Payroll for Small Businesses in the UK: PAYE, Pensions and Employment Allowance

If you run a small business and employ staff, getting payroll right is an essential part of being an employer. You need to calculate employees’ pay and deductions accurately, report the relevant information to HM Revenue and Customs (HMRC), meet workplace pension obligations, and make sure you claim any allowances your business is entitled to.

For small business owners, payroll can quickly become an administrative burden. Understanding the key responsibilities, however, makes the process far easier to manage and helps you avoid costly mistakes.

At R&R Chartered Certified Accountants, we support small business owners across Blackburn and the Northwest with payroll and wider accounting needs. In this guide, we look at three important areas of payroll for small businesses in the UK: PAYE, workplace pensions and Employment Allowance.

PAYE: What Small Business Employers Need to Know

PAYE, or Pay As You Earn, is the system employers use to collect Income Tax and National Insurance from employees’ pay.

When you run payroll, you generally need to calculate deductions such as Income Tax and employee National Insurance, along with the employer’s National Insurance liability. You also need to provide employees with payslips and report payroll information to HMRC.

For each pay period, employers normally need to submit a Full Payment Submission (FPS) to HMRC on or before the employees’ payday. This contains information about payments and deductions made through payroll, and your records may also need to account for salary and wages, Income Tax, National Insurance, workplace pension contributions, student or postgraduate loan deductions where applicable, statutory payments, and certain taxable benefits and expenses.

For the 2026/27 tax year, the standard secondary Class 1 National Insurance threshold is £96 per week, £417 per month or £5,000 per year. The exact calculation depends on the employee’s circumstances and category, so accuracy here really does matter.

Recommended action: Make sure your payroll software and employee records are kept up to date, particularly when employees join, leave, receive a pay increase, or have a change to their tax code or circumstances.

Workplace Pensions and Automatic Enrolment

Payroll is not just about paying employees and reporting figures to HMRC. Employers also have important workplace pension responsibilities that begin as soon as they take on staff.

If you employ staff, your automatic enrolment duties can begin from the day your first employee starts work. Even if you do not currently have anyone who needs to be automatically enrolled, you may still have workplace pension duties to fulfil.

Eligible employees generally need to be automatically enrolled into a qualifying workplace pension scheme. For 2026/27, the standard eligibility criteria include being aged between 22 and State Pension age and earning at least £10,000 a year, £833 a month or £192 a week.

For qualifying earnings, the minimum total pension contribution is generally 8%, with at least 3% paid by the employer. The qualifying earnings band currently sits between £6,240 and £50,270 for the relevant tax year, though employers should check the rules of their particular scheme since contribution arrangements can vary.

Automatic enrolment is an ongoing responsibility rather than a one-off task. Employers need to monitor employees’ ages and earnings, make the required pension payments, manage opt-in and opt-out requests, maintain accurate records, and complete re-enrolment duties when required.

Recommended action: Review your workplace pension processes every time you run payroll. Check new starters and any changes in employee earnings so you do not overlook an automatic enrolment obligation.

Employment Allowance: Could Your Business Reduce Its Employer National Insurance Bill?

Employment Allowance can help eligible employers reduce their employer Class 1 National Insurance liability, and it is worth checking whether your business qualifies.

For the 2026/27 tax year, the Employment Allowance is up to £10,500. It can only be used against employer Class 1 National Insurance contributions, and it cannot be used against Class 1A or Class 1B National Insurance liabilities.

Eligibility depends on the circumstances of the employer. Businesses and public bodies can generally qualify subject to the relevant conditions, while companies with only one director have an additional restriction if that director is the sole employee liable for secondary Class 1 National Insurance. From April 2025, employers with more than £100,000 of Class 1 National Insurance liabilities can also apply for Employment Allowance, subject to the other eligibility conditions.

The claim is normally made through payroll by submitting an Employer Payment Summary (EPS), and HMRC states that Employment Allowance should be claimed once each tax year.

Recommended action: Check your eligibility for Employment Allowance at the start of each tax year rather than assuming your business does not qualify.

Final Thoughts

PAYE, workplace pensions and Employment Allowance are closely connected parts of your payroll process, and getting the basics right in each area saves time and reduces the risk of avoidable errors. Small businesses should also stay alert to common pitfalls, such as late FPS submissions, incorrect tax codes, missed pension contributions, and end of year reporting mistakes, since these can all create additional administration and compliance problems.

The key is to have reliable payroll procedures in place, keep employee information up to date, and review your obligations whenever circumstances change.

If payroll is taking valuable time away from running your business, R&R Chartered Certified Accountants can help you manage the administration while keeping your payroll processes organised and compliant. Get in touch today to find out how we can support your business with payroll and wider accounting needs.

Frequently Asked Questions

What is PAYE and who needs to operate it?

PAYE (Pay As You Earn) is the system employers use to collect Income Tax and National Insurance from employees’ pay. If you employ staff, you generally need to operate PAYE, provide payslips and report payments and deductions to HMRC.

When must a Full Payment Submission (FPS) be sent to HMRC?

An FPS normally needs to be submitted on or before your employees’ payday for each pay period. It reports the payments made and the deductions taken through payroll.

What is the Employment Allowance for 2026/27?

For 2026/27 the Employment Allowance is up to £10,500 against employer Class 1 National Insurance contributions. It cannot be used against Class 1A or Class 1B liabilities, and eligibility depends on your circumstances, including the single director restriction.

How do I claim the Employment Allowance?

The claim is usually made through payroll by submitting an Employer Payment Summary (EPS). HMRC states it should be claimed once each tax year, so check your eligibility at the start of the year.

What are the minimum workplace pension contributions?

For qualifying earnings, the minimum total contribution is generally 8%, with at least 3% paid by the employer. The qualifying earnings band is currently £6,240 to £50,270, though individual scheme rules can differ.

Who has to be automatically enrolled into a workplace pension?

Employees aged between 22 and State Pension age who earn at least £10,000 a year (£833 a month or £192 a week) generally need to be automatically enrolled into a qualifying scheme. Employers must monitor ages and earnings on an ongoing basis.

This article is general guidance for UK businesses and individuals and does not constitute personal financial or tax advice. Rules, thresholds and individual circumstances vary — always confirm your specific position with a qualified accountant before acting.