PAYE for Trade Businesses UK — How to Run Payroll as a Trade Employer in 2026

1. What PAYE actually is

PAYE — Pay As You Earn — is the mechanism by which your employees' Income Tax and National Insurance contributions are collected at source, before they ever see their pay. Rather than employees settling a tax bill at the end of the year, the employer calculates what is owed on each payday, deducts it from gross pay, and pays it directly to HMRC on the employee's behalf.

As the employer, you also pay your own contributions on top — Employer's National Insurance — which is a separate cost above and beyond what your employee earns. The total PAYE bill you remit to HMRC each month or quarter therefore includes: Income Tax deducted from employees, Employee National Insurance deducted from employees, and Employer's National Insurance paid by you.

PAYE is not optional and it is not something you can defer. From the moment you have an employee on the books, you are a PAYE employer. Miss a payment or a submission and HMRC will charge interest and penalties automatically.

2. Registering as a PAYE employer

You must register as an employer with HMRC before you pay your first employee — not after. Registration is done online via the Government Gateway at HMRC.gov.uk. Allow up to five working days to receive your references, though in practice it is often faster.

Once registered, HMRC will issue you two references you'll use throughout the life of your payroll:

• PAYE reference (Employer Reference Number): Used on payslips, P60s, and all payroll submissions to HMRC. Format: three-digit HMRC office number followed by a forward slash and your employer reference (e.g. 123/AB456).
• Accounts Office reference: Used when making PAYE payments to HMRC. Thirteen characters — format: 123PA00012345.

Keep both references safe. You will need them every month. If you lose them, you can find them in your HMRC online account or on any letter HMRC has sent you about PAYE.

Do not wait until your employee's start date to register. If you haven't received your references by the time the first payday arrives, you cannot submit payroll correctly to HMRC. Register as soon as you know you are hiring.

3. What you deduct from employees

Every pay period you calculate and deduct the following from your employee's gross pay before paying them their net amount.

Income Tax

Income Tax is calculated using the employee's tax code, which HMRC issues and which tells you how much of their income is tax-free. The most common code in 2025/26 is 1257L, which gives a personal allowance of £12,570 per year — income below this threshold is not taxed. Above the personal allowance, tax is charged at:

• 20% Basic Rate on earnings from £12,571 to £50,270
• 40% Higher Rate on earnings from £50,271 to £125,140
• 45% Additional Rate on earnings above £125,140

Your payroll software handles the calculation automatically using the tax code HMRC provides. When a new employee starts, they should provide a P45 from their previous employer which carries their tax code. If they have no P45, use the HMRC starter checklist to determine the right code — using the wrong code means deducting too little tax, which HMRC will ultimately recover from the employee.

Employee's National Insurance (Class 1)

Employee NI is deducted from the employee's gross pay. In 2025/26, the rates are:

• 8% on weekly earnings between the Primary Threshold (£242/week, equivalent to £12,570/year) and the Upper Earnings Limit (£967/week, equivalent to £50,270/year)
• 2% on earnings above the Upper Earnings Limit

Note that the Employee NI Primary Threshold aligns with the Income Tax personal allowance at £12,570 per year, so both taxes kick in at roughly the same point. This is intentional — prior to April 2022 the thresholds differed, but they were aligned as part of a broader NI reform.

Student loan deductions

If your employee has a student loan, HMRC will notify you via the employee's tax code or a start notice (SL1). You must then make the appropriate deductions each pay period based on their plan type. Plan 1 repayments are 9% above £24,990/year; Plan 2 is 9% above £27,295/year; Plan 4 (Scotland) is 9% above £31,395/year; Postgraduate loans are 6% above £21,000/year. Your payroll software will handle this if you have the correct plan type set.

4. What you pay as the employer

In addition to the gross pay you hand to your employee, you have two employer-side PAYE costs that come directly out of your business — not deducted from the employee.

Employer's National Insurance (Class 1 Secondary)

Employer's NI is charged at 13.8% on each employee's earnings above the Secondary Threshold of £9,100 per year (£175/week). Critically, this threshold is significantly lower than the employee's Primary Threshold of £12,570 — which means Employer's NI kicks in at lower earnings than Employee NI. On a £30,000 salary, you pay Employer's NI on £20,900 of earnings, costing roughly £2,884 per year, before any allowances.

Employer pension contributions (auto-enrolment)

You must automatically enrol eligible employees into a workplace pension and contribute a minimum of 3% of qualifying earnings. Qualifying earnings are calculated on the band between £6,240 and £50,270 per year (2025/26). The employee contributes the remaining 5% (minimum) to reach the 8% total minimum contribution. This is an employer cost above and beyond the gross salary figure and must be factored into your budgeting.

PAYE deductions at a glance — employee vs employer

5. Employment Allowance — reduce your Employer's NI bill

The Employment Allowance lets eligible employers reduce their Employer's NI liability by up to £5,000 per tax year. For a small trade business with two or three employees, this can eliminate your Employer's NI bill entirely or come close to it.

You qualify if:

• Your total Employer's NI bill was under £100,000 in the previous tax year
• You are not a sole director with no other employees on the payroll

The sole director exclusion catches many single-person limited companies. If you are the only director and the only employee, you cannot claim Employment Allowance — even if you pay yourself through PAYE. The moment you take on a second employee (including a part-time one), you typically become eligible again.

You claim Employment Allowance via your payroll software or directly through your HMRC online account. You must claim it each tax year — it does not carry over automatically. Claim it at the start of the year (April) so the relief applies from your first pay run. If you forget and claim mid-year, HMRC will apply the credit to your remaining liability for the year.

6. Real Time Information (RTI) — reporting payroll to HMRC

Since April 2013, all UK employers have been required to submit payroll information to HMRC in real time — meaning on or before each payday, not monthly or quarterly after the event. This system is called Real Time Information (RTI). Miss a submission or submit late, and HMRC will issue an automatic penalty notice.

There are two main RTI submissions you will make:

• Full Payment Submission (FPS): Submitted on or before every payday. It tells HMRC about each employee who has been paid that period — their gross pay, tax deducted, NI deducted, year-to-date totals, and any new starters or leavers. Every pay run must have an FPS. If your employee is paid weekly, you submit an FPS weekly. Monthly payroll means one FPS per month.
• Employer Payment Summary (EPS): Submitted in months where you have no payments to make (e.g. no employees were paid), or to claim Employment Allowance, recover statutory payments, or make other adjustments to what you owe. If you do not submit an FPS for a month and do not submit an EPS, HMRC will estimate your liability and charge it.

RTI submissions are made through payroll software — HMRC accepts them via the internet, not by post or phone. This is one reason you cannot run payroll on a spreadsheet alone; you need software that is HMRC-recognised and capable of sending RTI submissions.

7. Payroll software — what to use

You have two main options: HMRC's own free tool or commercial payroll software.

HMRC Basic PAYE Tools (free)

HMRC provides a free payroll tool called Basic PAYE Tools, suitable for employers with up to 10 employees. It handles tax and NI calculations and submits RTI to HMRC. It is functional but basic — there is no integration with your accounting software, no automated bank payments, and no payslip generation built in. For a sole trader running one or two employees on a tight budget, it is a legitimate starting point.

Commercial payroll software

For most growing trade businesses, a commercial payroll solution is worth the cost. The main options used by UK trade businesses:

• Xero Payroll: Integrates directly with Xero accounting; automates RTI submissions, pension contributions, and payslip distribution. Good if you already use Xero for bookkeeping.
• QuickBooks Payroll: Similar integration with QuickBooks Online; competitive pricing for small teams.
• Sage Payroll: The most established UK payroll product; very comprehensive; used widely by bookkeepers and accountants who run payroll on behalf of trade businesses.

Many trade business owners outsource payroll to their bookkeeper or accountant for £20–£50 per month. For the peace of mind that submissions are done correctly and on time, this is often excellent value compared to the cost of a penalty.

8. Statutory payments — SSP, SMP, and SPP

As a PAYE employer, you are responsible for paying certain statutory amounts when employees are sick, or when they take maternity, paternity, or adoption leave. These are not optional and they apply from the relevant qualifying date — not after a probation period.

Statutory Sick Pay (SSP)

If an employee is too ill to work for four or more consecutive days (including non-working days), they qualify for Statutory Sick Pay. The current rate is £116.75 per week (2025/26), payable for up to 28 weeks. SSP is paid by you, the employer — not by HMRC directly. In most cases, employers can no longer recover SSP from HMRC: the Small Employer's Relief scheme that allowed recovery was abolished for most employers in 2014. It is worth checking the current position with your accountant, as the rules around small employer recovery have been subject to consultation.

Statutory Maternity, Paternity, and Adoption Pay

Statutory Maternity Pay (SMP) is paid by the employer for up to 39 weeks — 90% of average weekly earnings for the first six weeks, then the flat statutory rate (£184.03/week in 2025/26) for the remaining 33 weeks. Statutory Paternity Pay and Statutory Adoption Pay are paid at the statutory flat rate.

The recovery mechanism here is more generous: standard employers can recover 92% of statutory maternity, paternity, and adoption payments from HMRC via the EPS submission. Small employers — those whose total annual Class 1 NI liability (employer and employee combined) was £45,000 or less in the previous tax year — can recover 103%, which means you get a 3% top-up to cover administrative costs. Claim the recovery through your payroll software when you submit your EPS.

9. Payslips — what the law requires

Every employee has a legal right to receive a payslip on or before their payday. This right applies from the first day of employment; there is no qualifying period. You can issue payslips on paper or electronically — email or a payroll software portal is entirely acceptable provided the employee can access it.

The payslip must show, as a minimum:

• Gross pay (before any deductions)
• All deductions — itemised: Income Tax, Employee NI, pension contribution, student loan if applicable, any other deductions
• Net pay (the amount actually paid to the employee)
• If pay varies by hours worked — the number of hours the pay covers (this was added to the law in 2019)

Payslips do not need to show employer-side costs (Employer's NI, employer pension contributions) — these are your costs, not deductions from the employee. However, many payroll software packages include them as an informational line, which can be useful if your employees want to understand the full picture.

Failing to provide a payslip, or providing one with incorrect information, is a breach of employment law. An employee can make a claim to an Employment Tribunal for failure to provide payslips, and the tribunal can award compensation.

10. Year-end tasks — what you must do by April and beyond

The tax year runs from 6 April to 5 April. At the end of each tax year, you have several mandatory year-end payroll tasks, all with firm deadlines.

Most payroll software will prompt you through year-end tasks and generate P60s automatically. If you use a bookkeeper, confirm with them in February or March that year-end is on their schedule — do not leave it until April.

Benefits in kind (P11D) are the most commonly missed year-end obligation for trade businesses. If you provide an employee with a company van for private use, private fuel, or private medical cover, these are taxable benefits that must be reported. Van benefit for private use is currently valued at £3,960 per year (2025/26); fuel benefit for private use is £757 per year. Get advice if you are unsure what counts as a reportable benefit.