The Employer Obligation
Becoming an employer for the first time creates a set of obligations to HMRC that must be met accurately and on time, regardless of how many people are on the payroll. The Pay As You Earn system requires employers to calculate income tax and National Insurance contributions for each employee every pay period, deduct those amounts from gross pay, and submit Real Time Information reports to HMRC on or before each pay date. The obligations begin from the first payment made to an employee and continue until the payroll is formally closed.
Many small business owners underestimate the complexity of running a payroll correctly. Tax codes, National Insurance categories, student loan deductions, statutory payments, and pension contributions all interact within a single payroll calculation, and an error in any one of them can create a discrepancy that triggers an HMRC penalty or, at minimum, requires a corrective submission.
How PAYE Deductions Are Calculated
PAYE income tax is calculated by applying the employee’s tax code to their gross pay for the period. The tax code is issued by HMRC and reflects the employee’s personal allowance and any adjustments for untaxed income or outstanding tax debts. The employer must use the current tax code and update it promptly when HMRC issues a new one. National Insurance contributions are calculated on the earnings between the lower and upper earnings limits at the rates set for the tax year. For 2025/26, the employee NI rate on earnings between 12,570 and 50,270 pounds per year is eight percent, and the employer rate on earnings above 5,000 pounds per year is 15 percent. HMRC provides the full employer payroll guide on the PAYE for employers guidance page.
Real Time Information submissions must be made on or before the date an employee is paid. A Full Payment Submission reports the gross pay, deductions, and net pay for every employee in that pay run. Where no payment is being made in a period but the payroll remains open, an Employer Payment Summary must be submitted to HMRC to confirm the absence of payment.
Employer National Insurance and the Employment Allowance
The employer National Insurance liability in 2025/26 starts at the lower Secondary Threshold of 5,000 pounds, a change introduced in the October 2024 Budget. This means employer NI at 15 percent is payable on salary above this level, which affects the cost calculation for even modest salaries compared with prior years.
The Employment Allowance allows eligible employers to reduce their employer NI liability by up to 10,500 pounds per year in 2025/26, an increase from the previous 5,000 pound limit. Single director companies with no other employees cannot claim the Employment Allowance. Businesses with multiple employees typically qualify, and the allowance is claimed through the payroll software via the Employer Payment Summary.
Statutory Payments Through Payroll
Employers are responsible for administering Statutory Sick Pay, Statutory Maternity Pay, Statutory Paternity Pay, and Shared Parental Pay through the payroll. These payments are made by the employer and recovered through a reduction in the PAYE remittance to HMRC. The recovery rates and rules for each type of statutory payment differ, and incorrect calculations can result in either overpayment to HMRC or underpayment that creates an employee relations issue. The Pensions Regulator oversees auto-enrolment obligations which run alongside payroll, and non-compliance carries separate penalty consequences. Full information is available at The Pensions Regulator website.
Running payroll accurately alongside the rest of your bookkeeping is a demanding monthly task. Our payroll services handle PAYE calculations, RTI submissions, payslips, and pension reporting as part of a managed service, removing the compliance risk from your business.
Correcting Payroll Errors
HMRC’s RTI system is designed to be corrected through the payroll software rather than through manual adjustments. If a payment is reported incorrectly in a Full Payment Submission, the correction is made in the next FPS or through an Earlier Year Update if the error relates to a previous tax year. Attempting to correct payroll errors outside the software, for example by adjusting a bank payment without a corresponding FPS correction, creates a discrepancy in HMRC’s records that may not surface until a year-end reconciliation or a compliance check.
If your payroll records and bookkeeping records do not reconcile month to month, the source of the discrepancy can be difficult to identify after the fact. Our bookkeeping services include monthly payroll reconciliation to ensure wages, PAYE liabilities, and pension contributions are accurately reflected in the accounts at all times.
About the Author
Stuart Kerr is Managing Director of Bookkeeping Packages Ltd, an outsourced bookkeeping service supporting UK small businesses and accountancy practices. With over 20 years of bookkeeping experience, Stuart specialises in helping businesses maintain accurate records and management accounts. Stuart is a bookkeeper, not a regulated financial adviser. Nothing in this article constitutes tax or financial advice. Call 0161 531 0087 or visit bookkeepingpackages.co.uk.
The information in this article is provided for general guidance only. Stuart Kerr is a professional bookkeeper, not a regulated financial adviser. This content does not constitute tax or financial advice. For advice specific to your circumstances, please consult a qualified accountant or tax adviser.
By Stuart Kerr, Managing Director, Bookkeeping Packages Ltd