Payroll and PAYE for small employers: a practical 2026/27 guide

Running payroll is one of the first genuinely technical jobs a growing business takes on. The rules are unforgiving: submissions are due on or before every payday, and small errors repeat every pay period until someone spots them. This guide walks through what a small UK employer needs to do in the 2026/27 tax year, from registering with HMRC to issuing P60s, with a worked example of what a full-time employee on the National Living Wage really costs.

Setting up payroll: registration and Real Time Information

You must operate PAYE as part of your payroll if you employ anyone earning at or above the Lower Earnings Limit, anyone who has another job or pension, or anyone receiving employee benefits. Directors of limited companies count as employees for these purposes, even if they are the only person on the books.

Registering as an employer

Register with HMRC as an employer before your first payday. You cannot register more than two months before you start paying people, and it can take up to five working days to receive your employer PAYE reference and Accounts Office reference, so do not leave it until the week the first wages are due. You will also need HMRC-recognised payroll software.

The Full Payment Submission (FPS)

Under Real Time Information (RTI), every time you pay employees you send HMRC a Full Payment Submission. It must reach HMRC on or before the payday, not the date you process payroll or the end of the month. It lists each employee's pay and deductions and tells HMRC about starters and leavers.

The Employer Payment Summary (EPS)

The EPS is used to tell HMRC about things that reduce what you owe or explain why you owe nothing. You send one by the 19th of the following tax month to claim Employment Allowance, recover statutory payments such as Statutory Maternity Pay, report the Apprenticeship Levy if it applies, or confirm that you paid no employees in a period. Without it, HMRC may estimate what you owe.

Paying HMRC by the 22nd

PAYE tax, employee and employer National Insurance and student loan deductions are paid to HMRC monthly. Cleared funds must reach HMRC by the 22nd of the following tax month if you pay electronically (or the 19th if you pay by cheque). So deductions for the tax month ending 5 July are due by 22 July. Employers whose average monthly payments are under £1,500 can ask to pay quarterly. Full details of payment methods and references are on GOV.UK's pay employers' PAYE page.

Key payroll rates and thresholds for 2026/27

The figures below apply for the tax year running from 6 April 2026 to 5 April 2027. They drive almost every calculation in your payroll software, so it is worth checking that your settings have been updated each April.

Check the current minimum wage rates whenever you take on a new starter or an employee has a birthday that moves them into a new age band. Underpaying, even by a few pence an hour, can lead to arrears, penalties and public naming.

Employment Allowance is claimed through the EPS and is set against your employer National Insurance until it is used up. Most small employers qualify, but a limited company where the only employee paid above the secondary threshold is a director cannot claim it. See Employment Allowance eligibility for the full conditions.

Worked example: the real cost of a full-time employee

Gross salary is only part of the cost of employing someone. The example below shows the main statutory on-costs for one full-time employee paid the National Living Wage. It is illustrative only: it assumes 37.5 hours a week for 52 paid weeks (holiday is paid, so it is included), calculates National Insurance on an annual basis for simplicity and uses minimum auto-enrolment contributions on qualifying earnings. Real payroll calculates NIC per pay period, and your pension scheme may use a different basis.

In this illustration the employee costs around 14% more than their gross pay. If your business can claim Employment Allowance, the £2,967.68 of employer NIC could be fully covered, bringing the cost down to £25,340.84, but remember the allowance is capped at £10,500 across your whole payroll, so it goes further for a business with two or three staff than for one with twenty. The figures exclude insurance, recruitment, training and equipment.

Auto-enrolment pension duties

Every employer has workplace pension duties from the day their first employee starts. You must enrol eligible jobholders, those aged 22 to State Pension age earning over £10,000 a year, into a qualifying pension scheme and pay contributions. Minimum contributions total 8% of qualifying earnings, with the employer paying at least 3% and the employee making up the rest (usually with tax relief).

Other workers, such as those earning between £6,240 and £10,000, or aged 16 to 21 or over State Pension age, can ask to join, and you may have to contribute for some of them. You must also:

• write to each employee explaining how auto-enrolment applies to them;
• complete your declaration of compliance with The Pensions Regulator within five months of your duties starting;
• process opt-out requests and refund contributions if the employee opts out within the opt-out period;
• pay contributions to the scheme on time (generally by the 22nd of the following month if paid electronically).

See workplace pensions: what employers must do.

Starters and leavers

New starters

When someone joins, gather the information before their first payday and include them on your next FPS with a start date.

• Collect the P45 from their previous employer, if they have one, and use the tax code and pay to date it shows.
• If there is no P45, ask them to complete HMRC's starter checklist to determine the right emergency or standard code.
• Record their full name, date of birth, address, gender and National Insurance number exactly as shown on official documents.
• Confirm any student loan or postgraduate loan plan type.
• Carry out and keep a record of right-to-work checks before employment starts.
• Assess them for auto-enrolment and set up pension deductions.

Leavers

When an employee leaves, pay their final wages, including any accrued but untaken holiday, and report the leaving date on the FPS. You then give the employee a P45: parts 1A, 2 and 3 go to the employee, and the details are sent to HMRC through RTI. If you pay someone after they have left, for example a late bonus, tax it using code 0T on a non-cumulative basis.

Statutory payments in brief

Employers act as HMRC's paying agent for several statutory payments. You pay them through payroll and, in some cases, recover part or all of the cost.

Statutory Sick Pay (SSP)

SSP is paid to eligible employees who are off sick. It is not recoverable from HMRC. The rules on SSP eligibility and waiting days have been reformed under the Employment Rights Act 2025, so check the current conditions and weekly rate on GOV.UK before paying it, and keep records of sickness absence and fit notes.

Statutory Maternity Pay (SMP) and other family pay

SMP is paid for up to 39 weeks: the first six weeks at 90% of average weekly earnings, then the lower of the standard weekly rate or 90% of average earnings for the remaining 33 weeks. Similar schemes cover paternity, adoption, shared parental, parental bereavement and neonatal care pay. Employers can normally reclaim 92% of these payments, or more if they qualify for Small Employers' Relief, by claiming on the EPS.

Payroll year end: P60s and P11Ds

The payroll year ends on 5 April. Your final FPS for the year should be marked as the final submission, or, if you realise afterwards that it was not, send an EPS by 19 April to confirm the year is complete. Then:

• P60s must be given to every employee on your payroll at 5 April by 31 May. They can be paper or electronic.
• P11D and P11D(b) forms, reporting benefits in kind such as company cars, private medical insurance or beneficial loans, are due by 6 July, unless you payroll those benefits. Class 1A National Insurance on benefits is payable by 22 July if paid electronically. HMRC intends to make payrolling of most benefits mandatory from April 2027, so it is worth reviewing how you handle benefits now.
• Update software to the new year's rates and apply any tax code changes HMRC has issued.

Keep payroll records for at least three years from the end of the tax year they relate to. Our guide on how long to keep business records explains the wider retention rules, and our year-end checklist shows how payroll control accounts are reconciled when the accounts are prepared.

Common payroll errors and how to avoid them

Most payroll problems are small, repeated mistakes. The most common are:

1. Submitting the FPS late. Processing payroll on payday and then filing the next morning is a late submission. Build the FPS into the process a day or two before wages leave the bank.
2. Using the wrong tax code. Ignoring P6 and P9 coding notices from HMRC means under- or over-deducting tax all year. Apply notices as they arrive.
3. Forgetting the EPS. Employment Allowance and statutory payment recovery are only credited if claimed, and nil-payment months must be reported.
4. Not reconciling the HMRC account. Compare what the FPS and EPS say you owe with what you paid and what HMRC shows online. Differences are far easier to fix in month two than month eleven.
5. Missing minimum wage breaches. Salaried staff working extra hours, unpaid trial shifts or salary sacrifice can all push effective pay below the legal minimum.
6. Late pension contributions. Pension providers report persistent late payments to The Pensions Regulator.

If payroll is taking up more of your time than it should, a named bookkeeper can take it on for you. Verdi Bookkeeping, based in London NW1, runs payroll and PAYE for small employers weekly or monthly, including RTI submissions, payslips, P45s, P60s and pension returns, and can combine it with your bookkeeping so the payroll figures flow straight into your accounts.

Frequently asked questions