Running payroll for limited company directors – how PAYE works

When you set up a limited company, one of the first administrative jobs is to decide whether the company needs to register as an employer and run a payroll.

This may be necessary when the company pays a salary to its directors, even if it has no other employees.

In practical terms, a payroll system calculates the gross and net pay of all company employees and directors, after deducting taxes, pensions, child maintenance, and other applicable deductions.

PAYE (Pay As You Earn) is the system used to collect Income Tax and National Insurance from employment income through payroll.

Payroll software will calculate the amount of income tax and employers’ and employees’ National Insurance Contributions that need to be set aside to pay HMRC.

Outsourced payroll is standard 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 company directors, there are three useful 2026/27 figures to understand:

• £6,708 – the annual Lower Earnings Limit. Earnings at or above this level can help build a qualifying year for the State Pension, even though employee NIC is not yet payable.
• £12,570 – the annual Primary Threshold. Employee National Insurance generally starts above this level.
• £12,570 – also the standard Personal Allowance for Income Tax.

Many directors therefore choose a salary somewhere between the Lower Earnings Limit and the Personal Allowance, depending on their circumstances.

However, employer National Insurance has a lower threshold. For 2026/27, it is charged at 15% on earnings above the £5,000 Secondary Threshold, unless relief such as the Employment Allowance is available.

A company cannot claim the Employment Allowance if it has only one director and that director is the only employee liable for employer National Insurance.

You need to take into account the National Minimum Wage (NMW) legislation for staff. This doesn’t generally apply to company directors acting only as office holders, although a director who also has a contract of employment may be covered.

The current NMW rate for over-21s is £12.71 / hour (from April 2026).

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 a range of supplementary payments, including 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 calculate the Employer’s National Insurance that your company must pay for each employee’s salary.

In the 2026/27 tax year, this equals 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 displaying the ‘gross’ and ‘net’ pay for the specified period.

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 must pay PAYE and National Insurance to HMRC by the 22nd of the following tax month if paying electronically, or by the 19th if paying by post. If your company usually pays less than £1,500 per month, you may be able to arrange with HMRC to pay quarterly instead. Electronic quarterly payments are due by the 22nd following the end of each quarter.
• You must report each time an employee leaves or joins your company payroll and deal with relevant payroll changes as they arise.
• You must also provide your employees with a P60 at the end of each tax year, which shows their total pay and deductions for that year.
• Employers must report taxable expenses and benefits received by employees during the previous tax year by 6 July each year where they have not already been dealt with through payroll. These details are generally submitted via the P11D form, and Class 1A National Insurance may also be payable.

Other things to consider (relating to payroll)

Real-Time Information (RTI)

Payroll reporting to HMRC occurs in real time, not at year-end. Every time you run payroll, you must submit a Full Payment Submission on or before the payment date.

Modern accounting software (or your accountant) can easily manage this on your behalf.

Workplace pension schemes (sometimes)

Since pension auto-enrolment began, businesses must provide a workplace pension for eligible employees (those aged 22+, under State Pension age, earning over £10,000).

Director-only companies without staff don’t generally need a workplace pension scheme in place, but once you have eligible employees, pension contributions must be made via payroll.

Directors-only payroll

If your company has no employees other than its directors, you can choose to run an annual payroll instead of a monthly one.

This is permitted by HMRC, provided you make only one payment each tax year and register your PAYE scheme as an Annual Scheme.

Most small companies, however, continue to run monthly payrolls for simplicity and accuracy.

Many directors take a relatively small salary and supplement it with dividends. The most tax-efficient salary depends on the director’s other income, whether the company can claim the Employment Allowance, and the Corporation Tax relief available on salary and employer National Insurance. See our guide to choosing a tax-efficient director’s salary.

Remember that directors are employees for payroll purposes and must be included on the payroll.

Payroll processing costs

Typical accountant fees for director-only payroll services range from £15 to £30 per month. Some firms provide all typical accounting tasks within a single monthly payment.

If you run payroll independently, software costs range from free (HMRC’s Basic PAYE Tools) to £5-£25 per month for paid packages (such as Xero).

Penalties if you make errors

HMRC can charge penalties for late Full Payment Submissions and late PAYE payments. The amount depends on the circumstances, including the size of the payroll and how late the submission or payment is.

If you find you have made errors in payroll already reported to HMRC, correct them using the current HMRC payroll correction process.

Contact HMRC as soon as possible if you’re going to miss a deadline.