Setting up payroll for a new UK company
Reviewed by Mellow Editorial Team, HR & payroll content team
Setting up payroll for a new UK company means registering as an employer with HMRC, choosing compliant payroll software, calculating deductions correctly, and reporting every pay run in real time before or on payday. Get the foundations right from the start and you avoid penalties, late payments and difficult conversations with employees.
Register as an employer with HMRC
Before you pay anyone, you need to register as an employer with HMRC. You can do this online through the Government Gateway. HMRC will issue you a PAYE reference number and an Accounts Office reference — you need both before you can run payroll or make payments.
Register at least two weeks before your first payday. HMRC does not process registrations instantly, and if your reference numbers have not arrived, you cannot submit the reports that the law requires.
If you are paying a director — even if that director is you — you still need to register. Directors are employees for PAYE purposes.
Choose and set up payroll software
HMRC does not provide a full payroll product for businesses, so you need to use payroll software that is recognised by HMRC. There are several options, ranging from standalone desktop tools to cloud-based platforms and fully managed payroll services.
Whatever you choose, the software must be capable of submitting Real Time Information (RTI) reports. Under RTI, you send a Full Payment Submission (FPS) to HMRC on or before every payday. There is no monthly batch — every pay run triggers a submission. Missing or late FPS filings can result in automatic penalties, so the software needs to handle this reliably.
Set up your company details, pay schedule (weekly, monthly, or otherwise) and employee records before the first payday.
Understand the deductions you are responsible for
Every time you run payroll, you calculate and deduct the right amounts before paying employees. The main deductions are:
Income tax via PAYE. Employees have a personal allowance of £12,570, meaning they pay no income tax on earnings up to that threshold. Above it, the basic rate is 20%, the higher rate is 40% on earnings above the higher-rate threshold, and the additional rate is 45% on the highest earnings. Your payroll software applies the correct rate using each employee's tax code, which HMRC issues.
National Insurance Contributions (NICs). Employees pay NICs at 8% on earnings between the primary threshold and the upper earnings limit, then 2% above that. As the employer, you pay NICs at 13.8% on earnings above the secondary threshold. These employer contributions are a real cost on top of the employee's gross salary — factor them into your budget when setting pay.
Pension contributions. If you have eligible workers, auto-enrolment applies. The minimum employer contribution is 3% of qualifying earnings, and the employee contributes at least 5%. You need to enrol eligible staff into a qualifying workplace pension scheme, communicate this to them in writing, and keep records. You cannot opt workers out on their behalf.
Your payroll software should calculate all three deductions automatically, but you are responsible for ensuring the inputs — employee details, tax codes, pension scheme details — are correct.
Issue payslips and keep records
Every employee and worker must receive a payslip on or before their payday. This is a legal requirement. Payslips must show gross pay, the amount and reason for each deduction, and net pay. If hours vary, the number of hours worked must also be shown.
Beyond payslips, you need to maintain payroll records for at least three years. These include payment amounts, deductions, tax codes, and any correspondence with HMRC about employees' tax positions.
At the end of the tax year (5 April), your obligations include issuing a P60 to every employee still on your payroll by 31 May. If you provide benefits in kind — such as a company car or private medical insurance — you report these on a P11D by 6 July and pay any Class 1A NICs due.
Account for employment rights from day one
The Employment Rights Act 2025 has extended and strengthened day-one rights for employees, so it is worth reviewing what your new employees are entitled to from the moment they start. This includes the right to written terms of employment, statutory sick pay entitlement, and family leave provisions.
Statutory annual leave stands at 5.6 weeks — equivalent to 28 days including bank holidays for someone working a standard five-day week. You do not run this through payroll in the same way as salary, but holiday pay must be calculated and paid correctly when leave is taken or on termination of employment.
If you are growing quickly or hiring across borders, a managed payroll service such as how Mellow runs payroll across six countries can take the compliance burden off your team while keeping reporting accurate and on time.
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