Payroll setup guide for UK startups: PAYE, pensions, RTI, payments, and software

Setting Up UK Payroll: A Founder's Guide to PAYE, Pensions, and Payments

Transitioning from founder payments to your first official employee payroll is a major milestone. It signals growth, but it also introduces a new layer of operational complexity and legal responsibility. For early-stage SaaS, Biotech, and Deeptech founders managing finances in Xero, this is not just an administrative task. It is about embedding compliance, managing cash flow, and building a scalable foundation. Getting this wrong from the start creates needless risk and administrative debt.

Successfully setting up employee payroll in the UK involves distinct phases: initial registration with government bodies, a disciplined monthly calculation and reporting rhythm, and timely payments to the correct authorities. Understanding this workflow is the first step in avoiding common pitfalls and ensuring your team is paid correctly and on time, every time. This guide provides a practical walkthrough of how to set up payroll for a new UK company, focusing on the critical steps and deadlines you cannot afford to miss.

Phase 1: Before the First Payday – How to Register for PAYE

Before you can legally pay your first team member, you must register your company as an employer with HM Revenue & Customs (HMRC). This process enrols you in the Pay As You Earn (PAYE) system, which is how HMRC collects Income Tax and National Insurance from employment. The first critical step is to understand when this becomes a requirement. According to the rules for the 2023/24 tax year, you "Must register for Pay As You Earn (PAYE) if an employee earns £123 or more per week."

Registering as an Employer with HMRC

Knowing how to register for PAYE is the cornerstone of your initial setup. The registration is completed online via the government's portal. A scenario we repeatedly see is founders underestimating the time this takes. You will need key company information on hand, including your Company Registration Number (CRN), Unique Taxpayer Reference (UTR), and director details. The official guidance states that "PAYE registration with HMRC can take approximately 5-10 working days to receive reference numbers."

Starting this process well in advance of your first payday is essential. Once approved, "HMRC provides an Accounts Office reference and a PAYE reference upon registration." These two numbers are vital for all future payroll submissions and payments. The PAYE reference identifies your scheme for filing purposes, while the Accounts Office reference must be used for all payments to ensure HMRC allocates your funds correctly.

Setting Up a Workplace Pension Scheme

At the same time, you must address your pension obligations. A common mistake is treating this as a secondary task when, in reality, it is a parallel and equally critical process. Under UK law, "A workplace pension scheme is a legal requirement for eligible staff from their first day." This is known as auto-enrolment.

You must choose a pension provider and set up a scheme before your first employee's start date. When selecting a provider, consider factors like ease of administration, integration with your payroll software, and clarity of fees. This is a separate setup process from PAYE but is fundamental for your compliance. Failure to comply can result in significant fines from The Pensions Regulator.

Phase 2: The Monthly Rhythm – Calculating Pay and RTI Filing for Startups

The core of your ongoing payroll obligation is a disciplined monthly cycle. This involves calculating each employee's pay, making the correct deductions, and reporting this information to HMRC in real-time. This system is known as Real Time Information (RTI), and its central requirement is the Full Payment Submission (FPS). This is a non-negotiable deadline: the "Full Payment Submission (FPS) must be sent to HMRC on or before each payday." Filing late, even by a day, can trigger automatic penalties, making this a critical part of your UK payroll compliance checklist.

Calculating Pay and Deductions

The monthly calculation begins with an employee's gross pay, from which you deduct Income Tax and their National Insurance contributions. However, your cost as an employer is higher than the employee's gross salary. You must also account for Employer's National Insurance contributions. For the 2023/24 tax year, "Employer's National Insurance is 13.8% on earnings above £9,100 per year." You also need to factor in employer pension contributions.

Understanding the difference between an employee's take-home pay (net pay) and the total cost of employment is crucial for budgeting and managing runway. This gap can surprise founders who have not modelled it correctly.

Example: The True Cost of a £50,000 Salary

Consider a SaaS startup hiring a software engineer on a £50,000 annual salary. The financial breakdown for the company is more than just the gross figure.

• Gross Salary: £50,000
• Employer's National Insurance: On earnings above the £9,100 threshold, the company pays 13.8%. This amounts to approximately £5,644 per year.
• Employer's Pension Contribution: The minimum legal contribution is 3% of qualifying earnings. This would be around £1,300 per year, though the exact amount can vary based on the pension scheme's rules.

In this scenario, while the employee's net pay (after their own tax and NI) might be around £37,000, the total cost to the company is not £50,000; it is closer to £56,944. This £7,000 difference is a significant cash flow consideration that founders must factor into their financial models.

Phase 3: After Payday – Settling with HMRC and Pension Providers

Once you have paid your employees their net salaries and submitted your FPS, the process isn't over. You are now holding funds that belong to HMRC and your pension provider. The next step is to transfer this money to the correct organisations by their respective deadlines, which is a key part of managing your payroll tax deadlines in the UK.

Paying Your HMRC Bill

You must pay HMRC for all liabilities arising from that payroll run. This single payment includes all deductions from your employees' pay (Income Tax, employee's NI) plus your own Employer's NI contribution. The deadline is strict, and late payments can accrue interest and penalties. As per HMRC's rules, "Payment to HMRC for PAYE deductions must clear by the 22nd of the month following the payday." For a March 31st payday, the payment must be in HMRC's account by April 22nd. You must use your 13-character Accounts Office reference for the payment to be allocated correctly.

Paying Your Pension Contributions

Second, you must pay the pension provider. This payment includes the employee's contributions (deducted from their gross pay) and the employer's contributions you have calculated. It is a critical distinction that this is a separate payment to a different entity. Standard terms for most providers state that "Pension contribution payments are typically due by the 22nd of the month following the payday." Managing these two distinct payment streams and deadlines is a key part of a robust monthly close process.

Choosing Your Toolkit: How to Manage Payroll Effectively

What is the most sensible way for a startup to handle this? For most pre-seed to Series B companies, the founder or a non-specialist operations lead is often managing this process. There are three primary ways to approach payroll administration.

1. HMRC Basic PAYE Tools: HMRC provides free software that can calculate PAYE and NI and submit your RTI filings. While free is appealing, it is a highly manual system. It does not handle pension auto-enrolment calculations or submissions, nor does it integrate with your accounting software like Xero. It can be a false economy as you scale beyond one or two employees.
2. Integrated Payroll Software: This is the most common and recommended path for tech and professional services startups. Modern payroll software for small businesses in the UK automates the heavy lifting. Platforms like Xero Payroll, Pento, or Rippling connect directly to your accounting system. They calculate tax and NI, generate payslips, file the FPS to HMRC automatically, and manage pension contributions. This approach drastically reduces the risk of manual error, which is one of the most common payroll mistakes to avoid.
3. Outsourced Payroll or Accountant: For founders who want to completely remove payroll from their to-do list, using an accountant or a dedicated payroll bureau is an option. They handle all calculations, filings, and can even manage payments. This comes at a higher cost but provides peace of mind and frees you to focus on growing the business. It becomes a more viable option as team complexity grows.

A Note on Director's Payroll Strategy for Tax Efficiency

For a director-only company, a common payroll strategy is to pay a small salary up to the annual National Insurance Lower Earnings Limit or Primary Threshold. This salary is low enough that little or no NI or income tax is due, but high enough to count as a qualifying year for the State Pension. The remainder of the director's compensation is then taken as dividends, which are not subject to National Insurance contributions, making it a more tax-efficient structure.

Your UK Payroll Compliance Checklist

Setting up your UK payroll correctly from day one is a foundational step in building a sustainable company. It avoids costly compliance penalties and ensures your team trusts that they will be paid accurately and on time.

Your action plan should be built around this core workflow:

1. Setup (Pre-Payday): Register for PAYE with HMRC and select and set up a workplace pension provider. Allow at least two to three weeks for this process to complete to avoid any last-minute issues.
2. Execution (On Payday): Calculate pay and all deductions, issue payslips to employees, and, most critically, send your Full Payment Submission (FPS) to HMRC on or before the payment date.
3. Settlement (Post-Payday): Ensure your payment for all PAYE liabilities clears in HMRC's account by the 22nd of the following month. Separately, ensure your payment for all pension contributions reaches your provider by their deadline, which is often the same day.

For most startups, investing in integrated payroll software like Xero Payroll is the most efficient and scalable solution. It automates complex calculations and reporting, directly addresses the primary pain points of RTI filing and accuracy, and frees you to focus on growing the business. See the Payroll Overview for broader compliance context.

Frequently Asked Questions

Q: What is the difference between a PAYE reference and an Accounts Office reference?
A: Your PAYE reference is used on all submissions to HMRC, like your FPS, to identify your payroll scheme. Your Accounts Office reference is a 13-character number used exclusively as the payment reference when you pay your monthly PAYE bill. Using the wrong one can cause payment allocation errors.

Q: Can I pay an employee before my PAYE registration is complete?
A: No, you must be fully registered as an employer and have your PAYE and Accounts Office references before your first payday. Paying an employee without being registered puts you in breach of HMRC rules. This is why it is critical to start the registration process several weeks before your first payroll run.

Q: What happens if I miss an RTI filing deadline?
A: If you file your Full Payment Submission (FPS) late, HMRC can issue an automatic penalty. The penalty amount depends on the number of employees you have. While HMRC may show leniency for a single first-time offence, consistent late filing will result in fines and increased scrutiny.

Q: Do I need to set up a pension for a part-time employee?
A: Yes, if they are an 'eligible jobholder'. Auto-enrolment duties apply to any staff member who is aged between 22 and the State Pension age and earns over £10,000 per year, regardless of whether they are full-time or part-time. You must assess all your staff against the criteria on their start date.