How to Do Payroll for a Small Business

This guide provides general payroll information and is not tax, legal or employment advice. Payroll requirements vary by business and employees, and statutory rates and thresholds can change. Check the latest official guidance or seek appropriate professional advice where necessary.

Doing payroll for a small business means collecting accurate employee information, calculating gross pay and deductions, producing payslips, reporting pay to HMRC and making the correct payments on time. You also need to account for workplace pensions and keep records that support each pay run.

A defined payroll process gives you time to check inputs, resolve discrepancies and complete reporting before the relevant deadlines. The aim is to make each pay run consistent, with clear responsibilities and enough time built in for checks before payments are approved.

What do you need before running payroll?

Before the first pay run, make sure the basics are in place.

You will normally need to register as an employer with HMRC before the first payday and have the necessary PAYE references. You will also need payroll software capable of calculating deductions and sending the required reports to HMRC.

For each employee, you should have the information needed to set them up correctly, including:

• full name and address
• date of birth
• National Insurance number
• agreed salary or hourly rate
• normal working hours
• tax information from their P45 or starter details
• bank details where you are making payments directly
• pension information where applicable

Check these details before the employee enters the first live payroll run, particularly their tax information, pay rate and pension status. Incorrect information at setup can affect later calculations and create additional correction work.

How to do payroll for a small business step by step

Step 1: Set your payroll timetable

Start by deciding how frequently employees will be paid and establishing a regular payday.

Then work backwards. Give managers and employees clear deadlines for submitting timesheets, overtime, bonuses, sickness information and other changes.

A monthly payroll timetable could look something like this:

Payroll task	Example timing
Employee changes submitted	5 working days before payday
Timesheets and overtime approved	4 working days before payday
Payroll calculated and checked	2 to 3 working days before payday
Final payroll approved	1 to 2 working days before payday
Employees paid and reporting completed	Payday

These timings are examples rather than statutory deadlines. The important thing is to leave enough room to investigate problems.

We have written before about why leaving payroll until the last day creates unnecessary risk. Building a buffer before payday gives you time to resolve missing hours, late starter information or unexpected changes before payments and reporting are finalised.

Step 2: Calculate gross pay

Next, work out how much each employee has earned before deductions.

Depending on how your employees are paid, gross pay might include:

• regular salary or hourly wages
• overtime
• bonuses or commission
• holiday pay
• statutory payments
• other taxable payments or allowances

If employees are paid according to hours worked, make sure approved timesheets or other reliable records support the figures being entered.

You also need to make sure pay meets the applicable statutory minimum. From 1 April 2026, the National Living Wage and National Minimum Wage rates include a £12.71 hourly rate for workers aged 21 and over, with different rates applying to younger workers and eligible apprentices.

Step 3: Calculate payroll deductions

Once gross pay has been confirmed, calculate the deductions that apply to each employee.

These can include:

• Income Tax through PAYE
• employee National Insurance
• workplace pension contributions
• student or postgraduate loan repayments
• attachment of earnings orders
• other lawful or agreed deductions

You will also need to calculate relevant employer costs, including employer National Insurance and employer pension contributions.

Payroll software can calculate deductions using the rates, thresholds and employee information entered for that pay period, but the underlying employee data and payroll inputs still need to be checked for accuracy.

Tax codes and other employee details can change, so avoid assuming that the information used in the previous run will always remain current.

Step 4: Check your workplace pension duties

Workplace pension responsibilities need to be built into payroll rather than treated as a separate annual exercise.

Employers must normally automatically enrol eligible staff who are aged between 22 and State Pension age, earn at least £10,000 a year and normally work in the UK. Staff who do not meet all of those criteria can have different rights to join or opt into a workplace pension depending on their circumstances.

For the 2026/27 tax year, the automatic-enrolment earnings thresholds include an annual £10,000 earnings trigger and a qualifying earnings band of £6,240 to £50,270.

Pension assessment should therefore form part of the normal payroll process because an employee’s position can change as their age or earnings change.

Step 5: Review the payroll before approving it

Do not assume that software output is automatically correct. Payroll software calculates based on the information you enter, so incorrect or incomplete input can still produce the wrong result.

Compare the current run with the previous period and investigate anything that looks off.

Check areas such as:

• unexpected changes in gross or net pay
• unusually high or low deductions
• missing overtime or bonuses
• new starters and leavers
• changes to tax codes
• pension deductions
• statutory payments
• recently amended bank details

As an internal control, you may also choose to have another appropriately authorised person review the payroll before final approval.

This kind of checking also forms part of a wider effort to streamline payroll processes as a business grows. A documented process makes it easier to see where information is delayed, where repeated errors occur and which manual steps could be reduced.

Step 6: Produce payslips and arrange payment

Once the payroll has been checked and approved, employees and workers who are entitled to a payslip should receive it on or before payday.

The payslip should show earnings before and after deductions, together with the relevant deductions made. Where pay varies according to the amount of time worked, the number of hours should also be shown.

Check the final payment file or bank instruction against the approved payroll before money is released.

This check is particularly important when employee bank details have changed during the pay period.

Step 7: Report payroll to HMRC

Employers operating PAYE normally report employee pay and deductions through Real Time Information.

Each time employees are paid, your payroll software will usually send a Full Payment Submission, or FPS. HMRC’s guidance on reporting payroll information states that the FPS should normally be sent on or before the employees’ payday.

An Employer Payment Summary, or EPS, may also be required in certain circumstances, such as when no employees have been paid in a tax month or when particular reductions need to be reported.

Include the FPS in the payroll checklist rather than treating reporting as a separate task after employees have been paid.

Step 8: Pay HMRC

Your payroll records will show the PAYE and National Insurance due to HMRC, taking account of relevant reductions reported through an EPS.

For most monthly employers paying electronically, HMRC needs to receive payment by the 22nd of the following tax month. The deadline is generally the 19th when paying by post.

Employers that usually pay less than £1,500 per month may be able to pay HMRC quarterly rather than monthly. Check your payment arrangement with HMRC before changing how frequently you pay.

Build these dates into your payroll calendar so responsibility for payment is clear each month.

What payroll records should a small business keep?

Accurate calculations need an audit trail showing the information used, deductions made and reports submitted.

Useful records include:

• employee pay and deduction records
• tax-code notices
• payroll reports
• FPS and EPS submission records
• payments made to HMRC
• sickness and statutory-pay information
• leave and holiday-pay records
• workplace pension information
• taxable expenses and benefits where relevant

HMRC requires PAYE records to be kept for three years from the end of the tax year they relate to. Different retention requirements can apply to other employment, minimum wage, holiday pay, pension or business records.

Clear records also make payroll queries easier to investigate. If an employee questions a payment several months later, you should be able to trace the information used and see how the final figure was calculated.

What happens at the end of the payroll year?

The payroll tax year ends on 5 April.

Your year-end tasks normally include making the final payroll submission, preparing payroll for the new tax year and giving a P60 by 31 May to employees who were working for you on 5 April.

This is also a useful point to review how the payroll process worked during the year.

Ask:

1. Were payroll inputs regularly late?
2. Did the same errors appear more than once?
3. Were there too many manual calculations?
4. Did one person hold most of the payroll knowledge?
5. Did payroll regularly become difficult to complete before the agreed deadlines?

If several of these issues keep appearing, the process may need to change before the next payroll year.

Should you run payroll yourself or outsource it?

Small businesses can run payroll internally when the setup is straightforward, the right software is available, and somebody has enough knowledge and time to manage it properly.

As employee numbers increase, payroll can involve more starters, leavers, pension assessments, statutory payments, employee queries and changes that need to be processed correctly within each pay period.

There is also a resilience issue to consider. If only one person understands the payroll and they are unexpectedly unavailable, somebody else still needs to know what information is required, what has already been processed and which deadlines are approaching.

With our outsourced payroll services, we can handle recurring payroll processing, payslips, RTI submissions and pension administration, while your business remains involved in providing the necessary information and approving payroll runs.

Using a payroll provider can reduce the administration you handle internally, but your business still needs to provide accurate information and meet its responsibilities as an employer.

If payroll is taking too much time internally, becoming more complex or depending heavily on one member of staff, we can take on the recurring administration while you retain the oversight needed to keep each pay run moving.

Make payroll a routine, not a monthly emergency

Payroll works best when everyone knows what information is needed, when it is due and who is responsible for checking it.

Set realistic cut-offs, keep employee records up to date, review every pay run before approval and build statutory reporting and payment dates into your calendar.

If the process is taking more time than it should or relying too heavily on one person, outsourcing can reduce the amount of recurring administration your team needs to handle while keeping the approval process within your business.