How to Set Up and Run Payroll in the UK

Chrissy Leach • 10 November 2025

If you’re running a business in the UK, understanding how to set up and run payroll is essential.

Whether you’re a sole trader taking on your first employee or a limited company director paying yourself and your team,

in this guide we’ll walk through everything you need to know about UK payroll, including what it is, how to set it up, and what to do each month to stay compliant with HMRC.

What is Payroll?

Payroll is how you calculate, record, and pay your employees’ wages - including tax, National Insurance (NI), and pension contributions. You also use payroll to report this information to HMRC under the PAYE (Pay As You Earn) system.

Do the Self-Employed Need Payroll?

If you’re self-employed or a sole trader, you don’t need to set up a payroll system for yourself, you simply take profits from the business.

However, you do need to set up payroll if you hire employees or apprentices.

What About For A Limited Company

If you run a limited company, you’ll likely need a PAYE payroll scheme, even if you’re the only person on it. It means you can pay yourself tax efficiently, with a mix of salary and dividends. An accountant can help you determine the optimal director’s salary and dividend mix for your business.

Setting Up Payroll

Step 1: Register as an Employer with HMRC

Before paying anyone, you must register as an employer with HMRC. You’ll receive a PAYE reference and Accounts Office reference, which are needed for all payroll submissions.

Step 2: Choose Payroll Software

You’ll need software that can:

Calculate PAYE and National Insurance,
Generate payslips,
Submit RTI (Real Time Information) reports to HMRC, and
Produce year-end documents like P60s.

Popular payroll software options include HMRC Basic PAYE Tools, Xero, and BrightPay.

Step 3: Add Employees and Set Up Payment Details

Enter details such as each employee’s name, address, date of birth, NI number, and tax code.

For directors, you can choose between annual or monthly NI calculations depending on your pay frequency.

Step 4: Run Payroll and Report to HMRC

Each pay period (usually monthly):

Calculate gross pay.
Deduct tax, NI, and pension contributions.
Generate payslips for each employee.
Submit an FPS (Full Payment Submission) to HMRC on or before the pay date.

Step 5: Pay HMRC

You’ll need to pay HMRC any PAYE and NI due, usually by the 22nd of the following month (or the 19th if paying by post). You can pay quarterly if you have less than £1,500 per month to pay to HMRC.

Don't Forget Pensions

If you have employees, you'll need to assess them for auto-enrolment. If they meet the criteria to auto-enrol or opt in then you'll need to process that through the payroll and you may need to make contributions as an employer.

Common Payroll Mistakes to Avoid

Missing RTI deadlines - HMRC can issue penalties if submissions are late.
Using the wrong tax code - Always update when HMRC send new tax codes.
Forgetting pension auto-enrolment duties - You must assess and enrol eligible employees, even if you only have one.
Not keeping records - Payroll records must be kept for at least three years.

Can an Accountant Run Payroll for You?

Absolutely! Many business owners choose to outsource payroll to save time and ensure compliance.

At CJL Accountancy, we handle payroll for self-employed businesses and limited companies of all sizes, so you can focus on running your business while we keep everything compliant and on time.

Final Thoughts

Setting up and running payroll doesn’t have to be stressful. Once your system is in place, it’s simply a routine process of paying people accurately and reporting on time.

💡 Need help setting up payroll?

We’ll register your PAYE scheme, run your monthly payroll, and deal with HMRC, so you don’t have to.

📩 Get in touch today to simplify your payroll with CJL Accountancy.

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