How to Set Up Payroll for the First Time as a Small Business Owner

Starting a business comes with a long list of things to figure out. Registering with HMRC, sorting out contracts, setting up a business bank account. But one thing that catches a lot of first-time business owners off guard is payroll.

The moment you hire your first employee, you have a legal obligation to pay them correctly and on time, deduct the right taxes, and report everything to HMRC. Getting that wrong from the start creates problems that are genuinely difficult to untangle later.

So if you are setting up payroll for the first time, this guide will walk you through exactly what you need to do and how to make the process as straightforward as possible.

Chapters

First, Register as an Employer With HMRC

Before you can pay anyone, you need to register as an employer with HMRC. You can do this on the HMRC website and it usually takes up to five working days to get your PAYE reference number, so do not leave it until the day before your first payroll run.

You will need this reference number to submit payroll information and make payments to HMRC, so getting it sorted early is one of those small things that saves you a lot of stress later.

Understand What You Actually Need to Calculate

A lot of first-time business owners assume payroll is just about sending money to employees. It is a bit more than that.

Every time you run payroll, you need to calculate and deduct the right amount of income tax using the employee’s tax code, national insurance contributions for both the employee and yourself as the employer, pension contributions if the employee is enrolled in your workplace pension scheme, and any other deductions like student loan repayments if they apply.

You also need to calculate statutory payments correctly if an employee goes on sick leave, maternity leave, or paternity leave. These have their own rules and rates, and getting them wrong can cause compliance issues.

It sounds like a lot, and honestly it is, which is exactly why most small business owners do not try to do this by hand for very long.

Set Up a Workplace Pension Scheme

If you employ anyone aged between 22 and state pension age who earns more than £10,000 a year, you are legally required to automatically enrol them into a workplace pension scheme. This is called auto-enrolment, and it is not optional.

You need to choose a pension provider, set up the scheme, and make sure contributions are being calculated and paid correctly every pay cycle. HMRC and The Pensions Regulator both keep an eye on this, and the penalties for getting it wrong are real.

Most small businesses use a provider like NEST, which is the government-backed scheme, but there are other options available. The important thing is that you have something in place before your staging date or from day one if you are a new employer.

Decide How You Are Going to Run Payroll

This is the big decision. You have a few options and each one comes with its own trade-offs.

Doing it manually is technically possible but it is slow, error-prone, and gets harder as your team grows. Spreadsheets do not automatically update when tax rates change, they do not submit RTI reports to HMRC, and they do not catch mistakes. For most businesses, this stops being a viable option pretty quickly.

Outsourcing to an accountant or payroll bureau takes the work off your hands entirely but it comes at a cost. You are also dependent on someone else’s timeline, and you lose a bit of visibility into your own payroll data.

Using payroll software is where most small businesses end up, and for good reason. A solid platform like Zelt payroll software handles all the calculations automatically, submits RTI reports to HMRC on your behalf, manages pension contributions, and gives you a clear record of every payroll run. Once you have it set up, running payroll each month takes a fraction of the time it would take manually.

For small businesses especially, the combination of time saved and reduced compliance risk makes payroll software the most practical option by a significant margin.

Get Your Employee Information Right From the Start

Whatever method you choose for running payroll, the quality of your output depends entirely on the quality of your input. If you put wrong information in, you get wrong results out.

Before you run your first payroll, make sure you have collected the following from every employee. Their full legal name and address, their national insurance number, their tax code from their P45 or starter checklist if they do not have a P45, their bank details for payment, their salary or hourly rate, their contracted hours, and their pension details once they are enrolled.

It is worth double checking all of this before you set anything up in your payroll system. Fixing errors after the fact is always more work than getting it right the first time.

Understand RTI and What You Need to Submit to HMRC

RTI stands for Real Time Information. It is the system HMRC uses to collect payroll data from employers, and it requires you to send a submission every single time you pay an employee. Not monthly, not quarterly, every time.

This submission is called a Full Payment Submission, or FPS. It tells HMRC who you paid, how much, and what deductions were made. You also need to submit an Employer Payment Summary, or EPS, in months where you have not paid anyone or where you are claiming certain reductions.

Missing or late RTI submissions can result in penalties, so this is not something you want to be doing manually if you can avoid it. Good payroll software handles RTI submissions automatically as part of the payroll run, so you do not have to think about it separately.

Think About HR Software Alongside Payroll

A lot of small business owners set up payroll in isolation and then realise later that it does not connect with anything else. When your payroll system does not talk to your HR tools, you end up entering the same employee information in multiple places, and any time something changes, like a salary update or a new starter, you have to update it everywhere manually.

Using HR software for small businesses that integrates with payroll from the start saves you a lot of that duplication. When HR and payroll are connected, new employee records flow through automatically, salary changes reflect in payroll without anyone having to manually update a second system, and your data stays consistent across the board.

For a small team, this might not feel urgent on day one. But building on a connected foundation from the start is much easier than trying to integrate disconnected systems later when your team is bigger and the stakes are higher.

Do a Test Run Before You Go Live

Before you run your first real payroll, it is worth doing a test run if your software allows it. Put in a couple of employee records and run through the full process to make sure everything calculates correctly and the submissions go through as expected.

This is especially useful for catching any setup errors before they affect actual payments. A wrong tax code, a missing national insurance number, or an incorrect pay frequency can all cause problems that are much easier to fix before your first live payroll run than after.

Keep Your Records

HMRC requires you to keep payroll records for at least three years. That includes payslips, RTI submissions, details of employee pay and deductions, and any statutory payments you have made.

Most payroll software stores all of this automatically and gives you easy access to historical records whenever you need them. If you are doing anything manually, make sure you have a proper system for storing and organising these records from day one.

Final Thoughts

Setting up payroll for the first time does not have to be overwhelming. But it does require you to get a few important things right from the start, registering with HMRC, understanding your obligations, getting your employee data clean, and choosing a process that you can actually maintain as your business grows.

For most small business owners, using payroll software from day one is the simplest and safest way to do it. It removes the manual work, keeps you compliant automatically, and gives you a clear record of everything. Pair that with an HR system that connects to your payroll, and you have a foundation that will actually hold up as your team grows.

Master the Art of Video Marketing

AI-Powered Tools to Ideate, Optimize, and Amplify!

Spark Creativity: Unleash the most effective video ideas, scripts, and engaging hooks with our AI Generators.
Optimize Instantly: Elevate your YouTube presence by optimizing video Titles, Descriptions, and Tags in seconds.
Amplify Your Reach: Effortlessly craft social media, email, and ad copy to maximize your video’s impact.

Start for free!