How to Pay Employees from Your UK Ltd — PAYE, RTI, and Payroll Explained (2026)

When You Must Register for PAYE

Register as an employer with HMRC if you or any employee earns more than the Lower Earnings Limit (£6,396/year in 2025/26) from your company. This includes you as a director taking even a minimal salary.

You do NOT need PAYE if you take only dividends (no salary whatsoever from the company).

Most directors take a small salary (£9,100/year — the NI secondary threshold) specifically to maintain State Pension qualifying years while minimising NI costs. This requires PAYE registration.

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Step 1: Register as an Employer with HMRC

Go to: gov.uk/register-employer → Complete the online registration → Receive your Employer PAYE Reference (format: 123/AA12345) and Accounts Office Reference by post within 5 working days.

Register at least 4 weeks before your first payday — the references are needed to submit your first RTI report and make your first PAYE payment.

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Step 2: Set Up Payroll Software

Options by complexity:

HMRC Basic PAYE Tools (free): Suitable for: 1–10 employees on simple, fixed monthly salaries. Handles: tax code assignment, payslip calculations, RTI Full Payment Submission (FPS). Does not handle: complex payroll (benefits, attachment of earnings orders), auto-enrolment pension management.

FreeAgent (£19/month or free with NatWest/RBS business account): Includes payroll integrated with accounting. Ideal for sole-director companies. Automated RTI submission. Pension integration.

Xero Payroll (included in Xero Standard £33/month and above): Full payroll + accounting integration. RTI automated. Auto-enrolment pension integration. Best for companies using Xero for accounting.

QuickBooks Payroll (from £12/month additional): Similar to Xero payroll. Good if already using QuickBooks.

Sage Payroll (from £9/month): Market-leading dedicated payroll software. Used by many medium businesses. Strong compliance features.

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Step 3: Understand the Payroll Calculations

For each payroll run, calculate for each employee:

Gross pay: The salary agreed before any deductions.

Income Tax (PAYE): Calculated against the employee's tax code. Most employees have code 1257L (= £12,570 personal allowance). PAYE software calculates the cumulative tax due from April 6 and deducts accordingly each period.

• Employee National Insurance Contributions (NICs):
• 0% on earnings up to £1,048/month (Primary Threshold — £12,570/year)
• 8% on earnings between £1,048 and £4,189/month (Upper Earnings Limit — £50,270/year)
• 2% on earnings above £4,189/month

• Employer National Insurance Contributions:
• 0% on earnings up to £758/month (Secondary Threshold — £9,100/year)
• 13.8% on earnings above £758/month

This is the cost the company bears on top of the gross salary. The Employment Allowance reduces employer NI by up to £5,000/year — but only if there is more than one director and at least one other employee, OR the company has employees other than directors.

Net pay: Gross − income tax − employee NICs − any student loan deductions = amount paid to employee.

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Step 4: Submit RTI — Full Payment Submission (FPS)

• On or before each payday: submit a Full Payment Submission (FPS) via your payroll software directly to HMRC. The FPS contains:
• Employer PAYE reference
• For each employee: name, NI number, date of birth, tax code, gross pay, PAYE deducted, employee NICs, employer NICs, year-to-date totals

Late FPS penalties: Automatic penalties for late FPS (after first failure in a tax year). Small employers (fewer than 10 employees): £100/quarter. Larger employers: £400/quarter. Pay and file on time.

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Step 5: Pay PAYE to HMRC

• PAYE (income tax withheld + employee NICs + employer NICs − any Employment Allowance) must be paid to HMRC:
• Monthly: By the 19th of the following month (22nd if paying electronically)
• Quarterly: If total monthly PAYE liability is under £1,500, you can pay quarterly (19th of April, July, October, January)

Payment reference: [Accounts Office Reference][2-digit tax year][2-digit tax month]. Use this exact format — incorrect references cause HMRC to misallocate payments.

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Statutory Payments You Must Process

Statutory Sick Pay (SSP): £116.75/week (2025/26) for eligible employees absent through illness for 4+ qualifying days. Paid by the employer. No reclaim from HMRC (except for certain small employers).

Statutory Maternity Pay (SMP): 90% of average weekly earnings for first 6 weeks; then £184.03/week (or 90% if lower) for next 33 weeks. Small employers (total NIC bill < £45,000/year) can recover 103% of SMP from HMRC.

Statutory Paternity Pay (SPP): 2 weeks at £184.03/week (or 90% of earnings).

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Auto-Enrolment — Workplace Pension

The rule: All employers must automatically enrol eligible workers into a qualifying workplace pension scheme. An eligible worker is: aged 22–State Pension Age, earning above £10,000/year, UK-based.

For a single-director company with no employees: If you are the only director and have no employment contract with the company, you are likely NOT an eligible worker for auto-enrolment purposes. Register your position with The Pensions Regulator — they will confirm your exempt status.

For companies with other employees: Auto-enrolment obligations arise from the first eligible employee. Register with The Pensions Regulator within 5 months of the first eligible worker's start date.

• Minimum contributions (2025/26):
• Employer: 3% of qualifying earnings
• Employee: 5% of qualifying earnings (via payroll deduction)

Popular pension schemes: NEST (free, government-backed, no employer fees), The People's Pension (£500+/year employer cost), NOW:Pensions, Royal London.

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FAQs

Can I run payroll monthly and submit RTI less frequently? The FPS must be submitted on or before each payment date. If you pay monthly, submit monthly. You cannot batch multiple months into one submission.

What is a P60 and when must I issue it? A P60 is the annual summary of pay and tax for each employee. Must be issued to all employees who were on your payroll on April 5 (tax year end), by May 31 following the tax year end. P60s are needed by employees for self-assessment, mortgage applications, and tax refund claims.

What is the Employment Allowance? A £5,000/year reduction in employer NI liability. Available to most businesses with multiple employees. Not available to companies where the only director is also the sole employee (single-director companies with no other staff cannot claim the Employment Allowance from April 2020 onwards).

Can I use a payroll bureau instead of running payroll myself? Yes — many accountants and specialist payroll bureaux manage payroll on your behalf (typically £20–100/month for small payrolls). This outsources RTI submissions, pension administration, and payslip generation. Worthwhile if payroll complexity is high or if you simply prefer not to manage it.

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