the RTI system. Here is the step-by-step process.

Step 1: Register as an Employer

Before you can run payroll, your company must register with HMRC as an employer. You do this online through the HMRC website. You will need your company's Corporation Tax reference number (issued when you incorporated) and your company registration number.

HMRC will issue you an Employer PAYE reference number. This is a 3-digit tax office number followed by a forward slash and a reference, like 123/AB45678. You also get an Accounts Office reference for paying any tax and NI due.

Registration can take up to 10 working days, so do it well before your first salary payment. If you incorporated through Companies House automatically, HMRC may have already sent you a PAYE reference. Check your post or your HMRC online account.

Step 2: Choose Payroll Software

You must use HMRC-recognised payroll software to submit RTI returns. HMRC no longer provides free software for new employers. The old Basic PAYE Tools (BPT) was withdrawn in April 2024. You now need a commercial or free third-party solution.

For a director running payroll for one employee in the UK, the most practical options are:

  • FreeAgent: Included free with many business bank accounts (Mettle, NatWest, RBS). Handles RTI, payslips, and P60s. Also does your bookkeeping and VAT.
  • Xero: Excellent payroll module. Costs extra on top of the core subscription but integrates with your accounts. Good if you already use Xero for bookkeeping.
  • BrightPay: Standalone payroll software. Costs around £60-£100 per year for a single employee. Very reliable for RTI submissions.
  • Moneysoft Payroll Manager: Another standalone option, around £70 per year. Easy to use for one employee.
  • Crunch: If you use Crunch for your accounting, their payroll module is included in some plans.

Do not try to use spreadsheets. HMRC does not accept manual RTI submissions. Software is mandatory.

Step 3: Add Your Details as an Employee

Inside your payroll software, add a new employee record. That is you. Enter your full name, date of birth, National Insurance number, and address. Your start date is the date you first started working for the company as a director. If you incorporated the company and started immediately, use the incorporation date.

Set your tax code. For most directors in 2025/26, the standard code is 1257L. This gives you the full personal allowance. If you have other income or benefits, the code may differ. HMRC will tell you if they issue a different code.

Set your NI category. For a director, use category A (standard rate). Directors have an annual earnings period for NI purposes, which means the NI thresholds are applied to your annual pay, not each pay period. Your software should handle this automatically if you mark the employee as a director.

Step 4: Set Up Your Pay Schedule

Decide how often you will pay yourself. Monthly is most common. Set your salary to £1,047.50 per month (that is £12,570 divided by 12). Or if you prefer a quarterly schedule, pay £3,142.50 every three months.

Some directors pay themselves annually in one lump sum. That is allowed for directors, but it means you only get NI credits for that one month. If you want full year NI credits, you need to pay yourself at least once per quarter, or monthly. Monthly is simplest for record keeping.

Enter your salary amount into the software for each pay period. The software calculates the tax, employee NI, and employer NI automatically.

Step 5: Submit RTI Returns

Every time you pay yourself, you must submit an RTI return to HMRC on or before the payment date. The return is called a Full Payment Submission (FPS). It tells HMRC how much you were paid, how much tax and NI was deducted, and your tax code.

Your software sends the FPS electronically. HMRC confirms receipt. If you pay yourself monthly, you submit an FPS each month. If you pay yourself annually, you submit one FPS per year.

If you pay yourself the same amount every month, some software lets you set up a recurring FPS. That saves time, but you still need to check each submission.

If you make a mistake, submit an Earlier Year Update (EYU) after the tax year ends to correct it.

Step 6: Pay Any Tax and NI to HMRC

If your salary is £12,570 and the Employment Allowance covers the employer NI, the total amount due to HMRC is £0. You submit the FPS showing £0 due, and you pay nothing.

If you pay above the thresholds, or if the Employment Allowance does not apply, you must pay the PAYE and NI to HMRC by the 22nd of the following month (or the 19th if you pay quarterly). Your software will tell you the exact amount due.

Pay through the HMRC online system using your Accounts Office reference. Do not pay through your personal tax account. The company must pay.

Step 7: Year-End Returns

After 5 April each year, you need to file your year-end payroll returns. These are:

  • P60: A summary of your pay and deductions for the year. You must give yourself a P60 by 31 May after the tax year ends. Most payroll software generates this automatically. Print it and keep it with your records.
  • P11D: If you have any benefits in kind (private medical insurance, company car, interest-free loans over £10,000), you must report them on a P11D by 6 July after the tax year ends. For most director-only companies with no benefits, no P11D is needed.
  • P11D(b): A return of Class 1A National Insurance on benefits. Again, only if you have benefits.
  • Final FPS: Submit a final FPS for the year showing the final payment. Mark it as the last submission for the year.

Your software will handle most of this automatically. You just need to check the figures and submit.

What About Pension Contributions?

If you are the only employee and you earn above the earnings trigger for auto-enrolment (£10,000 per year in 2025/26), you must enrol yourself into a workplace pension scheme. Yes, you have to enrol yourself as an employee.

If your salary is £12,570, you are above the trigger. You need to set up a pension scheme. Most directors use a personal pension or a SIPP (Self-Invested Personal Pension). Your payroll software can handle the deductions.

The minimum contribution is 8% of qualifying earnings (between £6,240 and £50,270 in 2025/26), with at least 3% from the employer. For a £12,570 salary, qualifying earnings are £6,330 (£12,570 minus £6,240). 8% of that is £506.40 per year. You can pay more if you want, and many directors do because pension contributions are corporation tax deductible.

You can opt out of auto-enrolment as a director, but if you do, you lose the employer contribution. For most directors, the pension is a tax-efficient way to extract profit from the company, so opting in makes sense.

Common Mistakes with Director-Only Payroll

Directors running payroll for one employee in the UK often make the same errors. Here are the ones we see most frequently.

Not registering as an employer. Some directors pay themselves from the business account and call it a salary without registering for PAYE. HMRC will eventually catch this through data matching. The penalties for not operating payroll start at £100 per late or missing return, and they escalate quickly.

Using the wrong NI category. Directors must use category A, but the annual earnings period means NI is calculated differently from regular employees. If your software does not know you are a director, it may under-deduct NI. Always mark yourself as a director in the software.

Not submitting RTI on time. The FPS must be submitted on or before the payment date. If you pay yourself on the 1st of the month and submit the FPS on the 5th, that is late. HMRC charges penalties for late FPS submissions. Set a calendar reminder.

Ignoring the Employment Allowance. Many director-only companies qualify for the Employment Allowance but do not claim it. You claim it through your payroll software when you submit your first FPS of the tax year. If you do not claim it, you pay employer NI on salary above £9,100.

Not filing year-end returns. Even if you paid £0 tax and NI all year, you must file a P60 by 31 May and a final FPS. Missing these triggers late filing penalties.

What If I Take No Salary?

You are not required to take a salary. Many directors take only dividends and leave their director's loan account at zero. That is perfectly legal. You simply do not run payroll.

But if you take no salary, you get no NI credits for that year. That can affect your state pension entitlement. If you have 35 qualifying years of NI contributions, you get the full state pension. Missing a year means you may need to make voluntary NI contributions later to fill the gap.

Also, if you take no salary, you cannot claim the Employment Allowance. And you lose the corporation tax deduction that a salary provides. For most directors, the small salary of £9,100 or £12,570 is worth it for the NI credits and the tax deduction.

Do I Need an Accountant to Run Payroll?

You can run payroll for one employee yourself using software. The process is simple once set up. But many directors prefer to have their accountant handle it because:

  • The accountant ensures the RTI submissions are correct and on time.
  • The accountant handles year-end returns and P60s.
  • The accountant advises on the most tax-efficient salary level each year.
  • If HMRC queries anything, the accountant deals with it.

At Holloway Davies, we handle payroll for hundreds of director-only companies. Our ICAEW qualified team sets up your payroll, runs the monthly submissions, and files the year-end returns as part of our accounting services. You do not need to log into software or remember deadlines.

If you prefer to do it yourself, we can still advise on the right salary level and check your setup once a year.

Summary

Running payroll for one employee in the UK is a legal requirement if you pay yourself a salary through your limited company. The process involves registering as an employer, choosing HMRC-recognised software, setting up your employee record, submitting RTI returns on each payment date, and filing year-end returns.

The most tax-efficient salary for most directors in 2025/26 is £12,570. It avoids income tax and employee NI, and employer NI is often covered by the Employment Allowance. It also gives you full NI credits for the year.

Do not skip payroll. The penalties for non-compliance outweigh the small effort of setting it up. And if you want a hands-off approach, your accountant can run it for you.

For more on director pay strategies, see our guide on director pay and dividends. For the full picture on limited company compliance, visit our bookkeeping and compliance hub.