Running payroll

What employers need to get right

Once you take on your first employee, or even if you're simply paying yourself a salary as a director, payroll stops being optional admin and becomes a legal responsibility with deadlines attached. It's one of the areas we see catch business owners out most, not because it's conceptually difficult, but because the rules change every year and the consequences of getting it wrong land on your team as well as on you.

The core duties

Every time you run payroll, whether that's weekly, fortnightly or monthly, you need to work out each employee's gross pay, deduct Income Tax and National Insurance correctly, account for anything like student loan repayments or pension contributions, and report all of this to HMRC through Real Time Information, or RTI, on or before the day you pay them. Your employees need accurate, on-time payslips, and you need to keep proper records in case HMRC ever asks to see them.

Rates that change every April

One of the trickiest parts of payroll is that several key figures reset every tax year, and missing an update means you're running payroll on outdated numbers. From April 2026, the National Living Wage for workers aged 21 and over is £12.71 an hour. Workers aged 18 to 20 are entitled to at least £10.85 an hour, and under-18s and most apprentices to £8.00 an hour. Paying below these rates, even by accident, is a compliance failure HMRC does check for.

Employer National Insurance also has its own thresholds. For 2026/27, employers pay Class 1 National Insurance at 15 percent on employee earnings above £5,000 a year. Many small employers can reduce this bill using the Employment Allowance, which is £10,500 for 2026/27 for those who qualify, and for a business with just a few employees this can wipe out most or all of the employer National Insurance due.

Workplace pensions don't stop at set-up

Auto-enrolment is often treated as a one-off task completed when you first take on staff, but the duties are ongoing. You need to keep assessing new and existing staff against the criteria as their circumstances change, process opt-ins and opt-outs correctly, keep contributions flowing at the correct percentages, and complete your re-enrolment duties roughly every three years. HMRC and The Pensions Regulator both take non-compliance seriously, and the fines for getting it wrong are not trivial

Paying yourself as a director

If you run your own limited company, payroll isn't just about staff, it's also about how you pay yourself. Many directors take a modest salary, often set with National Insurance and Income Tax thresholds in mind, and then draw further income through dividends. Getting this balance right depends on your personal circumstances and the company's profits, and it's worth reviewing each year rather than leaving it on autopilot, since thresholds and dividend tax rates both move over time.

What happens when it goes wrong

The consequences of payroll errors are wider than most people expect. Underpaying someone, even briefly, can mean back pay, penalties and reputational damage with your own team, who notice these things quickly. Late or incorrect RTI submissions can trigger automatic penalties from HMRC. And persistent errors tend to erode trust with employees faster than almost anything else in a small business, because pay is personal.

Keeping on top of it

The practical answer is compliant payroll software that updates automatically when rates and thresholds change, combined with a habit of checking those changes each April rather than assuming last year's figures still apply. If you're taking on your first employee, it's worth setting payroll up properly from day one, including registering as an employer with HMRC and setting up your workplace pension scheme, rather than trying to retrofit compliance after the fact.

The information contained herein is provided for information purposes only; the contents are not intended to amount to advice and you should not rely on any of the contents herein. We disclaim, to the full extent permissible by law, all liability and responsibility arising from any reliance placed on any of the contents herein.

Feeling unsure about payroll and what it means for your business? Book a free, no obligation chat and we'll help you work out what applies to you.