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

Do I Need to Register for PAYE?

• You must register as an employer and operate PAYE if:
• You employ anyone (including yourself as a director on a salary)
• You pay anyone over the Lower Earnings Limit (£6,396/year in 2025/26)
• You pay expenses or benefits to employees/directors

Even if you pay yourself only the minimum director's salary (£9,100/year), you must run PAYE and submit RTI.

• You do NOT need PAYE if:
• You take only dividends (not a salary)
• You engage contractors who invoice through their own companies (but be careful of IR35)

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Step 1: Register as an Employer with HMRC

• Go to: gov.uk/register-employer
• Register at least 4 weeks before your first payday. You'll receive:
• Employer PAYE Reference: Format 123/AA12345 — used on all RTI submissions
• Accounts Office Reference: Used for PAYE payments to HMRC

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Step 2: Set Up Payroll Software

HMRC's Basic PAYE Tools is free and sufficient for a single director company with a fixed monthly salary. For anything more complex (multiple employees, benefits, expenses): FreeAgent (included free with some business bank accounts), Xero Payroll (£5/month), Sage Payroll (£9/month), or QuickBooks Payroll (£12/month).

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Step 3: Understand PAYE Calculations

• For each payroll run, you must calculate:
• Gross pay: The salary before any deductions
• Income Tax: Calculated against the employee's tax code (e.g., 1257L = £12,570 personal allowance). Tax is deducted from gross pay.
• Employee National Insurance: 8% on earnings between £12,570 and £50,270/year; 2% above £50,270. Deducted from gross.
• Employer National Insurance: 13.8% on earnings above £9,100/year. Paid by the employer (your company) in addition to gross pay.
• Employee Student Loan deductions (if applicable — Plan 1, 2, or 4 depending on when/where they studied)
• Net pay: What the employee actually receives (gross minus income tax, employee NI, student loan)

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Step 4: Submit RTI — Full Payment Submission

• On or before every payday, submit an RTI Full Payment Submission (FPS) to HMRC through your payroll software. The FPS contains:
• Employee details (name, NI number, date of birth)
• Pay period
• Gross pay for this period
• Income tax deducted
• Employee and employer NI

Late RTI: HMRC can charge automatic penalties for late FPS submissions — initially £100/quarter for small employers. Don't miss them. Payroll software submits automatically if set up correctly.

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Step 5: Pay PAYE to HMRC

• PAYE (income tax withheld + employee NI + employer NI) is paid to HMRC:
• Monthly: If total PAYE liability is £1,500+/month
• Quarterly: If total PAYE liability is < £1,500/month (small employers)

Payment reference: [Accounts Office Reference] + [tax month] — always use the correct reference or HMRC cannot allocate the payment.

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Statutory Payments You Must Know

Statutory Sick Pay (SSP): £116.75/week (2025/26) for employees absent due to illness for 4+ days. Paid by the employer (no government subsidy for most employers). The employer can no longer reclaim SSP from HMRC (unlike pre-2014).

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. The employer advances SMP and recovers 92% from HMRC (100% + 3% if eligible for Small Employers' Relief).

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

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Auto-Enrolment for Pensions (Workplace Pension)

All employers must automatically enrol eligible employees into a workplace pension scheme. Eligible employee = aged 22–State Pension Age, earning above £10,000/year, works in UK.

• Minimum contributions (2025/26):
• Employee: 5% of qualifying earnings (including employee NI relief)
• Employer: 3% of qualifying earnings

Popular pension providers for small employers: Nest (free, government-backed), The People's Pension (slightly more features), Royal London.

Staging/duty start date: Auto-enrolment obligations begin from the date you take on your first eligible worker. Register with The Pensions Regulator within 5 months.

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FAQs

I'm the only director with no other employees — do I need to auto-enrol myself in a pension? If you're the only person working for your company AND you don't have an employment contract, you are probably not an "eligible worker" for auto-enrolment purposes. Most single-director companies without employees are exempt. Confirm with The Pensions Regulator's assessment tool.

Can I pay an employee in cash? Technically yes — cash is legal. But you still must deduct PAYE and NI before paying, report via RTI, and pay HMRC the deductions. "Paying cash in hand" without running PAYE is illegal (not the cash itself, but the failure to deduct and report).

What NI number do I use for a director who doesn't have one? If a director is a non-UK national who doesn't have a National Insurance number, apply for one via the DWP (this requires a right to work in the UK, which non-residents may not have). Alternatively, for non-resident directors not physically working in the UK, the NI/PAYE system may not apply — take specialist advice on the nexus test.

What is a P60? The annual PAYE summary issued to each employee by May 31 after the tax year end (April 5). It shows total gross pay and tax deducted for the year. Employees need P60s for self assessment, mortgage applications, and tax refund claims.