As soon as your limited company starts paying salaries — including to yourself as director — you must operate PAYE (Pay As You Earn). PAYE is the system through which Income Tax and National Insurance contributions are deducted from employee pay and paid over to HMRC. Getting it right from the start avoids significant penalties.
What is PAYE?
PAYE is the system HMRC uses to collect Income Tax and National Insurance Contributions (NICs) from employed individuals, including company directors receiving a salary. As an employer, you are responsible for deducting the right amounts and paying them to HMRC on behalf of your employees.
Registering as an Employer
You must register as an employer with HMRC before you make your first salary payment. Registration is done online through the HMRC business tax account. Once registered, HMRC will send you a PAYE reference number (also called an "Employer Reference Number" or ERN).
You should register as an employer even if the only person being paid is yourself as director and your salary is below the PAYE threshold — this ensures you are credited with National Insurance for state pension purposes.
Running Monthly Payroll
Each month (or at another agreed pay frequency), you must:
- Calculate each employee's gross pay
- Deduct Income Tax (using the employee's tax code) via PAYE
- Deduct employee National Insurance Contributions
- Calculate employer National Insurance Contributions (currently 13.8% above the secondary threshold)
- Deduct employee pension contributions (auto-enrolment applies if eligible)
- Pay the net salary to the employee
- Pay HMRC the Income Tax and NICs deducted, plus employer NICs
Real Time Information (RTI) Reporting
Since 2013, all employers must report payroll information to HMRC in real time using Real Time Information (RTI). This means submitting a Full Payment Submission (FPS) to HMRC on or before each payday — not monthly or annually. The FPS contains details of each employee's pay, tax, and NI for that payment.
If you have no employees in a pay period, you may need to submit an Employer Payment Summary (EPS) to inform HMRC.
Key PAYE Deadlines
Missing PAYE deadlines results in automatic penalties:
- FPS submission: On or before each payday
- Monthly PAYE payment to HMRC: 22nd of the following month (electronic) or 19th (cheque)
- P60 to employees: By 31 May after the tax year end
- P11D (benefits in kind) to HMRC: 6 July after the tax year end
- P11D Class 1A NICs payment: 22 July (electronic)
Employment Allowance
Most employers can claim the Employment Allowance, which reduces the employer National Insurance you pay by up to £5,000 per tax year. Single-director companies where only the director is paid cannot claim this allowance. Once you have a second employee, you become eligible.
Payroll Software
You must use HMRC-recognised payroll software to run RTI payroll. Options include:
- Basic PAYE Tools (free HMRC software): Suitable for very small employers
- Integrated accounting packages (Xero, FreeAgent, QuickBooks): Provide payroll as part of the accounting suite
- Dedicated payroll software: Sage Payroll, BrightPay, and others for more complex payroll needs
Frequently Asked Questions
Do I need to run payroll if I only pay myself dividends?
If you take no salary at all, you are technically not required to run payroll. However, most directors take a small salary (up to £12,570) to maintain their National Insurance record. This requires running payroll and submitting RTI reports.
What is auto-enrolment pension?
Auto-enrolment requires employers to automatically enrol eligible employees (those aged 22–State Pension Age earning over £10,000/year) into a qualifying workplace pension and make minimum contributions. As a sole director with no other employees, you are exempt from auto-enrolment duties.
What is a P60?
A P60 is an annual summary issued to each employee by 31 May showing their total pay, tax deducted, and NI contributions for the tax year just ended (5 April). Employees need their P60 for Self Assessment returns and benefit claims.
What happens if I get the payroll wrong?
HMRC may charge penalties and interest on underpaid tax and NICs. Persistent non-compliance can trigger a PAYE compliance check. Mistakes can usually be corrected through a correction submission in your payroll software.
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