Running Payroll for a Small Limited Company

Once your limited company starts paying a director or employee a salary, you are legally required to operate a payroll. For most small companies — including those where the director is the only person on the payroll — this means reporting every payment to HMRC using Real Time Information, calculating the correct tax and National Insurance deductions, and paying over what you owe each month or quarter.

Running payroll for a small limited company involves submitting a report to HMRC on or before every payday, deducting income tax and National Insurance where applicable, paying HMRC by the 19th of the following month, and keeping accurate records for at least three years. For a single-director company on a modest salary, the process is straightforward once you have the right setup in place.

Key takeaways

  • You must report every salary payment to HMRC on or before the payday using Real Time Information (RTI) — this is a legal requirement, not optional
  • Income tax and National Insurance are deducted from each payment and paid to HMRC by the 19th of the following month (22nd for electronic payment)
  • Small employers paying less than £1,500 per month to HMRC can apply to pay quarterly instead of monthly
  • Most single-director companies pay a small salary at or near the National Insurance threshold and top up income with dividends
  • Payroll records must be kept for at least three years from the end of the relevant tax year

Before You Can Run Payroll — What You Need

Before processing your first salary payment, you need three things in place:

  1. PAYE registration with HMRC — your company must be registered as an employer before the first payday. If you have not done this yet, read our guide to registering as an employer for PAYE before continuing.
  2. An employer PAYE reference number and Accounts Office reference — these arrive by post from HMRC after you register and are required to submit payroll reports and make payments.
  3. Payroll software capable of Real Time Information (RTI) submissions — HMRC's free Basic PAYE Tools or a commercial product.
Once these are in place, you are ready to run your first payroll.

What is Real Time Information (RTI)?

Real Time Information is HMRC's system for collecting payroll data from employers. Before RTI was introduced, employers filed an annual PAYE return at the end of the tax year. Under RTI, you must notify HMRC of every salary payment on or before the date it is made — there is no catch-up at year end for payments already made.

Each submission is called a Full Payment Submission (FPS). It tells HMRC:

  • The employee's or director's name, National Insurance number, and tax code
  • The gross amount paid in this pay period
  • The year-to-date cumulative figures for pay, income tax deducted, and National Insurance contributions
  • The date of payment
If you run a payroll for a period but make no payments (for example, because the director is taking a payment holiday), you must still file an Employer Payment Summary (EPS) to tell HMRC there is nothing to report. Leaving a submission gap can trigger automated penalty notices.

How Often Should You Run Payroll?

You can run payroll at any frequency that suits your business:

  • Monthly — the most common choice for directors paying themselves a regular monthly salary
  • Weekly or fortnightly — more typical when you have hourly-paid employees
  • Annually — HMRC allows annual payroll for directors who are the only employee, meaning you report once per tax year. This simplifies administration but you must still submit the FPS before or on the single payday.
Annual payroll is particularly popular for single-director companies taking a small salary. It eliminates eleven months of nil submissions and reduces the administrative overhead to a single annual run.

How to Calculate Payroll Deductions

For each pay period, you need to calculate:

Income Tax

Income tax is deducted based on the employee's tax code. Most directors will be on a standard tax code (such as 1257L for the 2026/27 tax year), which reflects their personal allowance. Tax is calculated cumulatively — your payroll software handles this automatically.

If the director's salary is kept below the personal allowance (£12,570 per year in recent tax years), no income tax is due. Verify the current personal allowance on GOV.UK.

National Insurance Contributions

Both employee and employer National Insurance apply once earnings exceed the relevant thresholds:

  • Employee (Primary) NI — deducted from the employee's pay once weekly or monthly earnings exceed the Primary Threshold
  • Employer (Secondary) NI — an additional cost to the company, due on earnings above the Secondary Threshold
Many director-only companies pay a salary pitched at or just below the Secondary Threshold so that employer NI does not apply, while still earning a qualifying year for the State Pension. See our optimal director salary guide for the current recommended salary figures.

Thresholds change each tax year — always verify current rates on GOV.UK's National Insurance rates page.

Other Deductions

  • Student loan repayments — deduct if the employee has a student loan and their earnings exceed the repayment threshold
  • Pension contributions — if the company auto-enrolls employees into a workplace pension, deduct contributions from pay
  • Attachment of earnings orders — if HMRC or a court has issued one, deduct the specified amount
Your payroll software calculates all of these automatically once you enter the employee's tax code and employment details.

How to Submit an RTI Full Payment Submission

The process for each pay period is:

Steps

  1. Open your payroll software and select the correct pay period.
  2. Enter the gross pay for each employee or director being paid in this period.
  3. Confirm or update tax codes — your software will flag if a code has changed since last period.
  4. Review the calculated deductions: income tax, employee NI, employer NI, and any other deductions.
  5. Run the payroll and generate payslips.
  6. Submit the Full Payment Submission to HMRC on or before the payment date.
  7. Pay your employees or transfer your director's salary via bank transfer.
  8. Note the net amount payable to HMRC (tax + NI) for payment by the 19th of the following month.
The FPS is submitted electronically and HMRC confirms receipt almost immediately. Keep a record of each submission confirmation.

When and How Do You Pay HMRC?

The deductions you collect from employees — and the employer NI your company owes — must be paid to HMRC.

Monthly payments: Due by the 19th of the month following the tax month in which you paid your employees (22nd if paying electronically). The tax month runs from the 6th of one month to the 5th of the next.

Quarterly payments: Available if your average monthly PAYE bill is less than £1,500. You can apply to HMRC to pay quarterly — a useful simplification for director-only companies with modest salaries.

Payments are made using your Accounts Office reference number (posted to you after registration). You can pay by bank transfer, BACS, or online banking. Late payment attracts interest and potential penalties.

Payslips

You are legally required to provide a written payslip to every employee on or before each payday. This applies to directors too. A payslip must show:

  • Gross pay
  • Each deduction and why it is being made (income tax, NI, pension, etc.)
  • Net pay (the amount received after deductions)
Most payroll software generates payslips automatically. For a single-director company, you can give yourself a payslip as a PDF or keep it within your payroll software records.

Year-End Payroll Duties

At the end of the tax year (5 April each year), you have additional reporting duties:

Final Full Payment Submission: Your last FPS of the tax year should be marked as the final submission. This closes out the payroll year with HMRC.

P60 forms: Issue a P60 to every employee who was on the payroll at 5 April. The P60 summarises their total pay, tax deducted, and NI for the year. Employees need this for their Self Assessment return and as proof of earnings. Deadline: 31 May.

P11D forms: If you have provided any benefits in kind to directors or employees — such as private medical insurance, a company car, or interest-free loans — you must file a P11D with HMRC and give a copy to the employee. Deadline: 6 July following the end of the tax year. Alternatively, you can payroll these benefits (add them to the regular payroll run) to avoid the P11D entirely.

P11D(b): If you file P11Ds or payroll benefits, you must also file a P11D(b) to report and pay the Class 1A National Insurance due on those benefits. Deadline: 19 July (22 July for electronic payment).

Salary and Dividends — How Most Directors Structure Their Pay

Most owner-directors of small limited companies do not pay themselves a large salary. Instead, they take a modest salary — just enough to maintain their National Insurance record — and draw the majority of their income as dividends from the company's after-tax profits.

This structure works because:

  • Dividends are not subject to National Insurance, unlike salary
  • Dividend tax rates are lower than income tax rates at the same income level
  • The company saves employer NI on the dividend portion (which salary would attract)
However, dividends can only be paid out of profits — you cannot pay a dividend if the company has insufficient retained profits. And dividends must be declared by the directors and evidenced by a board minute and dividend voucher.

For the tax-efficient split between salary and dividends in the current tax year, see our dividends vs salary guide for 2026/27. If you pay yourself dividends above the dividend allowance, you will need to report and pay the tax through Self Assessment.

Directors' Loan Account Considerations

If money moves between you and the company outside of the payroll and dividend processes — for example, you transfer company funds to your personal account to cover expenses and pay yourself back later — these transactions are recorded in a directors' loan account.

A directors' loan account that is overdrawn (you owe money to the company) at the company's year end can trigger a Section 455 tax charge of 33.75% of the outstanding balance. This is repayable to the company once you repay the loan. Managing the directors' loan account carefully avoids this liability — see our guide to directors' loan accounts and tax for full details.

Statutory Payments

As an employer, you may be required to pay statutory amounts when employees cannot work or are on leave:

  • Statutory Sick Pay (SSP) — payable to qualifying employees who are off sick for four or more days in a row
  • Statutory Maternity Pay (SMP) and Statutory Paternity Pay (SPP) — payable during qualifying leave
  • Statutory Shared Parental Pay (ShPP) and Statutory Adoption Pay (SAP)
For sole-director companies where the director is the only employee, SSP is generally not available (you cannot be your own employer for SSP purposes). SMP applies if the director is an employee of the company and meets the qualifying conditions.

Small employers can typically recover most statutory payments from HMRC by reducing their PAYE payments — the EPS is used to claim these recoveries.

Record Keeping Requirements

You must keep payroll records for at least three years from the end of the tax year to which they relate. Failing to do so can result in a penalty of up to £3,000 per tax year.

Records to keep include:

  • What you pay each employee and the deductions made
  • Reports and payments made to HMRC
  • Employee leave and sickness records
  • Tax code notices received from HMRC
  • Payslips issued
  • P60 copies
  • P11D copies (if applicable)
Most payroll software retains these records automatically. Export or back up the data annually.

Common Payroll Mistakes in Small Limited Companies

Missing RTI submissions. Even if you have nothing to pay because your salary falls below all thresholds, you must still submit an FPS or EPS. HMRC's automated systems generate penalty notices when expected submissions are missing.

Wrong tax codes. Using an emergency tax code (such as BR, which taxes everything at basic rate) when a standard code applies results in too much tax being deducted and a refund claim later. Check and update tax codes at the start of each tax year.

Forgetting employer NI. Many directors focus on income tax but overlook employer's National Insurance. If your salary exceeds the Secondary Threshold, the company owes employer NI on the excess — this is a company cost, not deducted from your pay.

Paying dividends as salary. Dividends paid without sufficient retained profits can be challenged by HMRC and re-characterised as salary, attracting full PAYE tax and NI. Ensure you have the profits to support each dividend before declaring it.

Frequently Asked Questions

Do I need payroll software to run a small company payroll?

Yes — HMRC's RTI system requires electronic submissions, so paper payroll is not an option. You can use HMRC's free Basic PAYE Tools for companies with fewer than ten employees, or a commercial product such as BrightPay, Moneysoft, or FreeAgent Payroll. Most commercial tools automate submissions and record keeping, which reduces the risk of errors.

Can I run my own payroll without an accountant?

Yes. Running payroll for a single director on a straightforward annual salary is one of the simpler compliance tasks for a small limited company. With the right software, most directors can manage it themselves. The main risk is missing submissions or using the wrong tax code — software largely eliminates both. Many directors handle payroll themselves and use an accountant only for the annual corporation tax return.

What happens if I miss an RTI deadline?

HMRC's automated systems flag missing or late FPS submissions. Persistent late submissions can attract penalties, though HMRC does operate a degree of tolerance for occasional delays — particularly for small employers. If you know a submission will be late, submit it as soon as possible and include an explanation. Do not simply skip a submission.

How do I know how much to pay HMRC each month?

Your payroll software produces an employee payment record showing the total deductions for the period — income tax, employee NI, and employer NI. Sum these for all employees across the pay period and that is your PAYE bill. Your software may also produce a payment summary report specifically for this purpose. Cross-check this against your FPS confirmation from HMRC.

Can I change my payroll frequency mid-year?

Yes, but you should notify HMRC and update your payroll software settings. Changing from monthly to annual payroll, for example, requires selecting the new frequency in your software and ensuring your next FPS reflects the new cadence. Changing frequency does not require re-registration.

Summary

Running payroll for a small limited company is a regular compliance task, but one that follows a predictable rhythm once you are set up. The core obligations — submitting an FPS on or before each payday, paying HMRC by the 19th of the following month, and issuing payslips and year-end P60s — can be managed with free or low-cost payroll software. For most director-only companies, pairing a small salary with dividend income is the most tax-efficient structure, provided the company has sufficient profits to support the dividends.