Around 1.4 million UK private sector businesses employ staff, and 2.73 million businesses were registered for VAT or PAYE as of March 2025 [1]. For every one of those employers, Pay As You Earn is the mechanism that collects Income Tax and National Insurance from wages before the money ever reaches the employee. It is not optional, and getting it wrong carries penalties that start the first time a report is late.
PAYE is HMRC's system for deducting tax and National Insurance at source [2]. A small business becomes responsible for operating it the moment it takes on staff, and in most cases even when the only person on the payroll is the sole director of a limited company. The obligations attach immediately: registration, real-time reporting, correct deductions and payment to HMRC by a fixed monthly deadline.
This guide sets out the full picture for a small employer. It covers when PAYE registration is required, how to set up a scheme, the Real Time Information reports that must reach HMRC on or before every payday, the current thresholds and rates for the 2026-27 tax year, the reliefs that reduce employer National Insurance, and the deadlines and penalties that make the difference between a clean payroll and an HMRC enquiry.
Key takeaways
- A small business must register for PAYE before the first payday, and cannot register more than two months in advance [3].
- PAYE normally applies once an employee earns £129 or more a week, though records must be kept even below that level [2].
- Employers report pay and deductions to HMRC through a Full Payment Submission on or before every payday [4].
- Employer National Insurance is charged at 15% on earnings above a £5,000 Secondary Threshold for the 2026-27 tax year [5].
- Employment Allowance can reduce an eligible employer's Class 1 National Insurance bill by up to £10,500 [6].
- PAYE due to HMRC must clear by the 22nd of the month (electronic payment) or the 19th (post) [7].
When a small business has to register for PAYE
A business normally needs to register as an employer with HMRC when it starts employing staff, or when it uses subcontractors for construction work [3]. Registration is required even when the business employs only its own director, which catches most newly incorporated companies. The trigger is the act of employing, not the size of the wage bill.
The registration deadline is tight. An employer must register before the first payday, but cannot register more than two months before it starts paying people [3]. HMRC advises allowing up to 15 working days to receive the employer PAYE reference number, because that number is needed before the first Real Time Information report can be filed [3].
The earnings thresholds that decide whether PAYE applies
PAYE does not have to run for every worker at every wage. The practical test is earnings. A business usually has to operate PAYE for an employee who earns £129 or more a week, which is £559 a month or £6,708 a year for the 2026-27 tax year [2]. That figure is the Lower Earnings Limit, and it is the point at which reporting through PAYE becomes mandatory.
Below that level the obligation changes rather than disappears. If none of the staff earns above the threshold and none has another job or receives a pension, a business may not need to register a PAYE scheme, but it must still keep payroll records [2]. Those records evidence that no deductions were due, which matters if HMRC later asks. The table below sets out the National Insurance thresholds a small employer works to.
| Threshold | Weekly | Monthly | Annual |
|---|---|---|---|
| Secondary Threshold (employer NI starts) | £96 | £417 | £5,000 |
| Lower Earnings Limit (PAYE reporting trigger) | £129 | £559 | £6,708 |
| Primary Threshold (employee NI starts) | £242 | £1,048 | £12,570 |
| Upper Earnings Limit | £967 | £4,189 | £50,270 |
These thresholds come from HMRC's rates and thresholds guidance for the 2026-27 tax year [5]. A small business running its own payroll should confirm each employee against them at the first payrun, because the point at which employer National Insurance starts (£5,000) sits well below the point at which employees start paying their own (£12,570).
Setting up the PAYE scheme
Most limited companies can register for PAYE online through HMRC [3]. The process produces two identifiers: an employer PAYE reference and an Accounts Office reference. Both appear on almost every piece of PAYE correspondence and are needed to make payments, so a small business should store them somewhere durable from day one [8].
Once the scheme exists, the employer needs payroll software capable of calculating deductions and filing Real Time Information. HMRC lists the functions software must perform: recording employee details, working out pay and deductions, and reporting to HMRC [8]. Modern UK payroll software handles the tax and National Insurance arithmetic automatically and submits the returns without manual re-keying.
What to collect before the first payrun
Each new employee brings a set of details the payroll needs before the first payment. HMRC's new-employee guidance sets out the checks: confirming the person should be paid through PAYE, obtaining their P45 or completing a starter checklist, and establishing the correct tax code [9]. Without a P45, the starter checklist determines whether the employee goes on a cumulative code, a week-1 or month-1 code, or an emergency code. A one-person business paying itself, or an occasional employer, can also produce a compliant payslip through an instant payslip generator without running a full scheme.
The tax code drives every subsequent deduction, so accuracy here saves correction later. The standard code for a single-job employee with the full Personal Allowance is 1257L, reflecting the £12,570 allowance for the 2026-27 tax year [10]. A payroll platform for small businesses applies the code HMRC issues and updates it automatically when HMRC sends a coding notice, which removes a common source of manual error.
Real Time Information: reporting to HMRC
Real Time Information is the reporting framework that underpins PAYE. Every time a business pays an employee, it must send HMRC a report on or before that payday [2]. The main report is the Full Payment Submission, which tells HMRC what each employee was paid and how much Income Tax and National Insurance was deducted [4].
The second report is the Employer Payment Summary. An employer sends an EPS to claim reductions such as Employment Allowance or statutory pay recovery, or to tell HMRC that no employees were paid in a given period [4]. Software that holds the HMRC Recognised badge files both the FPS and the EPS directly and reflects current rates without manual reconfiguration, which is why HMRC recognition is the baseline test for any payroll product rather than an optional extra.
The "on or before" rule and what happens when it slips
The timing rule is strict: the FPS is due on or before the day the employee is paid [4]. An employer who files after payday must record a reason for the late submission on the FPS, and HMRC may issue a penalty warning if no valid reason is given [11]. A short grace applies in practice: employers who file within three days of payday may not be penalised, though HMRC may act against those who do so regularly [12].
There is one further relief worth knowing. HMRC does not charge a penalty for an employer's first late report in a tax year [12]. That single unpenalised slip is a buffer, not a licence, because the count resets and later lapses attract fixed penalties.
Rates a small business deducts and pays
PAYE moves two separate liabilities: Income Tax and National Insurance. Income Tax is deducted from the employee according to their tax code and the rate bands. For England and Northern Ireland, the basic rate is 20% up to £50,270 above the Personal Allowance, 40% to £125,140, and 45% above that [10]. Scottish and Welsh employees are identified by an S or C prefix on their tax code and, in Scotland, sit on a different set of bands [10].
National Insurance splits into an employee deduction and an employer charge. The table below sets out the rates a small business applies for the 2026-27 tax year.
| Payer | Band | Rate |
|---|---|---|
| Employee | Between £12,570 and £50,270 | 8% |
| Employee | Above £50,270 | 2% |
| Employer | Above £5,000 | 15% |
The employer rate is the figure that changed most recently. Employer National Insurance rose to 15% on 6 April 2026, up from 13.8%, and the Secondary Threshold at which it starts fell to £5,000 [5]. For a small business this is the single largest payroll cost item, because the employer pays 15% on the band between £5,000 and £12,570 even though the employee pays nothing on it.
Employer National Insurance reliefs
Several reliefs cut the employer bill to zero for particular groups of worker. Employees under 21, apprentices under 25 and qualifying armed forces veterans in their first year of civilian employment all attract a 0% employer rate up to £50,270 for the 2026-27 tax year [13]. Each relief is triggered by using the correct National Insurance category letter on the payroll, so a small business benefits only if it sets the letter correctly. The mechanics of the employer charge are covered in more depth in this guide to employer National Insurance.
The broadest relief is Employment Allowance, which reduces an eligible employer's total Class 1 National Insurance liability by up to £10,500 across the tax year [6]. It is claimed through the EPS and offset against the employer bill each payrun until the £10,500 is used or the tax year ends [6]. One restriction catches many owner-managed companies: a company whose only employee liable for secondary National Insurance is a single director cannot claim [14]. From April 2025 the previous £100,000 liability cap was removed, so larger small businesses now qualify as well [14].
Paying HMRC and the monthly deadline
Deducting tax and National Insurance is only half the cycle. The employer holds the deductions and pays them to HMRC on a fixed schedule. Payment is due by the 22nd of the following tax month for electronic payments, or by the 19th for payments by post [7]. A tax month runs from the 6th to the 5th, so deductions for the month to 5 May are due by 22 May.
Smaller employers can pay quarterly rather than monthly. A business that expects to pay less than £1,500 a month to HMRC can arrange to pay every three months instead [7]. This eases cash flow for micro-employers, though the same reporting discipline on each payday still applies regardless of how often the balance is settled.
Late-payment and late-filing penalties
HMRC operates two separate penalty regimes, one for late reports and one for late payments. The fixed late-filing penalty depends on the number of employees: £100 a month for one to nine employees, £200 for 10 to 49, £300 for 50 to 249 and £400 for 250 or more [12]. For most small businesses the first band applies.
Late payment carries its own charges. HMRC checks after the 22nd of each month whether payment has arrived, and a pattern of late or partial payments builds a default count that leads to escalating penalties [15]. Interest also accrues on amounts paid late [15]. An employer running payroll on time each period avoids both regimes, which is the strongest argument for automating the FPS rather than relying on a manual calendar.
Payroll duties beyond tax and National Insurance
PAYE sits alongside a workplace pension duty. Every employer must assess staff for automatic enrolment and put eligible workers into a qualifying pension scheme, a duty overseen by The Pensions Regulator [16]. Assessment happens on the payroll, because eligibility depends on age and earnings, so pension and PAYE are calculated in the same run.
Year-end brings a further set of tasks. An employer must give every employee still on the payroll on 5 April a P60 summarising their pay, tax and National Insurance for the tax year, and the deadline for issuing it is 31 May [2]. Employers running payroll across several clients, such as accountants and bureaux, manage these deadlines at scale through a multi-client payroll platform that flags each obligation per client, while software platforms embedding UK payroll into their own products use an HMRC-recognised payroll API to run the same calculations behind their interface.
Conclusion
PAYE turns a small business into an unpaid tax collector, and the system rewards routine over improvisation. The pattern is consistent every period: calculate the deductions, file the FPS on or before payday, and pay HMRC by the 22nd. The thresholds and rates change each April, but the rhythm does not, and a business that builds the rhythm into software rather than a spreadsheet removes most of the risk.
The 2026-27 tax year sharpens the case for getting employer National Insurance right, because the 15% rate and the £5,000 Secondary Threshold make staff more expensive to employ than in any recent year. Reliefs such as Employment Allowance and the zero-rate categories for younger workers exist to soften that cost, but they reach a small business only when the payroll is set up to claim them correctly and on time.
Frequently asked questions
Does a small business have to register for PAYE if it only pays one director?
In most cases, yes. A company must register as an employer even when it employs only its own director, and it must do so before the first payday [3]. Registration cannot be done more than two months in advance, and HMRC advises allowing up to 15 working days for the PAYE reference number to arrive. A company that pays a director below the Lower Earnings Limit and has no other reporting trigger may not need a scheme, but it must still keep payroll records [2].
When does a small business have to pay PAYE to HMRC each month?
PAYE deductions are due by the 22nd of the following tax month when paying electronically, or by the 19th when paying by post [7]. A tax month runs from the 6th to the 5th. A business expecting to pay HMRC less than £1,500 a month can arrange to pay quarterly instead, which helps micro-employers manage cash flow while keeping the same on-payday reporting obligation.
How much can a small business save with Employment Allowance?
An eligible employer can reduce its Class 1 National Insurance liability by up to £10,500 across the 2026-27 tax year [6]. The allowance is claimed through an Employer Payment Summary and offset against the employer bill each payrun until it is used up. A company whose only employee liable for secondary National Insurance is a single director cannot claim, which is the restriction most owner-managed businesses fall foul of [14].
What happens if a small business files its payroll report late?
HMRC charges a fixed late-filing penalty based on employee numbers, starting at £100 a month for one to nine employees [12]. There is no penalty for the first late report in a tax year, and reports filed within three days of payday may escape a charge, though HMRC may act against employers who are regularly late. An employer who files after payday must record a reason on the Full Payment Submission to avoid a penalty warning [11].
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Documentary-style wide shot, the owner of a small UK business seen from behind at a desk in a converted warehouse office, reviewing a printed payroll summary next to an open laptop, a mug and a stack of paperwork nearby, soft daylight from a tall north-facing sash window, mid-morning, muted palette of warm grey, oak and paper white, a brick terrace visible through the window, off-centre composition with the subject in the right third, shot on a Leica Q3 at 28mm f/4, photojournalism, gentle 35mm film grain, no AI artefacts, no warped hands, no warped text, landscape orientation 16:9.
