Setting up payroll for small business

Paying yourself and other people involved in your business is a very important area to consider, so here's some more information about setting up a payroll for UK-based businesses.

Do I need to set up a payroll at all?

If you're a sole trader, or a partner in a partnership, and the business has no employed staff, this is one area you don't have to worry about. That's because you aren't an employee, legally you are the business. So breathe a sigh of relief and go and put the kettle on.

But, if your business does have employees, then read on.

I'm a director of a limited company, am I an employee?


Remember, that when you're the director of a limited company, the company is a separate legal entity from you. That's different from sole traders and partners, who legally are the business.

So if you're a director, and you want the limited company to pay you a salary, the company is an employer, you are an employee!

OK, so how do I set up a payroll?

You need to tell the nice people at HMRC that you're going to be paying staff, and register your business as a new employer. See how to do that on their website.

How do I decide how much to pay each member of staff?

That's entirely up to you.

Bear in mind that you need to pay your team members at least the National Minimum Wage. This doesn't apply to directors who don't have contracts of employment with the company, so if that's you, you can pay yourself 1p a year if you really want to…

Your own salary 

When you choose how much to pay for your own salary, remember that many directors choose to pay themselves a salary of around about the personal allowance for the tax year, to avoid wasting the personal allowance and to keep entitlement to State Pension, and make up the rest of their income in dividends, as this can help save tax.

Talk to your accountant if you like the sound of that.

How often to pay staff; paying them and HMRC 

You also need to decide whether to pay your staff weekly, fortnightly, 4-weekly or monthly, and on which date you'll pay them. Make sure this isn't going to upset your cashflow applecart. It might be easier to budget for smaller weekly payments than for larger monthly ones.

If there's any PAYE or National Insurance due, you must pay that to HMRC on time, too. Here's when your PAYE and National Insurance is due. You can pay this monthly, or if your PAYE and National Insurance bill is small enough, you might be able to pay quarterly.

What about annual tasks?

The tax year runs from 6th April to 5th April of the following year. So at the moment, we're in tax year 2009/10, which started on 6th April 2009 and will finish on 5th April 2010.

By 19th May following the end of the tax year, so that's 19th May 2010 for 2009/10, you'll also need to have filed your year-end form P35, which tells HMRC exactly how much PAYE and National Insurance you should have paid during the year, and how much you did pay. That's so they can come after you if you haven't paid enough :-)

You'll also need to give your staff a form P60 each, showing their earnings and tax paid for the year, and file forms P14 with HMRC.

If you use a payroll service such as MyPAYE or HMRC's own CD-ROM to run your payroll, this can help you with your annual tasks.

Or, you can simply take your year-end figures from FreeAgent's payroll software and file them online through HMRC's website.

Do I have to file payroll year-end forms online?

Almost inevitably yes. There are some people who don't, though - here are the exceptions.

Payroll is a big area and one that's crucial to your business, because if you don't pay your employees, they very soon won't be your employees. So make sure you get it right. 

If you're in any doubt at all, talk to your accountant, or go along to one of HMRC's employer workshops.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

Related Articles