Payroll basics for Employers: Everything you need for 2025/26

As an employer (big or small), getting payroll right is essential. It’s not just about paying staff — it’s about staying compliant, avoiding penalties, and running a smooth, trustworthy operation. This guide walks you through the essentials: starter forms, right to work, P45s, submissions, P11Ds, part-time staff, holiday pay, and more — all specific to UK law in the 2025/26 tax year.

Setting up Payroll & employer registration

Before you can run payroll, there are a few steps you must take:

Register as an employer with HMRC before your first payday. You’ll receive a PAYE reference and an Accounts Office reference.
Decide how you’ll run payroll: either in-house (using payroll software) or outsource. If doing it yourself, choose software that handles RTI submissions, deductions, etc.
Tell HMRC about your employees via a Full Payment Submission (FPS) on or before the first payday.
Keep proper records from day one (more on this later).

Missing any of these early steps can lead to HMRC penalties or delays. Registering for PAYE can be a daunting process — here at DNA Accountants, we handle all of this for you, making sure you’re set up correctly the first time.

Starter forms & employee information

When a new employee joins, you’ll need to gather their details so payroll is set up correctly.

P45 or Starter Checklist

If the employee has a P45 (from their previous employer), use that to set their tax code and make deductions.
If they don’t have a P45, you must use the starter checklist (this replaced the old P46) to ask a few questions about their current tax status and employment history.
The starter checklist helps allocate a starter declaration code (A, B, C, or D), which determines how tax is charged initially.
If the starter checklist says code C, you should use tax code BR for that employment (basic rate) unless otherwise instructed.
If you can’t complete the checklist or they have no P45, use starter declaration code C and tax code 0T.

Keep the completed starter checklist on file for the current and next 3 tax years.

Other employee details you need

Ask for and record:

Full name, date of birth, address
National Insurance number
Start date
Student loan status (if applicable)
Any other employment/pension income (to help determine the correct tax code)
Right to work documentation (see next section)
A personal email address — handy for sending payslips securely and electronically, especially if your payroll software supports online delivery

Getting these right from the start helps avoid HMRC mismatches and keeps your employee records clean and compliant.

Right to work checks

Before an employee begins work, you must confirm they have the legal right to work in the UK. This is non-negotiable — failure to do so can lead to significant penalties.

Acceptable documents include a British passport, a valid visa or immigration document, or the use HMRC/UKVI share code processes.
Always keep a copy of the supporting document(s) in your records (in a secure, compliant way).
Be consistent: treat all applicants the same in how you carry out checks to avoid discrimination claims.

Payroll documents & initial setup

To run payroll correctly, you’ll need:

The employer PAYE reference / Accounts Office reference, given when you register.
Payroll software that is RTI-compliant (Real Time Information), so you can make the necessary submissions to HMRC.
Configure the software with your employees’ details, their tax codes, NI categories, and pay frequency.
Make sure to update tax codes, benefits, and deductions if an employee’s circumstances change mid-year.

P45s & when employees leave

When someone leaves your employment:

You must issue them a P45 showing their tax code, total taxable pay, and deductions for the year so far.
Use your payroll software (most will generate it automatically).
Process the final pay, including any accrued but unused holiday pay or other final entitlements.
Submit an FPS marking them as a leaver.
If the employee’s tax code changes as a result, that should be reflected in their P45 details.

Employer Responsibilities, deductions & payments

As an employer, you have several ongoing obligations:

Deductions from wages

You must deduct from employee pay:

Income Tax (via PAYE)
Employee National Insurance contributions
Pension contributions (if auto-enrolled)
Student loan repayments, if applicable
Any other lawful deductions (e.g., attachments, court orders)

Employer costs

You also must pay:

Employer National Insurance contributions
Employer pension contributions (if you’re required to enrol)

Reporting & deadlines

Submit an FPS (Full Payment Submission) every time you pay employees (on or before payday).
Submit EPS (Employer Payment Summary) in situations where you need to reclaim statutory payments or adjust amounts owed.
Pay HMRC the tax and NIC you owe by the 22nd of the following month (if paying electronically). (If paying by post or cash, the deadline is the 19th.)
If your monthly PAYE bill is under £1,500, you may be allowed to pay quarterly (but you need to contact HMRC).
Late or missing submissions can attract penalties; in some cases, HMRC may even close your PAYE scheme if no report is sent within 120 days of paying someone.

Payroll records you must keep

Good record-keeping is both a legal requirement and your safety net if HMRC asks for proof.

You must keep records of what you pay employees, the deductions you make, and submissions to HMRC.
Keep employee leave and sickness records, tax code notices, benefits, expenses, and any supporting documents.
Records must be kept for at least 3 years from the end of the tax year to which they relate.
For expenses & benefits, you must keep evidence (e.g., receipts, mileage logs) to show how you calculated values and to support P11D reporting.
If you’ve payrolled benefits, your records should also show which benefits are payrolled and the adjustments to tax codes.

P11D, benefits & repaying expenses

If you offer your employees non-cash benefits or cover certain expenses, there are rules for reporting and tax treatment.

What is a P11D?

A P11D reports taxable benefits in kind and certain expenses you provide to employees or directors if these are not treated through payroll.
A corresponding P11D(b) is used to report Class 1A National Insurance due on those benefits.
You must submit P11D(s) and P11D(b) by 6 July following the end of the tax year.
The Class 1A NIC must be paid by 22 July (or 19 July if paying by post).
Note: you don’t file a P11D for an employee if all their benefits and expenses have been included via payroll (i.e. “payrolling benefits”). But even then, you still need to submit P11D(b).

Payrolling benefits

You may choose to payroll benefits (i.e. include their value through payroll) instead of using P11D, but you must register with HMRC in advance (before the start of the tax year).

Some benefits cannot be payrolled (e.g. living accommodation, beneficial loans).
You must notify affected employees in writing (e.g., via payslip or letter) by 1 June following the tax year.

Repaying expenses vs taxable benefits

Business expenses that are wholly, exclusively, and necessarily incurred for work are typically non-taxable (if properly documented).
If you reimburse costs that are private or part-private, or provide perks (company car, health insurance, etc.), these may be taxable benefits.
Calculate the cash equivalent of benefits correctly (there are rules for cars, loans, etc.).
If a benefit has been taxed through PAYE (e.g. via payrolling), or falls under a PAYE Settlement Agreement (PSA), you do not need to include it on a P11D.
Penalties can apply for late or incorrect P11D or P11D(b) submissions.

Part-time, casual & irregular workers

Even if someone works part-time, on a zero-hours contract, or irregular hours, many payroll rules still apply:

You must operate PAYE for them if they meet the thresholds or receive taxable benefits, regardless of hours worked.
Use accurate timesheets and record their actual hours/earnings.
Ensure correct deduction of tax, NI and pro rata benefits.
Holiday pay entitlement still applies (see next section).
Automatic enrolment into pension schemes may still apply depending on earnings and eligibility.

Holiday pay & statutory leave

Holiday pay is one of the more complex areas, especially for part-time or irregular-hour workers:

Workers accrue statutory annual leave (usually 5.6 weeks pro rata).
Pay holiday at the “normal remuneration” rate or the averaged rate for irregular hours.
When someone leaves, you must pay them for the untaken holiday.
Be cautious with statutory sick pay (SSP), maternity pay, paternity pay, etc.—these are taxable and interact with payroll deductions and submissions.
Payroll software typically has built-in holiday pay calculators; if doing it manually, use the correct formulae

Staying compliant & tips to avoid mistakes

Review payroll regularly (monthly or quarterly) to spot anomalies or coding issues.
Update tax codes promptly when HMRC notifies you of changes.
If you handle benefits & expenses, decide whether you will use payrolling or P11D and stick to it consistently.
Document and store all decisions, calculations, and evidence in case HMRC audits.
Consider outsourcing or consulting if payroll becomes burdensome — for you or your clients, this is a value-added service DNA could offer.
Keep up to date with HMRC announcements (budgets, changes).

Summary & final thoughts

Payroll is one of the core operational functions of any employer. Payroll mistakes can lead to penalties, unhappy staff, and reputational damage.

To summarise:

Register as an employer, set up payroll properly, and use RTI‐compliant software.
Use either a P45 or starter checklist to gather the correct tax info.
Check the right to work.
Deduct tax, NI, and pension contributions correctly.
Submit FPS (and EPS when needed) and pay HMRC by the deadlines.
Keep detailed records for at least 3 years.
Report benefits and expenses via P11D / P11D(b) or payroll benefits.
Treat part-time, variable, and holiday pay with care.

Getting payroll right from day one protects both you and your employees. If you ever feel unsure, seek professional payroll support — it’s worth it.