If your limited company pays anyone a salary — even just you as a director — you’ll probably need to set up PAYE and run a basic payroll system. It’s one of the key admin tasks when running a company, and essential if you want to pay a tax-efficient salary.
Sole traders typically do not run payroll for themselves, as they are not employees of their own business. But if you’re a sole trader and you take on staff, you’ll need to register as an employer and follow the same PAYE rules covered below.
This guide walks you through the process of registering for PAYE, choosing payroll software, submitting the correct HMRC forms, and making tax and NI payments on time.
Contents
- When does a company need to set up payroll?
- Registering as an employer
- Choosing payroll software
- Paying yourself as a director
- Key payroll forms: what HMRC expects
- PAYE and National Insurance deadlines
- Tips for staying compliant
When does a company need to set up payroll?
If your business pays any employee (including directors) more than the Lower Earnings Limit (£6,500 per year in 2025/26), or provides taxable benefits like a company car, you must register as an employer and operate PAYE.
Even if you’re the only person on the payroll, HMRC still expects you to report salary payments via RTI (Real Time Information).
If you plan to pay yourself a small salary and dividends — a popular setup for limited company owners — you’ll still need a PAYE scheme if that salary exceeds the NI threshold.
Registering as an employer
You can register your company as an employer with HMRC online. You’ll need to provide some basic company details, and it is recommended that you do this before your first payday.
Registration can take up to 2 weeks, so don’t leave it until the last minute.
Once set up, HMRC will send you:
- Your PAYE reference number
- Your Accounts Office reference
These references are unique to your company and will be required each time you file or make payments.
Choosing payroll software
To report to HMRC, you must use RTI-compliant software. Some of the most popular options for small companies and contractors include:
- FreeAgent – built-in payroll, especially useful for one-person companies
- Xero – integrates accounts and payroll
- QuickBooks, Sage, and BrightPay – other full-featured solutions
- HMRC’s Basic PAYE Tools – free but limited (best for very small employers)
If you work with an accountant, they may run payroll for you and handle the reporting.
Paying yourself as a director
Most limited company directors choose to take a low salary and top up their income with dividends. This helps minimise Income Tax and National Insurance, while still utilising the director’s personal allowance.
There are three common salary levels to consider in 2025/26:
- £6,500 – very low admin, and no Income Tax or employee NI to pay. However, this does trigger a small amount of employer’s NI, and you miss out on the full Corporation Tax saving. Your earnings still count as a qualifying year for the State Pension.
- £9,100 – just below the secondary NI threshold. This avoids all NI (both employee and employer) and still counts towards your State Pension. It’s a good choice if you want to keep things simple and aren’t eligible for the Employment Allowance.
- £12,570 – equal to the Personal Allowance. This is usually the most tax-efficient option overall, especially if your company can claim the Employment Allowance. It does trigger employer’s NI, but the extra salary reduces your Corporation Tax bill enough to make up the difference.
If your company is eligible for the Employment Allowance (e.g. you have two or more employees or directors on the payroll), you won’t need to pay the first £10,500 of employer’s NIC – making the £12,570 salary completely tax- and NIC-free.
Even if you’re not eligible (e.g. you’re the sole employee/director), paying £12,570 is still more tax-efficient than £6,500. You’ll pay £1,135.50 in employer’s NICs, but save around £1,326.25 in Corporation Tax – leaving your company better off by at least £190.75.
All of these salaries are fully deductible for Corporation Tax purposes. You can read more in our detailed guide to the best salary and dividend split for directors.
Once you start drawing dividends, you’ll also want to be aware of how they’re taxed. See our dividend tax guide for the latest rates and thresholds.
Key payroll forms: what HMRC expects
Whether you’re paying yourself, an employee, or both, you need to comply with HMRC’s reporting rules. This includes submitting various forms at different points in the year:
- P45: Given to an employee when they stop working for you. Summarises the pay and tax paid so far in the tax year. It’s split into several parts for you, the employee, and their new employer.
- P60: A summary of an employee’s pay and deductions for the whole tax year. Issued by 31st May following the end of the tax year. Directors receiving a salary will also need a P60.
- P11D: Used to report benefits in kind, such as a company car or health insurance. Must be filed by 6th July following the end of the tax year.
- P11D(b): A separate return submitted to HMRC showing the total Class 1A NIC due on the benefits reported in the P11D.
- Starter Checklist: Replaces the old P46. Used when a new employee joins without a P45, to help HMRC assign the correct tax code.
You’ll also need to submit Real Time Information (RTI) reports:
- FPS (Full Payment Submission): Sent every time you pay an employee. Includes pay, tax, NI and student loan details.
- EPS (Employer Payment Summary): Used to report statutory payments or claim reductions (e.g. Employment Allowance). Sent when no payments are made or adjustments are needed.
PAYE and National Insurance deadlines
Once you’ve reported payroll data to HMRC, you must pay any PAYE tax and NICs owed by the deadline.
- If you pay monthly, the payment must reach HMRC by the 22nd of the following month (or the 19th if paying by cheque or post).
- If you qualify to pay quarterly, you can do so if your average monthly liability is less than £1,500. Payment is due by the 22nd after the quarter-end (or 19th by post).
HMRC may charge interest or penalties if you miss a deadline.
If you pay electronically, the payment date is the date funds clear into HMRC’s account – not when you initiate the payment.
You’ll find more information on how to pay, including reference formats, on the GOV.UK site.
Tips for staying compliant
- Keep employee and director payroll records for at least 3 years
- If you stop employing staff or paying salaries, inform HMRC to close the scheme
- Set reminders for P60, P11D and payment deadlines so nothing is missed
- Make sure any benefits in kind are properly valued and reported
Speak to your accountant or payroll provider if you’re unsure about forms, deadlines or payment thresholds.
You can also find official step-by-step guidance at GOV.UK.