Do I have to run payroll? 

Expanding your business is exciting, with new team members bringing in additional skills and capacity. But with a bigger workforce comes new responsibilities. Among those may be running payroll. Employers must carry out payroll correctly to avoid substantial fines.

If you’re asking yourself whether you need to register your business as an employer and run payroll for your staff - let’s take a step back first and ask:

What even is payroll?

Briefly, it’s the system you use to work out how much you’re going to pay certain members of your team: employees, and some other workers. Running payroll is a legal requirement and makes sure your employees are paid accurately and on time. It also details deductions for Income Tax, National Insurance, student loan repayments and pension contributions. As part of the process, this must all be reported to HMRC. 

Who does not have to run payroll?

You don’t need to set up payroll if your business doesn’t employ anyone. If you’re a sole trader, or a partner in a partnership, any money you take out of your business doesn’t count as a salary; you can’t be an employee of your business in this case because legally you are the business. See below for what to do if you are the director of a limited company.

Who does have to run payroll?

Whether you’re running a limited company, or are a sole trader, or a partner in a partnership, you need to run payroll if your business has employees, or certain workers, working for it.  

Any member of your team with a contract of employment with your business is usually considered an employee and needs to be on payroll. This includes, but is not limited to: full- and part-time employees, workers on zero-hours contracts and apprentices.

“There are a lot of possible reasons why a worker might count as an employee for payroll purposes,” says FreeAgent’s Chief Accountant Emily Coltman FCA. “If you are unsure, check HMRC’s detailed guidance or check with your accountant.”

When you are ready to go, our step-by-step guide to becoming an employer can help you get started the right way.

Do I have to add employees to payroll if I am paying them in cash? 

Yes, you still have to include employees who are being paid in cash on your payroll.

What about company directors?

Directors who are taking a salary from a company need to be included in the company’s payroll. This means the company will need to run payroll if it’s paying a salary to a director, even if the company has no other employees.  

What else might I need to consider? 

You may need to run a payroll, or process very similar reports, even if your business doesn’t employ anyone and its only staff are those who consider themselves to be independent contractors.

Construction industry scheme (CIS)

If you’re operating in the construction industry and engaging subcontractors to carry out work for you, you will need to register as an employer and a contractor under the CIS and file regular reports to HMRC showing how much tax you’ve deducted from your subcontractors’ invoices. These reports are not dissimilar to payroll reports and you are required to check whether your subcontractors are genuinely independent or whether in fact they should be employees. If they turn out to be employees, then you’ll need to pay them through a payroll.

Off-payroll workers: IR35

If a worker invoices you through their own limited company or partnership, you may still need to add them to your payroll as an ‘off-payroll worker’. Off-payroll workers are those who would have been an employee of your business under tax law if they were not invoicing you through an intermediary, such as their own limited company or partnership. You will have to deduct Income Tax and employee’s National Insurance (NI) from the value of off-payroll workers’ invoices before you pay them.

IR35 is the UK legislation governing off-payroll workers, so you might hear references to someone being “within IR35” or “caught by IR35” if they are an off-payroll worker.

If your business is a small business operating in the private sector, then it’s for your worker to determine whether they’re within IR35 and to pay any extra tax and NI to HMRC. But if your business is larger, or works in the public sector, then it’s for you to determine if the worker is caught by IR35. If they are, you will have to add them to your payroll. 

HMRC may carry out investigations to see if one of your staff is a genuine independent freelancer or if they are a quasi-employee. When they do this, they will go beyond the written terms of your contract with the person and instead look at the entire picture of what happens in real life.

Key factors they will look at are:

• How much control do you as an employer have over how, where and when the person does their work?
• Can the person send a substitute if they are not able to carry out the work?
• Do you have to give them work, and if you do, do they have to accept that work?
• Is the individual part and parcel of your organisation, for example:
• • do they have an email address from your business?
  • do they get the same benefits as employees (e.g. the right to use the staff gym free of charge)?

Whether someone is, or is not, caught by IR35 is very subjective -  so if in doubt, do consult your accountant for more guidance.

How can FreeAgent take the stress out of running payroll?

FreeAgent allows you to pay yourself and your employees, and submit payroll directly to HMRC. 78% of customers say they can complete payroll in less than 30 minutes with FreeAgent (Small Business Monitor, spring 2025). 

Find out how you can manage accounting and payroll together, at no extra cost.