Payroll essentials: A practical handbook for startups

Setting up payroll is one of the first serious legal responsibilities you’ll face as a new employer. While exciting, hiring your first team members brings a host of obligations that are tricky to navigate if you’re unprepared.

 

This guide covers everything you need to know about payroll, when you need to do it, and how to avoid common issues. Whether you’re hiring your first employee or planning to grow your team in the coming months, securing your payroll workflows saves time, money, and potential issues with HMRC. 

 

After all, few things damage morale faster than payroll mistakes or delayed wages. With proper systems in place, you can transform this administrative duty into a seamless part of your operations. Let’s get started.

 

Payroll fundamentals 

The moment you hire your first employee, you enter the world of payroll. But what exactly does this mean for your startup?

 

At its core, payroll means calculating what you owe your employees, making the correct deductions, providing payslips, and reporting to HMRC. It sounds simple, but each step comes attached with specific requirements designed to ensure workers receive their entitlements and the government collects the right amount of tax.

 

Here are the basic steps involved:

• Calculating gross pay: Working out what each employee is owed based on their salary or hourly rate, including any overtime, bonuses, or commission.
• Making deductions: Calculating and withholding Income Tax and National Insurance contributions through the PAYE (Pay As You Earn) system.
• Handling additional elements: Managing student loan repayments, pension contributions, statutory payments like sick pay or maternity pay, and any other deductions or allowances.
• Providing payslips: Creating detailed, legally compliant payslips showing earnings and deductions.
• Reporting to HMRC: Submitting Real Time Information (RTI) reports with each payroll run.
• Making payments: Transferring the correct amounts to employees, HMRC, and pension providers on time.
• Maintaining records: Keeping accurate, compliant payroll records for the required period.

 

Each of these responsibilities carries legal and personal weight. Pay someone incorrectly, and you risk damaging trust. Miss a filing deadline, and HMRC penalties soon follow. Get the tax calculations wrong, and you may face an unexpected bill later.

 

Understanding key thresholds

To effectively manage payroll, you’ll need to understand the key thresholds determining your tax obligations. 

 

These financial triggers establish when you must register with HMRC, what deductions to make, and the minimum you can legally pay your team. Missing these thresholds can result in penalties, so getting them right from day one is essential.

• PAYE Registration: You must register for PAYE as soon as any employee earns £125 or more per week (the Lower Earnings Limit for 2025/26).
• Employer NI Contributions: As of 2025/26, employers pay 15% National Insurance on employee earnings above the Secondary Threshold of £96 per week (£5,000 per year).
• National Minimum Wage: For employees aged 21 and over, you must pay at least the National Living Wage of £12.21 per hour (as of April 2025). Lower rates apply to younger workers. 

 

These thresholds change annually, usually from 6 April when the new tax year begins. Staying current with these figures is essential for compliance.

 

The difference between employees and contractors

When you engage someone to work for your startup, one of the first decisions is whether they are employees or contractors. This choice directly affects your payroll responsibilities and has important legal and financial implications.

 

If the individual is an employee, you’re required to:

• Operate PAYE to deduct Income Tax and National Insurance
• Pay employer National Insurance contributions
• Include them in your regular payroll processing and RTI submissions
• Issue payslips and maintain payroll records
• Provide statutory entitlements such as holiday pay, sick pay, and maternity or paternity pay

 

Contractors, by contrast, are typically self-employed. They:

• Handle their own tax and National Insurance obligations
• Are not included in your PAYE payroll
• Do not receive employment rights or statutory benefits
• Usually supply their own equipment and determine how the work is delivered

 

If someone works for you but legally qualifies as an employee — even if you’ve agreed to treat them as a contractor — you could be held liable for unpaid Income Tax, National Insurance contributions, and interest. In some cases, HMRC may also apply penalties for incorrect classification.

 

This falls under IR35 legislation, which is designed to prevent so-called disguised employment — where someone is effectively an employee, but paid as a freelancer or limited company contractor to avoid tax. HMRC actively reviews these cases, especially in tech, creative, and consultancy roles where flexible work is common.

 

Signs someone may count as an employee include:

• You control how, when, and where the work is done
• They work for you regularly and aren’t genuinely independent
• They don’t send substitutes and use your tools or systems
• They’re financially dependent on your business

 

This isn’t just about paperwork — it’s about how the relationship works in practice. Even if someone has signed a contractor agreement, HMRC will assess the actual working arrangement.

 

If there’s any doubt, it’s essential to check before you pay someone as a contractor. You can:

• Use HMRC’s Check Employment Satus for Tax (CEST) tool as a first step
• Document the basis for your decision clearly
• Get advice from an accountant or payroll specialist who understands employment status

 

Startups often get this wrong by accident — but the consequences can hit hard. One misclassified worker can trigger a full PAYE investigation. Getting it right early protects your business and avoids a costly mistake down the line.

 

Your legal obligations explained

Running payroll comes with strict legal requirements. As a startup founder, you’re personally responsible for meeting these obligations, even if you delegate the day-to-day handling of payroll.

 

Step 1: Register as an employer with HMRC

You must register with HMRC as an employer before you pay staff. This is required as soon as any employee earns above the PAYE threshold or receives benefits.

 

You’ll receive an employer PAYE reference number – a unique identifier used for all payroll submissions. Registration must be completed before your first payday, but not more than two months in advance.

 

Step 2: Operate PAYE and apply tax codes

PAYE (Pay As You Earn) is the system used to deduct Income Tax and National Insurance contributions from your employees’ wages. HMRC provides tax codes for each employee. These codes determine how much tax-free income they can earn and what deductions to make. 

 

You must apply the correct tax code to each employee – using an incorrect one can result in underpayments or overpayments, and lead to HMRC corrections later.

 

Step 3: Calculate and deduct National Insurance

National Insurance (NI) is deducted separately from Income Tax and applies to both employees and employers.

• Employees pay NI on earnings above the Primary Threshold.
• Employers pay NI on earnings above the Secondary Threshold.

 

As of 2025/26, the employer National Insurance rate is 15%. This applies to employee earnings above the secondary threshold and represents a significant cost to factor into your hiring budget – especially for full-time or higher-paid roles.

 

However, many smaller employers can claim Employment Allowance, which reduces your employer NI bill by up to £10,500 per tax year. This can make a substantial difference to your overall employment costs.

 

The allowance is applied against your Class 1 secondary National Insurance contributions and is claimed through your payroll software or directly through HMRC. It renews annually but must be claimed each tax year.

 

As of April 2025, eligibility has expanded. The previous £100,000 NI liability cap has been removed, making more businesses eligible to claim. That said, some exclusions remain – for example, if your company’s only employee is also the director, you likely won’t qualify.

 

For startups with limited payroll budgets, Employment Allowance is one of the most valuable reliefs available – but it’s often missed in the first year. Make sure it’s applied from your first eligible payroll run to maximise the benefit.

 

Step 4: Provide statutory payments when required

You’re legally required to provide statutory payments to eligible employees during key life events like illness, becoming a parent, or adopting a child. These benefits have fixed rates and conditions, which apply regardless of your company size.

 

Here’s what you need to know for the 2025/26 tax year:

• Statutory Sick Pay (SSP): £118.75 per week for up to 28 weeks. This applies to employees who are too ill to work and meet the minimum earnings and absence rules. SSP is fully funded by the employer – it cannot be reclaimed from HMRC.
• Statutory Maternity Pay (SMP): 90% of average weekly earnings for the first 6 weeks, then £187.18 per week (or 90% of earnings, whichever is lower) for up to 33 more weeks. Employees must meet minimum service and earnings thresholds to qualify.
• Statutory Paternity Pay (SPP): £187.18 per week, or 90% of average weekly earnings if lower, for up to 2 weeks. This can be taken as one block or split across two separate weeks.
• Statutory Adoption Pay (SAP): Paid at the same rate and duration as SMP. The employee receives 90% of average earnings for 6 weeks, then £187.18 or 90% (whichever is lower) for up to 33 weeks.

 

Reclaiming statutory payments

You may be able to reclaim SMP, SPP, and SAP from HMRC – depending on how much employer National Insurance you paid in the previous tax year.

• If you paid more than £45,000 in Class 1 NI: You can reclaim 92% of the total statutory payments.
• If you paid £45,000 or less: You may qualify for Small Employers’ Relief, which lets you reclaim 100% of the payments plus 8.5% compensation, totalling 108.5%.

 

You’ll claim through your payroll software using an Employer Payment Summary (EPS). Most payroll systems will guide you through it – but you still need to make sure it’s activated and filed correctly.

 

Don’t miss out

Plenty of startups overlook these repayments – often because their payroll wasn’t set up to track them or no one knew to submit an EPS. That’s money left on the table.

 

If you’re not sure whether your business qualifies, speak to your accountant or payroll provider. Getting it right ensures your team is supported, and you don’t carry unnecessary costs.

 

Step 5: Issue payslips to employees

By law, you must give every employee a payslip on or before payday. This applies to all staff on your payroll. Each payslip must show:

• Gross pay before deductions
• Itemised deductions (such as tax and NI)
• Net pay (take-home amount)
• Method of payment (e.g. bank transfer
• Any variable hours or rates, such as overtime

 

Step 6: Submit Real Time Information (RTI) to HMRC

RTI is HMRC’s system for reporting payroll data every time you pay employees – not just annually. The two main reports are:

• Full Payment Submission (FPS) – sent on or before every payday, showing pay and deductions for each employee
• Employer Payment Summary (EPS) – used in specific cases, such as reclaiming statutory pay or applying Employment Allowance

 

Missing RTI deadlines can result in automatic penalties, so having a reliable system or software is essential.

 

Step 7: Keep accurate payroll records

You must retain all payroll records for at least three years from the end of the tax year they relate to. These include:

• Employee pay and deductions
• Tax code notices and adjustments
• RTI submissions and HMRC correspondence
• Records of statutory payments
• Absences and leave related to pay (e.g. sick leave, maternity)

 

Records can be stored digitally but must be complete, legible, and accessible in the event of an HMRC inspection.

 

3. Setting up your payroll system

Once you hire your first employee, you’ll need a reliable way to run payroll. That means calculating pay, handling tax and National Insurance, submitting reports to HMRC, and making sure your team gets paid correctly and on time.

 

There’s no one-size-fits-all method, but most startups choose one of the following: run it themselves using software, outsource the entire process, or use a combination of both.

 

Do it yourself with payroll software

Running payroll in-house means you’re responsible for every part of the process. You’ll:

• Add employees to the system and keep their records up to date
• Input hours or salaries
• Calculate deductions for tax, National Insurance, student loans, and pensions
• Generate payslips and submit Real Time Information (RTI) reports to HMRC
• Stay on top of deadlines and rule changes

 

Most cloud-based payroll software makes this easier by automating calculations, offering reminders, and providing templates for payslips and submissions. It’s usually affordable and flexible, especially for small teams. This option works well if:

• Your team is small, with straightforward pay structures
• You’re confident with admin and numbers
• You want to stay close to the detail

 

Just remember: software helps, but it won’t make decisions for you. You’ll still need to understand your responsibilities and double-check figures. One wrong tax code or missed submission can cause real problems with HMRC – or worse, with your team’s trust.

 

Use an outsourced payroll provider

Outsourcing means paying someone else – often an accountant – to run your payroll for you. You send them updates (like new starters, pay changes, or sick leave), and they handle the calculations, payslips, submissions, and compliance on your behalf. This can be a huge relief when:

• You don’t have time to learn payroll from scratch
• Your team is growing or has variable hours and rates
• You’re worried about getting something wrong

 

A good provider will:

• Process pay accurately and on time
• File RTI reports and end-of-year returns
• Calculate statutory pay like SSP or SMP
• Manage pension enrolment and contributions
• Advise on rule changes or HMRC issues

 

It costs more than doing it yourself, but it can save time, reduce risk, and help you avoid penalties or delays. Just make sure you’re clear on what’s included, how changes are handled, and who’s responsible if something goes wrong.

 

Combine both

Plenty of startups choose a hybrid model. You might run payroll using software but have an accountant check everything each quarter. Or you might handle basic pay runs yourself and outsource more complex tasks like maternity pay, pensions, or HMRC corrections. This setup gives you:

• Control over the day-to-day without being totally on your own
• Professional input when things get complicated
• Flexibility as your business grows

 

It’s a useful option when your needs are simple now, but likely to evolve – or when you want to keep costs manageable while still having someone to lean on.

 

What to think about before deciding

Before choosing how to run payroll, ask yourself:

• How complex is your payroll now – and will that change soon?
• Do you have the time to run it regularly and accurately?
• Are you confident in keeping up with HMRC rules and deadlines?
• Would you rather pay a bit more to avoid admin, or keep control and save money?

 

Getting payroll right from the beginning saves time, protects cash flow, and builds trust with your team. Whether you run it yourself or hand it off, the important thing is having a setup you understand – and one that won’t let you down when things get busy.

 

4. Key deadlines and payment cycles

Payroll isn’t just about paying people – it’s about doing it on time, reporting to HMRC properly, and avoiding penalties. The UK payroll system runs on its own calendar, and if you’re not used to it, it’s easy to miss something.

 

Here’s what you need to know to stay compliant and avoid unnecessary costs or delays.

 

The tax year and tax months

The UK tax year runs from 6 April to 5 April. PAYE reporting and payments follow this timeline, not the calendar year. What often catches founders out is that HMRC also works in tax months, which run from the 6th of one month to the 5th of the next. For example:

• Tax month 1: 6 April – 5 May
  Tax month 2: 6 May – 5 June
• And so on, through to tax month 12

 

Why this matters:

• PAYE deadlines (filings and payments) are based on tax months
• Some allowances reset by tax month
• Software and outsourced providers will often schedule reports on this basis

 

If you’re using accounting systems or calendars based on standard month-ends, it’s easy to submit late without realising. Build your workflow around HMRC’s cycle from the start.

 

RTI reporting deadlines

HMRC requires Real Time Information (RTI) submissions every time you pay employees – not just at the end of the month or year. There are four main types of RTI submission:

 

Full Payment Submission (FPS)

This shows what each employee was paid, and what deductions were made. You must submit this on or before payday — not after. Even a one-day delay can trigger a penalty. HMRC issues fines of £100 per late filing per tax month for employers with 1–9 employees.

 

Employer Payment Summary (EPS)

Used when you:

• Don’t pay anyone in a period
• Reclaim statutory payments (e.g. sick or maternity pay)
• Claim Employment Allowance or reductions for Apprenticeship Levy

 

EPS submissions are due by the 19th of the following tax month.

 

Final FPS of the tax year

When submitting your last FPS in March or early April, you need to flag it as your final report for the year. This confirms year-end totals to HMRC and starts the process for issuing P60s.

 

Earlier Year Update (EYU)

Only used when correcting a previous year’s payroll figures if your software doesn’t support in-year corrections. Most modern systems now let you send an updated FPS instead, which is simpler and preferred.

 

Payment deadlines to HMRC

Once you’ve submitted your FPS and EPS, you’ll owe HMRC whatever you deducted from employee pay – plus your employer’s National Insurance contributions.

 

Standard payment deadlines:

• 22nd of the following tax month (if paying electronically)
• 19th of the following tax month (if paying by post)

 

For example:

• Pay run covers 6 April – 5 May
• Payment must reach HMRC by 22 May (19 May if posting)

 

Alternative schemes:

• Quarterly payments – allowed if your PAYE liability averages below £1,500/month
• Annual scheme – possible for director-only companies paying once per year
• Budget payment plans – allow you to spread PAYE across the year in instalments

 

Direct Debit tip: You can set up a Direct Debit with HMRC, but it only works for regular monthly PAYE. It doesn’t apply to late payments, one-offs, or corrections – so keep that in mind if cash flow is tight or inconsistent.

 

Missing payment deadlines triggers automatic interest – and if you’re repeatedly late, HMRC may add percentage-based penalties.

 

Annual payroll events

In addition to monthly tasks, there are a few critical dates in the annual payroll cycle. These don’t change – and they’re not flexible.

 

Start of tax year – 6 April

• Apply new tax codes (HMRC sends these in March)
• Update thresholds for National Insurance and statutory payments
• Start a new payroll year in your system

 

End of tax year – 5 April

• Submit final FPS for the year
• Issue P60s to all employees by 31 May
• Submit P11Ds (if applicable) by 6 July for any taxable expenses or benefits

 

Failing to meet these deadlines can result in fines, employee frustration, or incorrect year-end reporting – which HMRC doesn’t take lightly.

 

Set up a working payroll calendar

Even if you use software or outsource your payroll, don’t rely on others to remember your deadlines. Set up your own simple payroll calendar that includes:

• Pay dates and pay run cut-offs
• FPS and EPS submission points
• HMRC payment due dates
• Annual tasks like tax code updates and P60 deadlines
• Pension submission dates and re-enrolment windows

 

This takes less than half an hour to build — and can save you days of clean-up if something slips.

 

5. Common problems and how to avoid them

Setting up payroll for the first time brings several challenges. Understanding these common hurdles and how to overcome them will help you avoid costly mistakes, penalties, and employee dissatisfaction.

 

Misclassifying workers

One of the most expensive mistakes startups make is incorrectly classifying employees as contractors. While hiring contractors might seem to reduce administrative burden, HMRC scrutinizes these arrangements closely.

 

The consequences of misclassification can be severe – back taxes, penalties, interest, and even personal liability for company directors. HMRC’s CEST (Check Employment Status for Tax) tool helps determine whether someone should be treated as an employee or contractor, though it’s not definitive in every case.

 

Key indicators of employee status include:

• You control how, when, and where work is done
• The person works exclusively for you
• They use your equipment and materials
• They’re integrated into your business

 

When in doubt, it’s safer to treat workers as employees until proper professional advice confirms otherwise.

 

Missing key deadlines

With numerous filing and payment deadlines throughout the year, it’s easy to miss one – especially for new employers. Yet the consequences can be immediate and costly.

 

Late filing penalties start at £100 for companies with 1-9 employees, with additional penalties for extended delays. Late payment of PAYE tax and National Insurance triggers interest charges from the due date, and persistent lateness can result in penalties of up to 5% of the amount due.

 

Creating a comprehensive payroll calendar with reminders well in advance of due dates is essential. Set up alerts at least a week before each deadline to allow time for unexpected issues. Many payroll software packages include automated reminders – use them.

 

Incorrect tax code application

Tax codes determine how much Income Tax is deducted from employees’ pay. Using the wrong code means employees pay too much or too little tax – both scenarios create problems.

 

When an employee starts, they should provide a P45 from their previous employer showing their tax code. Without this, you’ll need to use a starter declaration to determine the appropriate code or use an emergency tax code until HMRC provides the correct one.

 

HMRC regularly issues coding notices with changes, which you must implement promptly. Set up a system to track and apply these changes, and ensure staff know who to contact if they believe their tax code is incorrect.

 

Handling new starters and leavers correctly

The processes for adding new employees and removing departing ones involve specific timing and reporting requirements that are easy to get wrong.

 

For new starters, you need:

• Full name, date of birth, and gender
• National Insurance number
• Address and contact details
• P45 from previous employer (if available)
• Bank details for payment
• Starting date and salary information

 

For leavers, you must:

• Include their leaving date on your FPS
• Provide them with a P45 showing earnings and tax paid to date
• Issue the P45 on or before their final payment date
• Process any outstanding holiday pay or deductions

 

Having clear checklists for onboarding and offboarding helps ensure nothing is missed during these transitions.

 

Managing statutory payments correctly

Calculating and processing statutory payments like sick pay and maternity pay can be complex, especially for small employers. Eligibility rules vary between different types of statutory payments, as do the calculation methods and durations. Without proper understanding, you risk underpaying employees (leading to potential claims) or overpaying them (costing your business).

 

Good record-keeping is essential – particularly tracking sickness absence and linking periods of sickness correctly. Most payroll software handles the calculations once you input the relevant information, but you need to understand the basics to know what information to provide.

 

Small employers can often reclaim a percentage of statutory payments, but you must include the correct codes on your EPS to receive these reimbursements. Many businesses miss out on these recoveries simply through administrative oversight.

 

Preventing common payroll errors

Beyond the specific issues above, several general practices can help prevent most payroll problems:

• Double-check all calculations: Have a verification process for all manual entries and calculations
• Stay informed: Subscribe to HMRC employer bulletins and professional updates
• Establish communication channels: Ensure employees know who handles payroll queries
• Document processes: Create step-by-step guides for regular payroll tasks
• Seek help when needed: Don’t hesitate to consult professionals for complex situations

 

With careful planning and proper systems, these common payroll problems can be avoided, saving your business time, money, and unnecessary stress.

 

How EV Accountants can help you with payroll

Payroll isn’t just admin – it’s legal, financial, and time-sensitive. One missed deadline or incorrect deduction can cause problems with HMRC or damage team morale. At EV Accountants, we take that weight off your shoulders.

 

We handle the details – tax codes, submissions, statutory pay, pension setup – so you can stay focused on building your business. Whether you’re hiring your first employee or managing a growing team, we keep your payroll accurate, compliant, and stress-free.

 

Expert payroll support

We understand that effective payroll management is critical to your business operations and employee satisfaction. The payroll sector has seen numerous changes in recent years, from the introduction of RTI reporting to HMRC to the legislation surrounding workplace pensions and auto-enrolment. Keeping up with these changes while running your business can be overwhelming.

 

We provide comprehensive support designed to remove the compliance burden from your shoulders, giving you more time to focus on what you do best – growing your business.

 

Our complete payroll service

We can assist with all aspects of payroll compliance including:

• Preparation of weekly or monthly payroll reports and payslips: Accurate, timely processing that keeps your team paid correctly.
• Submission of the required returns to HM Revenue & Customs: Meeting all RTI requirements and deadlines.
• Compliance in relation to workplace pensions for auto-enrolment: Managing your pension obligations fully.

 

For companies that are not yet registered with HMRC, we can also assist with company registration to be an employer – handling the paperwork and ensuring a smooth setup process.

 

Why choose EV Accountants for your payroll 

When you work with us, you benefit from:

• Expertise you can trust: Our team stays current with all legislation changes and HMRC requirements.
• Personalized service: We take the time to understand your business and create solutions specific to your needs.
• Proactive advice: We’ll alert you to potential issues and opportunities before they impact your business.
• Time savings: Free up valuable hours each month to focus on running and growing your business.
• Peace of mind: Know that your payroll obligations are being handled correctly and on time.

 

Our clients value the confidence that comes from knowing their payroll is in expert hands, with no worry about missed deadlines or compliance errors.

 

Getting started is simple

Whether you’re hiring your first employee or looking to outsource an existing payroll function, we make the transition straightforward. We’ll guide you through the initial setup process, help you gather the necessary information, and ensure a smooth handover. Once established, our regular service keeps everything running like clockwork, with clear communication at every stage.

 

Contact EV Accountants today to discuss how we can support your payroll needs and help your business thrive.