Paying employees accurately and on time is one of the most important responsibilities for any business owner- big or small, in the UK. It’s not just about transferring money—it’s about complying with employment laws, managing tax obligations, and ensuring your team is motivated and satisfied.
For small businesses, getting payroll right can sometimes feel challenging, especially with limited resources and changing regulations.
In this detailed blog guide, we’ll cover the topic how to pay employees in a small business in the UK, from setting up payroll to meeting legal requirements, along with some pro tips to make the process efficient and error-free.
Understand Your Legal Obligations as an Employer
Before paying your first employee(s), you need to understand the legal framework in the UK:
- Register as an Employer with HMRC – You must register with HM Revenue & Customs before the first payday.
- Follow the National Minimum Wage and National Living Wage rates – Ensure you’re paying at least the legal minimum based on your employee’s age and role.
- Provide Written Terms of Employment – A written contract must clearly state pay rates, frequency, and payment method.
- Comply with PAYE (Pay As You Earn) – Most UK employers use PAYE to collect Income Tax and National Insurance from employees’ wages.
Decide and Choose How to Pay Employees
There are several ways you can pay employees:
- Bank Transfer (BACS or Faster Payments) – The most common and secure method in the UK.
- Cheque – Rarely used today but still an option for certain cases.
- Cash Payments – Legal but must still be recorded for tax and compliance purposes.
- Payroll Cards – Prepaid cards where wages are loaded, suitable for casual or seasonal workers.
Pro Tip: Always maintain detailed payroll records for at least 3 years to meet HMRC requirements.
Set Up a Payroll System
A payroll system ensures your employees are paid correctly, and all deductions are handled properly. You can easily:
- Manage Payroll In-House – Suitable for very small teams but requires knowledge of tax rules and payroll software.
- Use Payroll Software – HMRC-recognised payroll software (e.g., Sage, Xero, QuickBooks) automates calculations and tax submissions.
- Outsource to a Payroll Service – Ideal for small businesses that want accuracy and compliance without the hassle.
When setting up payroll, you’ll need to:
- Collect employee details (National Insurance number, tax code, etc.).
- Set payment frequency (weekly, fortnightly, monthly).
- Calculate gross pay, deductions, and net pay.
Understand Deductions and Contributions
When you pay employees, you must make certain deductions:
- Income Tax – Based on the employee’s tax code.
- National Insurance Contributions (NICs) – For both employees and employers.
- Pension Contributions – Employers must automatically enrol eligible employees into a workplace pension scheme.
- Student Loan Repayments – If applicable.
All deductions must be reported to HMRC via the Real Time Information (RTI) system every time you pay employees.
Decide on Pay Frequency
UK small businesses typically choose between:
- Weekly Pay – Common in industries like retail, hospitality, and construction.
- Monthly Pay – The most common option for salaried employees.
- Fortnightly Pay – Less common but possible for certain arrangements.
Remember, Consistency is key—employees should always be paid on the agreed date.
Calculate Gross and Net Pay
Gross Pay – Total pay before deductions (includes basic pay, overtime, bonuses).
Net Pay – Take-home pay after all deductions.
Example: If an employee earns £2,000 per month gross, and after deductions for tax, NIC, and pension, they receive £1,600 net pay.
Payroll software makes these calculations quicker and reduces the risk of errors.
Provide Payslips
In the UK, employees have the legal right to receive a payslip—either printed or electronic—showing:
- Gross pay
- Deductions (tax, NIC, pension, etc.)
- Net pay
- Payment date
Payslips help employees understand how their pay is calculated and provide proof of income.
Meet HMRC Reporting Deadlines
Each time you pay employees, you must submit a Full Payment Submission (FPS) to HMRC on or before payday. This report includes details of pay and deductions.
If you make corrections, you may need to submit an Employer Payment Summary (EPS).
Missing deadlines can result in penalties, so keeping payroll organised is essential.
Keep Accurate Payroll Records
By law, you must keep records for at least 3 years showing:
- Amounts paid to each employee
- Deductions made
- Copies of FPS and EPS submissions
- Employee contracts and agreements
It is important to note that- Good record-keeping protects your business during HMRC audits.
Handling Special Cases
- Overtime Pay – Must comply with contract terms and the Working Time Regulations.
- Sick Pay (SSP) – Eligible employees must receive Statutory Sick Pay if off work due to illness.
- Maternity/Paternity Pay – Employers must follow statutory requirements for leave and pay.
- Holiday Pay – Must be calculated based on working hours and employment agreements.
Use Technology to Simplify Payroll
For small businesses, automation can save time and reduce mistakes. Popular HMRC-approved payroll tools include:
- Sage Payroll
- Xero Payroll
- QuickBooks Payroll
- BrightPay
These systems handle tax calculations, generate payslips, and submit RTI reports automatically.
Stay Updated with Employment Laws
UK payroll regulations change regularly—such as updates to minimum wage rates, tax thresholds, and pension rules. As a small business owner, staying informed is critical to avoid non-compliance.
Ultimately, accurate and timely payment builds trust, boosts morale, and supports the long-term success of your small business.
How can ClearPath help you in Payroll Management?
For many small businesses, payroll can be time-consuming and stressful. An HR outsourcing service provider takes over the entire payroll process—ensuring compliance with UK employment laws, accurate calculations, timely payments, and proper HMRC submissions. They also handle statutory pay, pensions, and record-keeping, freeing business owners to focus on growth. By leveraging their expertise, small businesses can reduce errors, avoid penalties, and provide employees with a smooth payroll experience.
If payroll management feels overwhelming or you simply want to ensure accuracy and compliance without the hassle, our experts at ClearPath are here to help. Our team of payroll and HR experts will manage everything—from calculating salaries to filing HMRC reports—so you can focus on running your business.
Contact us today for a free consultation and discover how we can simplify your payroll process while keeping your employees happy and your business compliant.
📞 Call us on : 020 377 30992
📧 Email: sales@clearpathuk.co.uk
🌐 Visit: https://clearpathuk.co.uk/
