Payroll Basics for Small Businesses: 2026/27 Guide

Why Getting Payroll Right Matters From Day One

Taking on your first employee — or reviewing a payroll system that has grown in an ad hoc way — is one of the most compliance-heavy tasks a small business owner faces. HMRC expects accurate, timely information every single payday, and the penalties for getting it wrong can bite fast. This guide walks you through every step, with the correct 2026/27 figures throughout.

Step 1: Register as an Employer With HMRC

Before you pay anyone a penny, you need to register for PAYE. You must register before your first payday, though you cannot do so more than two months in advance. Registration is free and done online via GOV.UK's register-as-an-employer service. You'll need a Government Gateway account — you can create one during the process.

Once registered, HMRC will send you two references by post:

• Employer PAYE Reference — used on all payroll records and HMRC correspondence
• Accounts Office Reference — used when making payment of PAYE and NI to HMRC

Allow up to five working days for your references to arrive. If your first payday arrives before they do, HMRC's guidance says to run payroll, store your Full Payment Submission, and send it as a late submission once the references land. And yes — if you are the sole director of a limited company paying yourself a salary, you must register too.

If you are also considering incorporating a new company, our company formation service can get your structure right from the outset, making the PAYE registration process more straightforward.

Step 2: Know Your 2026/27 Tax and NI Rates

Your payroll software will handle the maths, but understanding the underlying figures helps you budget accurately and spot errors before they become problems.

Income Tax (England, Wales & Northern Ireland)

• Personal Allowance: £12,570 (frozen until April 2031)
• Basic rate (20%): £12,571 – £50,270
• Higher rate (40%): £50,271 – £125,140
• Additional rate (45%): Above £125,140

Scottish employees have a separate, multi-band rate structure — their tax codes start with 'S', and compliant payroll software handles this automatically.

Employee National Insurance (Class 1)

• Primary Threshold (when employee NI kicks in): £12,570 per year
• Employee rate: 8% on earnings between £12,570 and £50,270; 2% above £50,270

Employer National Insurance (Class 1)

This is where many small businesses were caught out by the April 2025 Budget changes, which still apply in 2026/27:

• Secondary Threshold (when employer NI starts): £5,000 per year (£417/month, £96/week)
• Employer NI rate: 15% on each employee's earnings above £5,000

Worked example: You pay a part-time administrator a salary of £20,000. Your employer NI bill is (£20,000 − £5,000) × 15% = £2,250 per year. On top of their gross salary, that is your real cost before pension contributions.

Note: For employees under 21 and apprentices under 25, no employer NI is due on earnings below the Upper Secondary Threshold of £50,270 — a meaningful saving when hiring younger workers.

National Living Wage & National Minimum Wage (from 1 April 2026)

Your payroll must always meet these statutory minimums:

• Aged 21 and over (National Living Wage): £12.71 per hour
• Aged 18–20: £10.85 per hour
• Aged 16–17 and apprentices: £8.00 per hour

Underpaying the minimum wage — even accidentally — can result in HMRC penalties of up to 200% of arrears, capped at £20,000 per worker. Update your payroll rates every April.

Step 3: Claim the Employment Allowance

This is one of the most valuable reliefs available to small employers, and it is still under-claimed. Eligible employers can reduce their employer NI bill by up to £10,500 in 2026/27. The previous £100,000 prior-year liability cap was removed from April 2025, so most small businesses now qualify — as long as you are not a company whose only employee paid above the Secondary Threshold is a director.

You claim by submitting an Employer Payment Summary (EPS) to HMRC — your payroll software will have an option for this. The allowance is offset against your monthly PAYE payments until it is used up. If you forget to claim, you can backdate the claim by up to four tax years.

Worked example continued: Your total employer NI across five employees is £15,000. After applying the £10,500 Employment Allowance, you pay just £4,500 to HMRC — a 70% reduction.

Step 4: Submit Payroll to HMRC in Real Time (RTI)

Since 2013, HMRC has required employers to report pay data every time employees are paid — not just once a year. This is called Real Time Information (RTI). There are two main submission types:

• Full Payment Submission (FPS): Submitted on or before each payday. If you pay monthly on the 28th, your FPS is due by the 28th.
• Employer Payment Summary (EPS): Used to claim statutory payment rebates, Employment Allowance, or to report a period of no pay. Due by the 19th of the following tax month.

Once the FPS is submitted, you must actually pay HMRC what you owe. Deadlines are:

• By post or BACS: 19th of the following month
• Electronic payment: 22nd of the following month

Late FPS submissions carry monthly penalties based on payroll size — £100 for 1–9 employees, rising to £400 for 250+ employees. The first late submission in a tax year is typically penalty-free, but do not rely on that. Year-end obligations include issuing P60s to all employees by 31 May and filing P11D benefit-in-kind forms by 6 July.

Step 5: Set Up Auto-Enrolment Pension Contributions

Every employer must automatically enrol eligible workers into a qualifying workplace pension. For 2026/27:

• Earnings trigger: Workers earning over £10,000 per year must be automatically enrolled
• Qualifying earnings band: £6,240 – £50,270 per year
• Minimum total contribution: 8% of qualifying earnings
• Minimum employer contribution: At least 3% of qualifying earnings
• Employee contribution: The remaining 5% (including tax relief)

Contributions are calculated on qualifying earnings — the slice of pay between £6,240 and £50,270 — not on total gross salary.

Worked example: An employee earns £28,000. Their qualifying earnings are £28,000 − £6,240 = £21,760. Your minimum employer pension contribution is 3% × £21,760 = £652.80 per year (around £54 per month). Factor this in when budgeting for a new hire.

Workers earning between £6,240 and £10,000 can opt in to the scheme and still receive employer contributions. You must re-enrol eligible staff who have opted out roughly every three years.

Practical Tips to Keep Your Payroll Compliant

• Use HMRC-recognised payroll software. It handles RTI submissions, tax code updates, and auto-enrolment calculations automatically. HMRC publishes a list of approved options, including free tools for businesses with fewer than 10 employees.
• Act on P6 and P9 tax code notices promptly. When HMRC issues a new code for an employee, apply it from the next payday. Using the wrong code underpays or overpays tax — both create headaches.
• Check NI category letters. The letter on each employee's record (A, B, C, H, M, etc.) determines which NI threshold applies. Assigning the wrong letter is easy to miss and can cause significant overpayments or underpayments.
• Budget for employer costs before you hire. For every £30,000 salary, your employer NI is £3,750 and your minimum pension contribution is approximately £714 — together, that is an additional £4,464 on top of gross pay.
• Claim your Employment Allowance at the start of the tax year. Many payroll systems do not carry the election forward automatically.

How MyTaxLead Can Help

Managing payroll accurately alongside running your business is demanding — and the cost of errors falls entirely on you. At MyTaxLead Accountants, we handle PAYE registration, monthly RTI submissions, Employment Allowance claims, and auto-enrolment compliance so that you can focus on growing your business. Get in touch today for a straightforward, fixed-fee payroll quote.