A company must register as an employer with HMRC before the first payday, not at the end of the first month, but before the first payment is made.

Registration is required whenever the company:

• Takes on an employee (including the director, if the director is to be paid a salary).
• Pays any individual above the Lower Earnings Limit (currently £6,396 per year or £533 per month).
• Provides benefits to employees or directors that are subject to PAYE.

HMRC will allocate a PAYE reference number and an Accounts Office reference, both of which are required before any payroll can be run. Registering takes a few days and should be done well in advance of the first payday.

A company that pays salaries without registering as an employer and operating PAYE is in breach of its legal obligations, regardless of whether the amounts involved are small.

PAYE, Pay As You Earn, is the system by which employers deduct Income Tax and National Insurance Contributions (NICs) from employees’ wages and pay them to HMRC on the employee’s behalf.

Under PAYE, the employer calculates the correct deductions each pay period based on HMRC’s tax codes and NIC rates, pays the employee the net amount, and remits the deductions to HMRC. The employee never receives the gross amount, the tax is deducted at source.

The employer is also responsible for paying employer NICs on wages above the Secondary Threshold. Employer NICs are a cost to the company, not a deduction from the employee’s pay.

PAYE payments to HMRC, covering employee Income Tax, employee NICs and employer NICs, are due by the 22nd of the month following the tax month in which the pay was made (or the 19th if paying by cheque). For annual payroll (where a single payment is made once a year), payment is due by 22 July.

Real Time Information (RTI) is the system by which employers report payroll information to HMRC every time a payment is made to an employee, not annually or at the end of the tax year, but at the time of each payroll run.

Under RTI, the employer submits a Full Payment Submission (FPS) to HMRC on or before each payday, detailing the payments made and deductions applied for each employee. Where no payment is made in a tax month, an Employer Payment Summary (EPS) may need to be submitted.

RTI was introduced to allow HMRC to monitor PAYE compliance in real time, to support the Universal Credit system, and to reduce end-of-year reconciliation work. It is mandatory for all employers.

All payroll software compliant with HMRC’s requirements will submit RTI filings automatically as part of the payroll process. It is not a separate step for most employers, it happens as part of running the payroll. However, late or missing submissions attract automatic penalties.

Auto-enrolment is the legal requirement for employers to automatically enrol eligible workers into a workplace pension scheme and to make minimum employer contributions.

Eligible workers are those who are aged between 22 and State Pension age, earn more than the earnings trigger (currently £10,000 per year), and work in the UK. Employees can opt out but must be re-enrolled every three years.

The minimum contribution rates are currently:

• Employee contribution: 5% of qualifying earnings (including tax relief).
• Employer contribution: 3% of qualifying earnings.

‘Qualifying earnings’ are defined as earnings between the lower and upper thresholds (currently £6,240 and £50,270 per year).

The employer’s duties begin on the ‘duties start date’, the date the first member of staff is taken on. A pension provider must be chosen, eligible workers enrolled, and contributions collected and paid within strict timeframes. The Pensions Regulator enforces compliance and can impose fixed and escalating penalties for non-compliance.

Sole directors with no other employees may be exempt from auto-enrolment requirements. However, once an employee is engaged, including a family member, the obligations apply. Check your position with your accountant when you first take on staff.

The National Minimum Wage (NMW), or National Living Wage (NLW) for workers aged 21 and over, is the minimum hourly rate that employers must pay. It is a legal obligation, not a recommendation.

Current rates (from April 2025):

• National Living Wage (21 and over): £12.21 per hour.
• 18 to 20 year olds: £10.00 per hour.
• 16 to 17 year olds and apprentices: £7.55 per hour.

The NMW applies to workers, not to genuinely self-employed individuals. The distinction between worker and self-employed status is determined by the actual nature of the relationship, not by contract labelling, HMRC and employment tribunals look at the reality of the arrangement.

Failure to pay the NMW carries significant consequences: arrears must be repaid with interest, a penalty of up to 200% of the arrears can be imposed, and names of employers found to have underpaid can be publicly named by the government.

Directors who are also shareholders and do not have a contract of employment are generally not covered by NMW legislation. However, directors who work in the business with a contract of employment are subject to NMW requirements.

A director who is also an employee of the company should be paid through the payroll system in the same way as any other employee. However, the approach for owner-directors is typically structured to minimise tax and NIC liabilities.

The most common approach is:

• Pay a salary at or just above the Lower Earnings Limit (currently £533 per month / £6,396 per year). At this level, the director accrues qualifying years for the state pension without triggering employee or employer NIC liabilities.
• Alternatively, pay a salary up to the Personal Allowance (£12,570 per year) where the company qualifies for the Employment Allowance. This avoids Income Tax and minimises NIC. Note: companies where the sole employee is also the director cannot claim the Employment Allowance.

Dividends are then used to extract additional income above the salary level, as they are not subject to NICs and are taxed at lower rates than employment income.

The salary must be processed through a properly operated payroll, with RTI submissions made to HMRC on or before each payday. A salary paid to a director without a properly maintained payroll and RTI submission is a compliance failure, regardless of the amount.

A benefit in kind (BIK) is any non-cash benefit provided by an employer to an employee or director that has a taxable value. The employee or director is taxed on the value of the benefit, and the employer pays Class 1A National Insurance on it.

Common examples of taxable benefits in kind:

• Company cars. The taxable value is based on the list price of the car and its CO2 emissions. Fully electric vehicles attract a significantly lower benefit charge.
• Private medical insurance. Taxed on the premium paid by the employer.
• Accommodation provided by the employer.
• Interest-free or low-interest loans above £10,000.
• Personal use of assets owned by the company.

Some benefits are exempt from tax, including a limited amount of trivial benefits (under £50 per item), employer pension contributions, workplace canteen facilities, and certain childcare support arrangements.

Benefits in kind must be reported to HMRC annually on form P11D (or via payrolling of benefits), and the associated Class 1A NIC is payable by 19 July following the tax year.

Form P11D is the annual return submitted to HMRC reporting the cash equivalent of taxable benefits in kind and expenses provided to each employee and director during the tax year.

A P11D must be submitted for each employee who received benefits in kind that were not payrolled during the year. The deadline for submission is 6 July following the end of the tax year (5 April).

The employer must also pay Class 1A National Insurance on the total taxable benefits, calculated at 13.8% of the cash equivalent value. This payment is due by 22 July (or 19 July if paying by cheque).

Employees receive a copy of their P11D, which is used to calculate any additional Income Tax they owe on the benefits. For directors, this often feeds into the Self Assessment tax return.

An alternative to P11D reporting is payrolling benefits, adding the cash equivalent of benefits to the payroll calculation and collecting Income Tax through PAYE throughout the year. This must be registered with HMRC before the start of the tax year and eliminates the need for a P11D for payrolled benefits. Class 1A NIC is still payable in July.

Payroll errors are common but not always harmless. The consequences depend on the nature and size of the error.

If you underpay an employee, you have a legal obligation to correct it, and the employee has the right to raise a formal grievance or claim before an employment tribunal. Persistent underpayment can also engage NMW obligations.

If you report incorrect figures to HMRC via RTI, corrections can usually be made through the next FPS submission. Significant corrections may require an Earlier Year Update (EYU) submission.

If HMRC identifies discrepancies between your payroll returns and other information it holds, such as bank payment records or the company’s accounts, it may open an employer compliance review. These reviews can be time-consuming and, where errors are found, can result in assessments for underpaid PAYE, NICs, interest and penalties.

For minor errors identified promptly and corrected voluntarily, HMRC is generally reasonable. For systematic errors, particularly those involving significant underpayment of PAYE or deliberate misclassification of workers, the consequences can be severe.

The best defence against payroll errors is to use reputable payroll software, ensure it is correctly set up, and have the payroll reviewed periodically by your accountant, especially when there are changes to staff, salaries, benefits or company structure.