Payroll Guide for UK Trade Businesses (2026): What Every Sole Trader and Employer Needs to Know

The moment you take on your first apprentice or second engineer, your responsibilities as a business owner change significantly. PAYE, payslips, RTI submissions, auto-enrolment — these are not optional extras. They are legal requirements with real penalties for getting them wrong. This guide explains what you need to know about payroll as a UK trade business in 2026, whether you are a sole trader thinking about hiring or a small employer trying to get your systems straight.

Sole trader vs employer: what changes when you hire

As a sole trader, your tax obligations are straightforward: Self Assessment once a year, Class 2 and Class 4 National Insurance, and VAT if you are registered. The moment you employ someone — even one person, even an apprentice on a low wage — you become an employer and must register with HMRC for PAYE.

PAYE registration should happen before you pay your first employee. HMRC will issue you an employer PAYE reference and accounts office reference, which you need to make submissions. Registration takes around five working days online and is free. Do not wait until the first payday to register — you will not have time to set up payroll software, run your first Full Payment Submission (FPS), and get everything right.

You will also need to write an employment contract for every employee and provide a written statement of employment particulars on or before their first day. This is a legal requirement regardless of how casual the arrangement feels.

How PAYE works in practice

PAYE (Pay As You Earn) is the system HMRC uses to collect Income Tax and National Insurance from employees before they receive their wages. As the employer, you are responsible for calculating and deducting the correct amounts from each payslip, then paying them to HMRC by the 22nd of the following month (or 19th if paying by post).

For 2026/27, the key thresholds are: the Personal Allowance is £12,570, meaning no Income Tax is deducted below this level. The Primary Threshold for employee National Insurance is £12,570 (employees pay 8% between this and £50,270, then 2% above). As the employer, you pay secondary National Insurance at 15% on earnings above the Secondary Threshold of £5,000 — note this threshold was reduced from £9,100 in April 2025, which increased employer NI costs significantly.

The Employment Allowance lets eligible employers reduce their employer NI bill by up to £10,500 per year — a significant saving for small trade businesses. You claim it through your payroll software. You are eligible unless you are a sole director with no other employees, or your employer NI bill in the previous tax year exceeded £100,000.

Real Time Information: RTI submissions explained

Since 2013, employers must report PAYE information to HMRC in real time — meaning on or before each payday, not monthly or quarterly. This is done via a Full Payment Submission (FPS), which your payroll software sends automatically when you process each pay run.

An FPS includes: each employee's name, National Insurance number, tax code, gross pay, tax deducted, employee NI, and employer NI. If you employ someone but do not pay them in a given pay period (for example, they are on unpaid leave), you must still submit an Employer Payment Summary (EPS) to tell HMRC why no FPS was sent.

Late FPS submissions trigger automated penalty notices from HMRC. The penalty for a late FPS starts at £100 for employers with fewer than ten employees. Repeated late submissions escalate to higher penalties. Setting up payroll software correctly — with automated submissions — is the simplest way to avoid this.

Auto-enrolment: what trade employers must do

If you employ anyone aged between 22 and State Pension age who earns more than £10,000 per year (£833 per month), you must automatically enrol them into a workplace pension. This is not optional — it applies from the employee's first eligible pay period.

The minimum pension contributions in 2026 are 3% from the employer and 5% from the employee (including tax relief), totalling 8% of qualifying earnings. Qualifying earnings are the portion of pay between £6,240 and £50,270. You must choose a compliant pension provider — NEST (the government-backed scheme) is free to use and accepts all employers. Peoples Pension and Smart Pension are also popular with small trade businesses.

You must write to each employee within six weeks of their enrolment date, tell them which scheme they are in and what contributions are being made. You must also complete a Declaration of Compliance with The Pensions Regulator (TPR) within five months of your staging date. Ignoring auto-enrolment leads to fixed and escalating penalty notices from TPR.

CIS: the Construction Industry Scheme for contractors

If your trade business uses subcontractors — as many plumbers, electricians, builders and groundworkers do — you may be a CIS contractor. Under CIS, contractors must register with HMRC, verify each subcontractor before paying them, and deduct tax at source before making payment.

The deduction rates are: 20% for registered subcontractors, 30% for unregistered subcontractors (i.e., those you cannot verify with HMRC), and 0% for subcontractors with Gross Payment Status. Always verify subcontractors through HMRC's online CIS system before making any payment — never rely on a UTR number alone.

As a CIS contractor, you must submit monthly CIS returns to HMRC by the 19th of each month, detailing every subcontractor you have paid and the deductions made. You must also give each subcontractor a payment and deduction statement (equivalent to a payslip) within 14 days of the end of each tax month.

If your business is both a CIS contractor (using subbies) and a CIS subcontractor (working for main contractors), you can offset the deductions suffered against your own CIS and PAYE liabilities — reducing the cash you have to hand over to HMRC each month.

Apprentice payroll: the key differences

Apprentices are employees and must be paid through PAYE like any other worker. However, the National Minimum Wage rules are different: apprentices aged under 19, or aged 19 or over in the first year of their apprenticeship, are entitled to the Apprentice Rate — £7.55 per hour in 2026/27. Outside of these conditions, apprentices must be paid the National Minimum or Living Wage for their age group.

If you have fewer than 50 employees and your apprentice is aged 16–18 (or 19–24 and a care leaver or has an Education, Health and Care Plan), the government pays 100% of the apprenticeship training costs through the apprenticeship levy. For other apprentices in small businesses, the government covers 95% of training costs and you pay just 5%. This makes taking on an apprentice much more affordable than most trade business owners realise.

CITB (the Construction Industry Training Board) levy grants can also offset some training and apprenticeship costs for construction businesses — worth checking if you operate in the construction trades.

Payroll software: what to use and what to avoid

HMRC maintains a list of recognised payroll software that can submit RTI electronically. For most small trade businesses, the main options are: Xero Payroll (integrates well with Xero accounts), QuickBooks Payroll, BrightPay (popular with trade accountants), and Moneysoft Payroll Manager (low cost, straightforward for small payrolls). HMRC's own Basic PAYE Tools is free but has no automatic reminders or CIS features.

Avoid running payroll manually in a spreadsheet — the calculation errors and late submission risk are simply not worth it. A basic payroll software subscription for a small employer costs £5–£15 per month and handles all RTI submissions automatically.

What to do when payroll gets complicated

For most trade businesses with one to five employees, payroll is manageable in-house with good software. When it becomes worth outsourcing to a payroll bureau or accountant: you have more than five employees, you have a mix of employees and CIS subcontractors, you are dealing with TUPE (transferring employees from another business), or you have employees with multiple part-time jobs and complex tax codes.

A payroll bureau typically charges £4–£10 per employee per month, which is usually cheaper than the time you spend dealing with HMRC queries. Your trade accountant may offer payroll as part of their service — worth asking before setting up separately.

Trade2Base integrates with Xero, which handles payroll submissions and CIS returns in one place alongside your invoicing and job management. If you are already using Xero Accounting, adding Xero Payroll is the lowest-friction way to get payroll running correctly without maintaining a separate system.