Payroll may seem complex at first, but with the right guidance, it’s a rewarding way to gain more control over your business. Proper payroll management is about more than just numbers; it's about building a strong foundation for your business. When your employees are paid accurately and on time, it fosters trust and satisfaction. But, at the same time, it keeps you compliant with tax laws, helping you avoid costly penalties.
This guide is perfect for anyone getting ready to run payroll for the first time, whether you've just hired your first employee or are taking payroll in-house. We’ll take you through the process you need to handle payroll on your own - from the initial setup to understanding the key requirements - so you can pay your team with confidence.
Step 1: Getting ready to run your first payroll
Running payroll for the first time is a significant milestone for any small business owner. It signifies growth and success in your venture. But there are a few things you need to set up before you can get started.
Register as an employer with HMRC
To run payroll, you first need to register as an employer. This is also known as registering for PAYE.
PAYE stands for “Pay As You Earn”. It’s HMRC’s system to collect income tax and National Insurance, and things like student loans.
You can register as an employer on their website..
Once you’ve applied to register online, HMRC will send you a letter in the post. This can take 1-3 weeks. Once it’s arrived, you’ll need to enter the activation code on the letter online. Don’t wait too long, or it will expire and you’ll have to get the letter sent out again.
When your registration is complete, when you log in to your Government Gateway portal you’ll now see a box called “PAYE for employers”. If you can’t see it, you’re either not registered yet or are logging in to a different Government Gateway account (sometimes people log in to their personal ones by mistake).
⚠️ If you wait more than 2 months after registering before running payroll, HMRC may de-activate your registration as an employer, meaning you’ll have to call them again to re-activate it.
If you do need to re-activate your employer registration, you should contact HMRC to ask them to re-activate it for you.
Collect employee information and data
Collecting accurate employee information and data is crucial for payroll accuracy. When hiring your first employee, make sure that you gather all the necessary details required for payroll processing. This includes their full name, address, National Insurance number, and employment details like start date and job title. Create a standardised form or document to collect this information, and keep it securely stored for future reference.
In addition to basic employee information, you may also need to collect other details based on your specific payroll requirements. Make sure that you’re aware of any additional data you need to collect and have a streamlined process in place to acquire it from your employees.
Set up your payroll system
If you’ve chosen to run payroll yourself, you'll need payroll software to report to HMRC. To set up your payroll system, follow the instructions provided by the vendor to set up your account. This typically involves entering your business information, PAYE and Government Gateway details, and bank account details for direct deposit. Make sure you have all the necessary tax forms and documents readily available to complete the set-up process.
Once your payroll system is set up, we’d recommend familiarising yourself with the platform’s features and functionalities. Explore how to add employees, set up pay schedules, and customise deductions. Taking the time to understand your payroll system will save you valuable time and effort in the long run.
Set up your accounting software
This step is optional, but we do recommend integrating your payroll process with your accounting system. That way you can keep on top of your financial records, making sure that they remain accurate.
If you connect your payroll to your accounting software, you can automate the flow of financial data. Essentially, at the end of each pay period, your payroll information - like salaries, taxes and deductions - will be automatically updated in your ledger. This saves you time on admin and data entry, reduces the chance of errors and makes sure that your accounts are always up to date.
Step 2: Calculating employee wages and deductions
Knowing how to calculate your employees' pay and deductions is a fundamental part of running payroll yourself. Whether you choose to use payroll software that automates these calculations for you, or do them manually, a clear understanding of the process is essential.
You'll need to calculate two main figures: gross pay and net pay.
Gross Pay is the total amount an employee earns before deductions
Net Pay is the 'take-home' pay - the amount that lands in the employee's bank account after deductions
Calculate gross pay
For a salaried employee, this is the most straightforward calculation. You take their annual salary and divide it by the number of pay periods in the year. If you pay your team monthly, you would divide the annual salary by 12.
Example:
An employee has an annual salary of £30,000
The business pays employees monthly
Monthly gross pay: £30,000 / 12 = £2,500
For an hourly employee, you must track the number of hours they have worked in the pay period.
Example:
An employee earns £12 an hour
In one month, they worked a total of 150 hours
Monthly gross pay: 150 hours x £12/hour = £1,800
Deduct pre-tax contributions and student loans
Some deductions are taken from an employee's gross pay before income tax is calculated. This reduces the employee's taxable income, which can be a valuable benefit.
Pension contributions (via salary sacrifice): Many workplace pension schemes operate on a 'salary sacrifice' basis. The employee agrees to a reduction in their gross salary, and the employer pays this amount directly into their pension. This means both the employee and employer save on National Insurance contributions. You can learn more about salary sacrifice pension schemes in our guide.
Student loan repayments: In the UK, student loan repayments are a statutory deduction based on an employee's income. The amount deducted depends on the employee's loan plan and is calculated as a percentage of their earnings above a specific threshold. These repayments are taken from the gross pay.
Deduct PAYE income tax
Next, you’ll need to calculate the income tax due. The amount of tax an employee pays depends on their gross pay, their tax code, and the tax rates set by HMRC. Everyone in the UK has a tax-free Personal Allowance (£12,570 for the 2024/25 tax year) and you only pay tax on the income you earn above this allowance.
Example (for a monthly paid employee with a standard tax code):
Gross monthly pay: £2,500
Annual personal allowance: £12,570
Taxable monthly income: £2,500 - (£12,570 / 12) = £2,500 - £1,047.50 = £1,452.50
Basic rate tax band (20%) applies to this amount
Monthly income tax deduction: 20% of £1,452.50 = £290.50
Deduct National Insurance contributions
National Insurance is a mandatory deduction that helps fund state benefits like the NHS and the State Pension. Both the employee and the employer make contributions towards this, but the amount an employee contributes depends on their earnings and their National Insurance category.
Calculate net pay
The final step is to bring it all together and calculate the net pay.
Net pay = gross pay - (pre-tax deductions) - (income tax) - (National Insurance) - (post-tax deductions)
🚀 Tide Payroll calculates all salaries and deductions automatically, so all you have to do is do a quick check and submit your payroll for the month - a 3-click process.
Step 3: Processing payroll and generating payslips
Once you have collected all of the necessary employee data and calculated your employees’ salaries and deductions, it's time to process payroll and generate payslips. With reliable payroll software, this step becomes much easier. Most payroll products will automatically generate payslips for you and send them to employees on payday.
However, if your payroll software doesn’t offer automatic payslips, simply enter the data, review the calculated amounts, and approve the payroll run. The software will generate the payslips ready to be distributed to employees.
Ensure that you review and verify the payroll summary before finalising the process. Double-check the accuracy of employee data, wage calculations, and deductions. This step is crucial to avoid any errors or discrepancies that could lead to disgruntled employees or legal complications.
Step 4: Pay your staff
Now everything that should have been deducted has been removed from your staff’s gross salary, it’s time to pay them the balance. Make sure you’ve recorded all deductions, as you’ll need to include this information in a report to HMRC.
Step 5: Send reports to HMRC
As an employer, you are responsible for withholding and remitting various taxes on behalf of your employees. This is called Real Time Information (RTI). There are two parts to this:
Full Payment Submission (FPS)
Employer Payment Submission (EPS)
You’ll only need to send this if your employer is required to submit certain information. You can see a list of EPS requirements on the HMRC website.
🚀 Tide Payroll will calculate and report payroll-related taxes to HMRC and your pension provider every month once you’ve run your payroll. All that’s left for you to do is to pay those taxes, which can easily be done through a direct debit.
Step 6: Keep the right records
You’ll need to keep records relating to certain employee information. Make sure to keep records of the following:
Tax code notices
Employee authorisation forms
Sick, maternity, and annual leave
Payments and deductions
Taxable benefits and expenses
Agency contract forms
Payroll Giving Scheme documents
Reports to HMRC
Recommended payroll software for small businesses
When it comes to running payroll for your first employee, using reliable payroll software can make the process significantly easier and more efficient. Whatever payroll provider you choose, we’d recommend to prioritise the following:
It is recognised by HMRC as an official payroll provider: A HMRC-recognised payroll provider is one that can report PAYE figures to them on your behalf. Without this stamp of approval, you cannot be sure they’ll report your payroll figures to HMRC, let alone accurately or on time.
It specialises in payroll for small businesses: Making sure your payroll software focusses on the needs of small businesses will make your life easier (save you time, money and be easy to use).
It provides fast and reliable customer support: Although most of the product will mostly be automated and self-serve, having good customer support available when you need it is key. This is because you’ll probably need to reach out right before payday - short SLAs for response times is what to look for here.
🚀 Tide Payroll is simple, reliable, HMRC-recognised payroll software that allows you to pay yourself and your team in minutes. It can help you automate payments, stay compliant and simplify your payroll processes.
Do you need to set up a pension scheme?
You need to set up a pension scheme in the UK if you have “eligible staff”. If you don’t have any eligible staff but would still like to contribute to a pension scheme, you can still set one up.
Learn more about employers and eligible staff on the HMRC website.
Submitting and paying pension contributions
Typically, you’ll pay your pension provider by setting up a direct debit, so that the payments are taken automatically.
Most payroll software will automatically notify your pension provider exactly how much they need to take. It does this by calculating the amount of pension contributions due for each employee in your business, and also the amount of pension contributions due for the business itself.
Wrapping up
Remember, running payroll is a key responsibility, but it doesn't have to be a source of stress. By taking the time to understand each step of the payroll process, you've equipped yourself with the knowledge to manage it effectively.
Whether you decide to do all the calculations yourself or use software to automate the process, the foundational understanding you now have will make a huge difference. You are now ready to pay your team accurately, stay compliant, and build a solid financial foundation for your business.
Image from Unsplash, published by anniespratt
