Payroll for small businesses: what you are legally required to do

By Accounting Solution · June 2026 · 7 min read

Taking on your first employee is a significant milestone for any small business — but it comes with a set of legal obligations that many employers do not fully understand until they are already in breach of them. This guide covers what you must do, and when.

Register as an employer with HMRC

Before you pay your first employee, you must register as an employer with HMRC. You should do this at least two weeks before your first payday. HMRC will issue you a PAYE reference number, which you need to file payroll returns and pay over tax and National Insurance.

Set up PAYE

PAYE (Pay As You Earn) is the system through which you deduct income tax and National Insurance from employee pay and pass it to HMRC. You also pay employer's National Insurance on top of gross wages — currently 15% on earnings above the secondary threshold.

You need payroll software to calculate deductions correctly and file returns. HMRC provides free software for very small employers, but most businesses use dedicated payroll software or outsource to their accountant.

Real Time Information (RTI)

Since 2013, all employers must submit payroll information to HMRC in real time — meaning you submit a Full Payment Submission (FPS) on or before each payday, not monthly or annually. Late submissions attract automatic penalties. This is non-negotiable and one of the most common compliance failures for new employers.

National Minimum Wage

Every employee must be paid at least the National Minimum Wage for their age group. From April 2025, the National Living Wage (for workers aged 21 and over) is £12.21 per hour. Underpaying — even accidentally — results in HMRC enforcement action, public naming, and arrears liability. Keep accurate records of hours worked.

Payslips

You must provide a written payslip to every employee on or before their payday. The payslip must show gross pay, all deductions, and net pay. It must also show the number of hours worked if the employee's pay varies by time.

Pension auto-enrolment

If you employ anyone aged between 22 and State Pension age who earns over £10,000 per year, you must automatically enrol them into a qualifying workplace pension scheme and contribute at least 3% of their qualifying earnings (employees contribute a minimum of 5%). You cannot opt out of this — it is a legal obligation from day one of employment.

You must also complete a declaration of compliance with The Pensions Regulator within five months of your staging date. Many new employers miss this and face fines.

Year-end payroll

At the end of each tax year (5 April), you must submit an Employer Annual Return to HMRC. You also send P60s to all employees showing their total pay and deductions for the year, by 31 May. P11Ds are required by 6 July for any employees who received taxable benefits in kind.

Outsourcing payroll

For most small businesses with fewer than 10 employees, outsourcing payroll to Accounting Solution costs less than the time it would take to run it in-house. We handle registration, RTI submissions, pension administration, payslips, and year-end returns. You tell us the hours worked and any changes — we do the rest.