If you employ anyone in the UK, including yourself as a director of a limited company, you must operate payroll. There is no threshold below which payroll can be ignored. Even a single director taking a salary of £500 a month needs a payroll report sent to HMRC on or before each payday.

Payroll is governed by the Real Time Information (RTI) system. Every time you pay someone, you must report the payment to HMRC electronically before or at the time of payment. This is not a year-end afterthought. It is a per-payroll obligation.

For a small business owner, the question is not whether to run payroll. It is whether to run it yourself or outsource it to a specialist provider. Payroll services for small business owners are widely available, and the cost is often lower than the value of the time you would spend doing it yourself.

What Does Running Payroll Actually Involve?

Payroll is not just calculating gross pay and deducting tax. The full process includes:

  • Setting up each employee on HMRC's RTI system with a starter checklist (form or equivalent data)
  • Calculating PAYE income tax using the correct tax code (most codes are issued by HMRC, but some must be calculated by the employer)
  • Deducting employee National Insurance (Class 1 primary) at 8% on earnings between £12,570 and £50,270, and 2% above £50,270
  • Calculating employer National Insurance (Class 1 secondary) at 13.8% on earnings above the secondary threshold of £9,100 per year
  • Submitting a Full Payment Submission (FPS) to HMRC on or before each payday
  • Issuing payslips to employees on or before payday (legal requirement under the Employment Rights Act 1996)
  • Reporting benefits in kind via P11D or payrolling benefits (optional, but requires advance registration)
  • Producing a P60 for each employee by 31 May after the tax year ends
  • Submitting an Employer Payment Summary (EPS) if you claim any recoveries (statutory sick pay, maternity pay, employment allowance)
  • Paying HMRC the total PAYE and NIC due by the 22nd of the following month (or 19th if paying by post)

That list is not exhaustive. If you have employees on variable hours, zero-hours contracts, or directors taking irregular dividends alongside salary, the calculations become more complex.

When Should You Outsource Payroll?

The decision to use payroll services for small business owners depends on three factors: the number of employees, the complexity of your pay arrangements, and your own time constraints.

One Director, No Other Staff

If you are the only director of a limited company and you take a salary of £12,570 per year (the most common approach for tax efficiency), the payroll is straightforward. One fixed monthly amount, one FPS submission, one annual P60. Many directors run this themselves using FreeAgent or Xero payroll modules. The time cost is low, perhaps 15 minutes per month.

Even so, mistakes happen. Common errors include using the wrong tax code, forgetting to submit the FPS before payment, or failing to issue the P60 on time. HMRC penalties for late or incorrect RTI submissions start at £100 per month per 50 employees (or part thereof). For a single director, that is £100 per month for the first offence, rising with repeat failures.

Two to Five Employees

Once you have more than one employee, the complexity multiplies. Different start dates, different tax codes, student loan deductions, pension auto-enrolment, and statutory payments all add layers. This is where many small business owners start looking at payroll services for small business providers.

A good payroll service will handle all RTI submissions, calculate NIC correctly, manage pension contributions, and produce the year-end documents. The cost typically ranges from £10 to £30 per month for a small payroll, depending on the number of employees and the level of support.

Six or More Employees

At this point, the administrative burden is significant. You are likely dealing with holiday pay, overtime, commission, variable hours, and possibly multiple pay frequencies. Outsourcing becomes not just convenient but cost-effective. The time you would spend on payroll each month is better spent on growing your business.

Our ICAEW qualified team runs payroll for businesses across Manchester, Birmingham, Bristol, and the rest of the UK. We see the same mistakes repeated by business owners who try to manage payroll themselves: incorrect NIC calculations, missed pension deadlines, late RTI submissions. The cost of those mistakes often exceeds the cost of the payroll service.

What to Look for in a Payroll Provider

Not all payroll services are the same. Here is what to check before signing up:

  • RTI compliance. The provider must submit FPS and EPS on time, every time. Ask whether they have a direct HMRC gateway connection or use a third-party filing system.
  • Pension auto-enrolment. The provider should handle your staging date, re-enrolment every three years, and contributions to the pension scheme. Many small business owners forget the re-enrolment duty and face fines from The Pensions Regulator.
  • Benefits in kind. If you provide company cars, private medical insurance, or gym memberships, the provider should either payroll these benefits or prepare the P11D forms.
  • Statutory payments. The provider should calculate SSP, SMP, SPP, and ShPP, and include the recoveries on your EPS.
  • Employment Allowance. If your employer NI bill is under £100,000 per year, you can claim the Employment Allowance (up to £10,500 from April 2025). The provider should claim this on your behalf.
  • Year-end processing. The provider should produce P60s, P11D(b), and the final EPS for the tax year.
  • Director payroll. If you are a director, the provider should understand the annual earnings period rules and the interaction between salary and dividends.

We cover all of these in our payroll and PAYE services. Our approach is straightforward: we do the work, you get the reports, and we handle HMRC queries if they arise.

The Real Cost of Getting Payroll Wrong

Let us be direct. HMRC penalties for payroll failures are not theoretical. They are applied automatically.

  • Late RTI submissions. Penalties start at £100 per month per 50 employees. If you have five employees and miss a submission by one day, that is £100. Miss three months in a row, and the penalty can reach £300 or more per month.
  • Late payment of PAYE. HMRC charges interest on late payments. The late payment penalty is 5% of the amount due if you are one month late, plus another 5% at 6 months, plus another 5% at 12 months. A £5,000 PAYE bill paid three months late could attract £250 in penalties plus interest.
  • Pension auto-enrolment failures. The Pensions Regulator can issue fixed penalties of £400 and escalating penalties of up to £10,000 per day for non-compliance.
  • Incorrect tax codes. If you apply the wrong tax code and under-deduct tax, HMRC will still expect the full tax from the employee. If you cannot recover it, you may have to cover the shortfall yourself.

These are not scare stories. We see them regularly in our work at Holloway Davies. A client in Shoreditch with three employees missed an RTI deadline because their bookkeeper was on holiday. The penalty was £300 for one month. The cost of our payroll service for that client is £25 per month. They switched to us the same week.

Payroll Software vs. Full Service

There is a middle ground between doing payroll yourself and outsourcing completely. Many small business owners use payroll software like BrightPay, Sage 50, or the payroll modules in Xero or FreeAgent. These tools automate the calculations and RTI submissions, but they still require you to enter the data correctly and manage the process.

Software is a good option if you are comfortable with the rules and have the time to keep up with changes. The main changes for 2025/26 include the Employment Allowance rising to £10,500, the Class 1 secondary threshold remaining at £9,100, and the Class 1 primary threshold matching the personal allowance at £12,570.

Full-service payroll is better if you want to hand over the responsibility entirely. You send us the hours or salaries, and we do everything else. We calculate the deductions, submit the RTI, manage the pension, and produce the payslips and P60s. If HMRC queries anything, we deal with it.

For most small businesses with fewer than 10 employees, the cost of full-service payroll is between £15 and £50 per month. That is less than one hour of your time at typical business owner rates. If your time is worth more than that, outsourcing is the rational choice.

How to Set Up Payroll for a New Business

If you are starting a new limited company and plan to employ yourself or others, here is the process:

  1. Register as an employer. You can do this online via HMRC's website. You will need your company's PAYE reference number, which HMRC issues after registration. Allow up to 10 working days for the registration to complete.
  2. Choose your payroll method. Decide whether to use software, a full-service provider, or HMRC's Basic PAYE Tools (free but limited to nine employees and no pension auto-enrolment).
  3. Set up your employees. Collect their full name, date of birth, address, National Insurance number, and starter declaration (statement A, B, or C). For directors, use statement A.
  4. Run your first payroll. Enter the gross pay, check the tax code, and run the calculation. Submit the FPS to HMRC on or before payday.
  5. Pay HMRC. The total PAYE and NIC for the month is due by the 22nd of the following month. You can pay by direct debit, bank transfer, or debit card.
  6. Issue payslips. Every employee must receive a payslip on or before payday. It must show gross pay, all deductions, and net pay.
  7. Set up the pension. If you have at least one employee who is not a director, you must enrol them into a workplace pension scheme and make contributions. You can postpone this for up to three months from the first day of employment, but you must write to the employee to confirm the postponement.

If this sounds like a lot, it is. That is why many new business owners choose to speak with us before their first payday. We can set everything up and run the first payroll while you focus on getting the business off the ground.

Payroll for Directors: Special Rules

Directors have different payroll rules from regular employees. The key difference is the annual earnings period. For a normal employee, PAYE tax and NIC are calculated per pay period (weekly, monthly, etc.). For a director, the calculations are based on the full tax year, even if you pay monthly.

This means a director's tax code may not give the full personal allowance in the first few months. HMRC issues a cumulative tax code, but if the director's salary is low, the system may deduct too much tax early in the year and refund it later. This is normal, but it can be confusing if you are not expecting it.

Directors also have the option to take no salary and rely entirely on dividends. This is common for contractors working through their own limited company, particularly those operating outside IR35. However, taking no salary means you do not build up qualifying years for the state pension. The minimum salary to build a qualifying year is £6,380 for 2025/26 (the lower earnings limit).

The most common director payroll strategy is a salary of £12,570 per year, paid monthly. This matches the personal allowance and the primary NI threshold, so no income tax or employee NI is due. Employer NI is due on the portion above £9,100, but the Employment Allowance typically covers this for multi-director companies.

If you are a sole director with no other employees, you cannot claim the Employment Allowance. In that case, the employer NI on a £12,570 salary is £479 per year (13.8% on £3,470). Some directors choose a lower salary of £9,100 to avoid employer NI entirely, accepting the loss of the personal allowance on the difference. The maths depends on your dividend strategy and total income. We cover this in detail on our director pay and dividends page.

Payroll for Partnerships and Sole Traders

Partners in a partnership are not employees for payroll purposes. They are self-employed and pay tax via self assessment. However, if the partnership employs any staff, those staff must be on payroll. The partnership itself registers as an employer, not the individual partners.

Sole traders who employ staff must also run payroll. Many sole traders in trades, retail, and hospitality employ part-time or seasonal staff. The same RTI rules apply. The sole trader registers as an employer and submits FPS on or before each payday.

If you are a sole trader with no employees, you do not need payroll. You pay tax and NIC through self assessment. But if you take on your first employee, you must register as an employer before their first payday.

What Happens at Year-End?

The tax year ends on 5 April. By 31 May, you must give each employee a P60 showing their total pay and deductions for the year. You must also submit a final EPS to HMRC to confirm that no more payments will be made for the year.

If you provide benefits in kind (company car, private medical, interest-free loans over £10,000), you must submit a P11D for each employee and a P11D(b) for the employer by 6 July. The Class 1A NIC on benefits is due by 19 July (or 22 July if paying electronically).

Many small business owners miss the P11D deadline. The penalty is £100 per 50 employees for each month the return is late. If you have five employees with benefits, a three-month delay costs £300 in penalties alone.

Our payroll and PAYE blog has more detail on year-end procedures, including how to payroll benefits instead of filing P11Ds.

Is Payroll Services for Small Business Worth It?

Let us answer that directly. If you have one employee and you are comfortable with software, you can probably manage payroll yourself. The risk is low, and the cost of a mistake is manageable.

If you have two or more employees, or if you value your time at more than £30 per hour, payroll services for small business providers are almost certainly worth the cost. The price of a good service is less than the cost of one mistake. And you get the peace of mind that comes from knowing your compliance is handled by professionals.

We are ICAEW qualified accountants. We do not sell payroll services as an add-on. We treat it as a core compliance function that protects your business from penalties and keeps your employees paid correctly and on time.

If you want to discuss your payroll needs, get in touch. We work with businesses across the UK, from a single director in a Manchester tech startup to a 15-person team at a Birmingham construction firm. We can take your payroll off your hands and give you back the time to focus on what you do best.