UK Small Business Payroll

Your first employee starts on Monday. HMRC expects a Full Payment Submission before or on their first payday. If you have never run payroll before, that deadline arrives faster than most founders expect.

The mechanics behind it are not optional. PAYE registration, tax code assignment, National Insurance calculation, RTI filing, auto-enrolment assessment.

Miss any of these and the penalties start accumulating before you have even issued the first payslip.

For a business with 1 to 49 employees, payroll is not complicated in the way enterprise HR is complicated.

It is complicated in the way tax compliance is complicated: the rules are precise, the deadlines are rigid, and the cost of getting it wrong lands on you personally as the employer.

This guide covers what UK small business payroll actually requires, what it costs across the three main routes, and where most small employers make the mistakes that trigger HMRC attention.

What does UK small business payroll require you to do?

In our assessment of where small businesses first hit compliance difficulty, we find the RTI submission deadline is understood in theory but missed in practice when the business owner is also doing the payroll run.

Every UK employer paying anyone above the Lower Earnings Limit (£123/week in 2024-25) must operate PAYE.

That means registering with HMRC as an employer, calculating income tax and National Insurance for each employee every pay period, and submitting a Full Payment Submission to HMRC on or before each payday through Real Time Information.

RTI is not a monthly summary you file at your convenience. It is a per-payment report, filed electronically, every time you pay an employee. Late filing triggers an automatic penalty of £100 per month for businesses with 1-9 employees, rising to £400/month for 250+ employees.

HMRC applies these penalties without warning or negotiation.

Beyond RTI, you must calculate and deduct student loan repayments where applicable, process statutory payments (SSP, SMP, SPP, ShPP), and issue payslips that meet the legal requirements introduced in April 2019 (showing hours for hourly workers).

You also file an Employer Payment Summary each month if you have any adjustments. At year end, you must issue P60s to every employee and file the final FPS or EPS by 19 April.

None of this is discretionary. If you employ people in the UK, this is the baseline.

How much does UK small business payroll cost?

The cost depends entirely on which of the three routes you take: run it yourself with software, hand it to your accountant, or outsource to a payroll bureau.

Source: Provider pricing pages and market research, April 2026. Costs vary by provider, location, and complexity.

At the DIY end, BrightPay processes unlimited employees for £139/year. Moneysoft charges £99/year for up to 50 employees.

Sage Payroll starts at £7/month. Xero includes payroll in its Growing plan at £33/month. FreeAgent includes payroll in all plans at £19-33/month.

The accountant route costs more per employee but buys you zero operational involvement. For a 10-person business paying your accountant £10/employee/month, that is £1,200/year. The same payroll on BrightPay costs £139/year.

The difference is the 2-4 hours per month someone on your team spends running it.

For a full comparison of UK payroll software features and pricing, see our UK payroll software guide.

Should you run payroll yourself or outsource it?

The decision is not about whether payroll is technically difficult. Modern software makes the calculation and filing straightforward.

The decision is about three things: who has the time, who has the confidence, and what happens when that person is unavailable.

Run it yourself if: You have someone (or you are that someone) who will reliably run payroll every pay period. Your employee count is stable. You use accounting software that integrates payroll (Xero, FreeAgent, Sage).

You want direct control over timing and process.

Outsource if: Nobody on your team wants to own payroll. You cannot answer “who runs payroll when the usual person is on holiday?” You have had HMRC issues from manual errors.

Your time is worth more than the outsourcing premium.

The hybrid middle ground: Run payroll in software yourself but have your accountant review the numbers and handle year-end. Common for businesses with 10-30 employees.

Cost: the software fee plus a reduced accountant fee of £2-5/employee/month for review only.

If you are leaning toward outsourcing, we cover the full decision framework in our UK payroll outsourcing guide, including bureau vs accountant trade-offs and what to check before signing.

What auto-enrolment pension duties apply to small employers?

If you employ anyone earning above £10,000/year (the auto-enrolment earnings trigger), you must enrol them into a qualifying workplace pension scheme.

The minimum contribution is 8% of qualifying earnings: at least 3% from you as the employer, the rest from the employee.

This applies from your staging date, which HMRC assigns when you register as an employer. For most new employers, the staging date is immediate.

You must assess every employee on each payday, enrol eligible jobholders, process opt-outs correctly, and re-enrol anyone who opted out every three years.

That three-year re-enrolment cycle catches small businesses off guard. You opted someone out in 2023. In 2026, you must re-enrol them and write to tell them.

If you miss the re-enrolment window, The Pensions Regulator can issue fixed penalties starting at £400/day.

Most payroll software handles auto-enrolment calculation automatically. But the re-enrolment duty, the opt-out processing, and the communication letters are your responsibility as the employer.

If your payroll provider or accountant does not manage these, you need to track them yourself. For a wider view of which UK payroll providers handle pension administration end to end, see our provider comparison.

What are the most common HMRC payroll mistakes for small businesses?

We assessed HMRC guidance, penalty data, and accountant forums to identify the errors that hit small businesses most often. These are not exotic edge cases.

They are the mistakes that happen when payroll is run in a rush by someone who treats it as a side task.

Wrong tax codes. HMRC issues tax code notices (P9 and P6) throughout the year. If you do not update them in your payroll software, employees over-pay or under-pay tax.

HMRC reconciles at year end and the employee gets an unexpected bill. You get the complaint.

Late RTI filing. The FPS must be submitted on or before each payday. Not the end of the month. Not the following Monday. On or before the day you pay.

For weekly payroll, that is weekly filing. Miss it and the £100/month penalty applies from the first late submission.

Auto-enrolment assessment failures. Not assessing a new joiner from their first payday. Miscalculating qualifying earnings.

Not processing opt-out requests within the one-month window. Each failure is a separate compliance breach.

Director payroll on annual salary only. Directors paid an annual salary below the NIC threshold often assume they do not need to be on payroll.

They do. HMRC requires directors to be included in PAYE even if no tax or NIC is deducted, and the NIC calculation for directors uses an annual earnings period, not the same per-pay-period method used for employees.

When should you upgrade your payroll setup?

We find the trigger for most small business payroll upgrades is not employee count but complexity: auto-enrolment, salary sacrifice, or the first employee with variable hours typically forces the move from spreadsheets to software.

The setup that works for 5 employees will not necessarily work for 30. These are the signals that your current arrangement has outgrown your business.

You are spending more than 4 hours per month on payroll. At that point, the time cost exceeds the outsourcing premium. A bureau at £5/employee/month for 20 employees is £100/month.

If the person running payroll earns £30,000/year, 4 hours of their time costs roughly £70. The maths is already close.

You have multiple pay schedules. Once you have salaried monthly staff, hourly weekly staff, and directors on annual arrangements, the complexity multiplies.

Most basic payroll software handles this, but the operational burden of running three separate pay cycles per month increases error risk.

You are expanding beyond the UK. UK payroll software does not handle overseas employees. If you are hiring internationally, you need either a global payroll provider or an EOR.

That is a different buying decision entirely.

Your accountant is becoming the bottleneck. Accountants who run payroll as a side service often deprioritise it during busy periods (January self-assessment, April year-end).

If your payslips are regularly late because your accountant is swamped, a dedicated bureau or managed service will be more reliable.

The upgrade path is not always “spend more.” Sometimes it is switching from an accountant charging £12/employee to a bureau charging £5/employee. Sometimes it is moving from a bureau to DIY software because your new office manager is confident running it.

Match the route to your current team’s capacity, not to a generic recommendation.

Frequently asked questions

Methodology and disclosure

Whichapp is an independent comparison site. We do not sell payroll services or software. Pricing data was gathered from provider websites and verified in April 2026.

HMRC penalty figures are based on published HMRC guidance.

We have not directly tested every payroll software product mentioned.

Where we reference user experience, we rely on published reviews and provider documentation rather than hands-on testing. This does not constitute financial, tax, or legal advice.

Last reviewed: April 2026