Setting up a limited company payroll – the basics

When you set up your own limited company, one of the most important things to consider if you also have employees is to set up your company’s payroll.

In practical terms, a payroll system calculates the gross and net pay of all company employees and directors, after deductions for taxes, pensions, child maintenance, and so on. This is the fundamental basis of PAYE (Pay-As-You-Earn).

Payroll software will calculate how much income tax and employers’ and employees’ National Insurance Contributions need to be set aside to pay HMRC.

Outsourced payroll is common for smaller companies

In larger companies, a dedicated accounts team is tasked with payroll management. However, small company owners typically outsource this task to an accountant as part of an ongoing monthly/yearly accounting package.

Getting started

Before you can start paying employees, you (or your accountant) must register your company as an employer with HMRC.

You then need to work out how much you will pay yourself (and any employees).

For example, some directors may pay themselves a small salary beneath the prevailing National Insurance thresholds. However, in the 2025/26 tax year, this is unlikely to be below £6,500 – the lowest amount to qualify for the state pension.

You need to take into account National Minimum Wage (NMW) legislation for staff. This doesn’t apply to the company’s directors, however. The current NMW rate for over-21s is £12.21 / hour (from April 2025).

You will then decide how frequently to pay yourself and your staff. Many limited company owners opt for a monthly payroll.

How does the payroll process work in practice?

When it is time to pay your employees (usually once per month), your payroll software records their pay and calculates any deductions (including tax).

In addition to their salaries, employees may be entitled to receive a wide array of additional types of pay, such as statutory sick pay and maternity pay. You can read a full list here.

Deductions, which are also processed by the payroll system, include Student Loan payments, pensions and child maintenance payments.

Your payroll software will then work out how much Employers’ National Insurance your company will have to pay on each employee’s salary.

In the 2025/26 tax year, this amounts to 15% of each employee’s salary above £5,000 per year (the Secondary Threshold).

The software will then create a payslip for each employee, clearly showing the ‘gross’ and ‘net’ pay for the period in question.

Once these activities have been completed, you should submit a Full Payment Submission to HMRC, which contains all of these calculations.

For obvious reasons, almost all small limited companies use an accountant to run the payroll on their behalf.

Other ongoing payroll tasks

Alongside producing your regular payroll, there are a number of ongoing payroll-related tasks to complete each year.

• You (as the employer) must pay any payroll tax liabilities (National Insurance / Income Tax) to HMRC by the 22nd day of the following month (if you pay monthly), or the 22nd of the month following the end of the current quarter (if you pay quarterly). Smaller companies can often make payments quarterly, as their liabilities tend to be small.
• You must report each time an employee leaves or joins your company payroll, they join your workplace pension, or changes address.
• You must also provide your employees with a P60 following the end of each tax year, which shows the total pay and deductions for the year.
• Employers must report any expenses and benefits received by employees during the previous tax year by 6 July each year, upon which further National Insurance Contributions may be payable. These details are submitted via the P11D form.