Running Payroll for UK Trade Businesses — PAYE, RTI and CIS in 2026

When does PAYE apply to your trade business?

PAYE (Pay As You Earn) is the system HMRC uses to collect income tax and National Insurance from employment income in real time. You must register as an employer and run PAYE as soon as you pay anyone — including yourself as a company director — above the Lower Earnings Limit (LEL), which is £6,396 per year (£533/month) in 2026/27.

This catches more situations than many trade owners expect:

• A limited company director paying themselves a salary above the LEL must run PAYE — even if they're the only person in the company.
• A part-time labourer you pay cash on Fridays is an employee if you direct when, where and how they work.
• A relative helping out on site who receives regular payments above the LEL triggers PAYE obligations.

The sole trader/CIS exception: if you are a sole trader paying subbies under the Construction Industry Scheme (CIS) and those subbies supply their own tools, set their own hours and work for multiple contractors, they are self-employed — not employees. You use CIS deductions, not PAYE. But the moment someone works regularly under your direction and control — turning up when you say, using your equipment, working exclusively for you — HMRC will treat them as an employee regardless of what the paperwork says. Employment status is determined by the working arrangements, not by what you call them.

Setting up as an employer with HMRC

Register as an employer at gov.uk/register-employer. Do this at least four weeks before your first pay date — HMRC takes time to process the registration and issue your references, and you cannot submit RTI reports without them.

You will receive two references:

• PAYE reference number — used on all correspondence and FPS submissions (format: 123/AB456).
• Accounts Office reference — used when paying PAYE and NI to HMRC (format: 123PA00012345).

Keep both safe. You'll need them every month.

Choosing payroll software

You need software that can calculate tax, NI and deductions, and submit RTI reports to HMRC. Options used by trade businesses:

For most trade businesses with 1–5 employees, BrightPay strikes the best balance of price and functionality. HMRC's free tool works, but it won't generate payslips — you'll have to produce those separately.

2026/27 tax and NI rates you need to know

These are the rates that apply to wages paid from April 2026. Update your payroll software at the start of each tax year — rates change annually.

Income tax bands (England, Wales & Northern Ireland)

National Insurance 2026/27

The employer NI rate increased from 13.8% to 15% from April 2025 — if your payroll software or accountant hasn't already updated this, check now. The secondary threshold (the point above which you start paying employer NI) also dropped from £9,100 in previous years — meaning you start owing employer NI at a lower salary level.

Employment Allowance

Employment Allowance lets eligible employers reduce their employer NI bill by up to £10,500 per tax year. You claim it through your payroll software at the start of each year. You qualify if your employer NI bill was under £100,000 in the prior tax year.

Important exception: if you are the sole director of your limited company and have no other employees on the payroll, you cannot claim Employment Allowance. As soon as you employ even one other person, the allowance becomes available.

For a trade business with two or three employees on average wages, Employment Allowance can wipe out the entire employer NI bill. Claim it — it's free money you're otherwise leaving on the table.

RTI — Real Time Information submissions

RTI is the system HMRC uses to receive payroll data in real time. Every time you run payroll, you must submit a Full Payment Submission (FPS) to HMRC on or before the pay date. Not after — on or before.

Your payroll software handles the technical submission, but you need to understand the deadlines and penalties:

FPS late-filing penalties

• 1–9 employees: £100 per month the FPS is late.
• 10–49 employees: £200 per month.
• 50–249 employees: £300 per month.
• 250+ employees: £400 per month.

HMRC allows one late FPS per tax year without penalty (a so-called 'first in-year failure' concession), but don't rely on it. After three or more months of late submissions, HMRC can apply a 5% surcharge on the unpaid PAYE in addition to interest.

Paying PAYE to HMRC

Collect the income tax and NI you've deducted from employee wages, add your employer NI, and pay the total to HMRC:

• By 22nd of the following month if paying electronically (BACS or faster payment).
• By 19th of the following month if paying by cheque or postal order.

For example, for wages paid in June, your PAYE payment to HMRC is due by 22 July. Set a recurring reminder — missing this attracts interest at the current HMRC rate (currently 7.75% per annum on late PAYE payments).

If your average monthly PAYE liability is under £1,500 you can apply to pay quarterly instead of monthly. This can help cash flow but ask your accountant whether it suits your situation.

CIS payroll for construction contractors

If your trade business operates in construction and pays subcontractors, you are likely a CIS contractor and have separate monthly obligations alongside (or instead of) PAYE.

CIS deduction rates

The deduction applies only to the labour element of the payment — materials are excluded. Always ask for a breakdown and verify each subcontractor through HMRC's CIS online service before their first payment to get the correct rate.

Monthly CIS return (CIS300)

Submit your CIS300 return to HMRC by the 19th of each month covering payments made in the previous tax month (6th to 5th). The return lists each subcontractor, what you paid them, and how much you deducted. If you made no payments in a month, you can submit a 'nil return' — or contact HMRC to suspend returns if you expect no CIS activity for a period.

Pay the deducted CIS amounts to HMRC along with your PAYE payment using the same Accounts Office reference. The payment deadlines are the same: 22nd electronically, 19th by post.

Late CIS300 returns attract penalties: £100 for up to 2 months late, £200 for 2–12 months late, £300 or 5% of the CIS deductions (whichever is higher) after 12 months.

Auto-enrolment pension obligations

Auto-enrolment is not optional. From the day you take on your first eligible employee, you must enrol them into a qualifying workplace pension and start making contributions.

Who is eligible?

Workers aged 22 to state pension age earning over £10,000 per year (£833/month) must be automatically enrolled. Workers earning between £6,240 and £10,000 can opt in. Workers earning under £6,240 can request to join.

Minimum contribution rates

New employers (businesses that became an employer for the first time after 1 October 2017) must comply with auto-enrolment from day one of their first employee's employment. There is no staging date grace period for new employers.

Choosing a pension provider

NEST (National Employment Savings Trust) is the government-backed workplace pension scheme and has a legal duty to accept all employers. It is free to use as an employer, charges employees 1.8% on contributions and 0.3% annual management charge — costs that compare well against the market for small schemes.

Alternatives include The People's Pension (good for trade sectors with high staff turnover) and Smart Pension. Your payroll software should integrate with all three. Pension providers require you to re-enrol any opted-out eligible workers every three years — put a reminder in your calendar.

Non-compliance with auto-enrolment attracts escalating fixed penalty notices from The Pensions Regulator: £400 initial, then £50–£10,000 per day depending on employer size.

Statutory payments — what you must pay and what you can reclaim

Certain payments to employees are set by law. You pay them first, then reclaim from HMRC through your payroll.

Statutory Sick Pay (SSP)

SSP is £116.75 per week for up to 28 weeks, payable from the fourth qualifying day of sickness (the first three are 'waiting days' with no SSP). You pay SSP as the employer. Small employers could previously reclaim SSP but that right was removed in 2014. The SSP Rebate Scheme introduced during COVID has ended. Unless HMRC introduces a new scheme, SSP is entirely your cost.

Budget for this. One employee off sick for a month costs you around £465 in SSP plus their replacement or lost productivity. If you have three or more employees, SSP can materially disrupt your cash flow in a bad month.

Statutory Maternity, Paternity & Adoption Pay

Statutory Maternity Pay (SMP) is paid for up to 39 weeks: 90% of average weekly earnings for the first 6 weeks, then the lower of 90% of earnings or the flat rate (£184.03/week in 2025/26 — check the updated 2026/27 rate in April) for the remaining 33 weeks.

You pay SMP upfront, then reclaim from HMRC:

• Standard employers: reclaim 92% of SMP paid.
• Small employers (employer NI bill under £45,000 in the prior tax year): reclaim 103% — the extra 3% covers your admin costs.

The same 92%/103% reclaim rules apply to Statutory Paternity Pay (SPP — 2 weeks at the flat rate) and Statutory Adoption Pay (SAP — same structure as SMP). Reclaims are made through your payroll software when you submit your FPS or EPS (Employer Payment Summary).

The cash flow implication: even if you reclaim 103%, you may be paying out SMP for several weeks before the recovery shows up in your PAYE offset. Keep a float. If cash flow is tight, contact HMRC — they can arrange advance funding of SMP.

Payroll bureau vs doing it yourself

Once you understand the mechanics, running payroll for 1–3 employees is manageable in-house with good software. But 'manageable' and 'worth your time' are different questions.

Costs compared

The case for a bureau or accountant is strong if:

• You have employees with variable hours, overtime, or irregular pay periods.
• Any employee is on SSP, SMP or SPP (the reclaim calculations are fiddly).
• You also operate CIS (bureau handles both together).
• You've already had one late FPS or PAYE payment penalty.

The case for doing it yourself is strong if:

• You have 1–2 salaried employees on fixed monthly pay with no variables.
• You're comfortable with software and setting calendar reminders.
• Cash is tight and you genuinely have the time to do it properly each month.

Many trade owners start DIY and move to a bureau after the first compliance scare. If your accountant offers payroll as part of a monthly package, that's usually the most cost-effective route — you're buying peace of mind that someone qualified is watching the deadlines for you.

Payroll setup checklist for trade business owners