How to set up and run payroll in a London small business

Payroll often sits quietly in the background of a business, but it shapes more than most people realise.

It affects how secure your staff feel, how organised your operations are and how well you understand your own costs.

When it's handled properly, it supports the rest of your work without drawing attention to itself. When it isn't, the ripple effects appear quickly.

If you're running a small business in London, you don't need deep technical knowledge to manage payroll.

You just need a clear sense of what's required, the choices available to you and the habits that keep things running smoothly.

This guide cuts through the noise and lays out the essentials so you can decide how payroll will work in your business and feel confident in that choice.

1. What payroll is and how it works

Payroll means:

• Working out what everyone in the business has earned.

• Deducting what amounts must be taken out.

• Handling employer obligations (such as tax and pensions).

• Making sure people get paid on time.

It also means keeping records and sending the right reports to HMRC.

If payroll works smoothly, employees get paid correctly and on time. That builds trust. If something slips – a wrong tax code, a late payment, a missing deduction – trust can erode quickly.

On top of that, payroll is a legal responsibility. HMRC asks that businesses keep accurate records, make correct deductions and report on their finances promptly. Messing up payroll can carry penalties or fines.

Once you have a proper process, payroll becomes routine rather than a headache. The tricky part is often the first few times – figuring out what's needed, gathering the right info and picking the right method.

2. Legal requirements for payroll in the UK

When you hire staff, you're responsible for their tax and National Insurance (NI) via the Pay As You Earn (PAYE) system.

Before you pay a single employee, register as an employer with HMRC.

Once registered, you must report each pay run – how much people earned, what you deducted and what you owe – via Real Time Information (RTI).

NI contributions come in two parts:

• Employees' NI (deducted from pay).

• Employer NI (an extra cost for you, as a business that employs people).

NI rates and thresholds change, so check what applies at the start of each tax year.

You also need to make sure employees get at least the National Minimum Wage (or National Living Wage, depending on their age and the number of hours they work).

Statutory payments – for sick leave, maternity/paternity leave and so on – are part of your legal responsibility too.

As long as you keep accurate records, submit RTI reports on time and apply the correct deductions and payments, you'll meet your legal duties.

3. How payroll is made up

Each pay run breaks down into a few basic parts:

• Gross pay – what the employee has earned before deductions (salary, hourly pay, overtime, bonuses).

• Deductions – Income tax, the employee's NI, pension contributions (if this applies), student loans or other agreed deductions.

• Net pay – what the employee receives after deductions.

• Employer contributions and costs – employer's NI contribution, any employer pension contributions (if you offer a pension scheme).

Behind those calculations is the tax code. This tells payroll what allowances or tax bands to apply.

If the tax code's wrong, a deduction could be too high or too low – and you may need to correct it later.

If you offer a pension, auto-enrolment may apply once someone meets certain criteria. Payroll must then handle both employee and employer contributions correctly.

When you understand each of these components, payroll becomes a matter of entering accurate data and letting the system (or provider) do the maths.

4. Payroll options for SMEs

How you handle payroll will depend on the size of your business, your team, your cash flow and how comfortable you are with admin.

• Doing it yourself (in-house): with a small team and simple pay structures, you can run payroll using software.

  This gives you control but also puts the burden on you: you must stay up to date with rules and deadlines.

• Outsourcing payroll (payroll bureau or accountant): if you'd rather avoid the admin, you can hand the job over to specialists.

  They'll handle calculations, reports, payslips and compliance. You provide accurate information about your staff and they handle the rest.

• Using payroll software: many small businesses choose this option. It's less hands-on than manual payroll and cheaper than a full bureau, while reducing the risk of errors.

  Popular tools in the UK include Xero Payroll, QuickBooks Payroll, Sage and BrightPay.

5. Setting up payroll for the first time

If you've never run payroll before, these steps will help you get started:

1. Register with HMRC as an employer. You'll get a PAYE reference. Do this before you pay anyone.

2. Pick how you'll run payroll – manually (for a tiny team), via software or by outsourcing it to an expert (see section 4).

3. Gather information for each employee: name, NI number, address, date of birth, tax code, start date, bank details, pay method, contracted hours or salary, pension eligibility.

4. If you need to, set up enrolment for a workplace pension and record who's eligible.

5. For the first pay run: enter pay details, apply deductions, review payslips, submit RTI to HMRC, then pay staff (and your employer obligations, like pension and NI contributions) on the due date.

After that initial set-up, payroll becomes a routine task.

You only need to update it when people join or leave the business, or something changes (for example, their salary, working hours, pension status or tax code).

6. Common payroll challenges and how to avoid them

Payroll mistakes often start with simple errors: wrong data, missed deductions, late reporting.

• One frequent problem is having incorrect information about an employee. If someone's NI number, tax code or bank details are wrong, any deductions or payments you make will be too. It helps to check new-starter details carefully and update records when things change.

• Late or missing reports to HMRC also cause issues. A calendar or regular reminder for pay and RTI reporting dates can help you stay on schedule.

• Pension duties add complexity. If you forget to enrol a staff member who's eligible, or mishandle pension contributions, you could be failing to meet your legal responsibilities. Good payroll software or outsourcing to a reliable specialist makes a big difference.

• Then there's data security. Payroll holds sensitive information. Make sure whatever system you use is secure and access is restricted only to the people who need it.

The simplest way to avoid most problems is to build habits. Check records regularly, use reliable tools or help and act quickly when something changes.

7. Best practice for managing payroll efficiently

Once payroll's up and running, a few steady habits will keep things smooth:

• Use a good payroll system. Let software handle calculations, payslips, NI and pension contributions and reporting. Your job becomes checking inputs and approving pay runs.

• Do regular reviews. Monthly or quarterly (three-monthly) checks will catch changes in hours, pay rates or personal details. They'll also show mistakes early – before they cause bigger issues.

• Watch for rule changes. Tax bands, NI thresholds, minimum wage and pension rules shift occasionally. Check for updates around the start of each tax year (and whenever you hear there's a law change).

• Communicate with your team. Let employees know when they'll be paid, what deductions look like and who to contact with questions. When expectations are clear, you'll receive far fewer queries.

• Keep records organised and secure. Even if you outsource, maintain a clear log of what you've submitted, what's been paid and who's on your payroll at any time.

With consistent effort, payroll becomes manageable – not a looming burden.

Where to get help: support from Grow London Local

If you're based in London and want extra help with payroll or financial admin, these services from Grow London Local can make a difference:

• Accountancy services (Westridge Accountants)

• Bookkeeping, accounting and tax services (ABF Accounting Services)

• Accountants and tax advisers (EliteEdge Accountants)

• Expert accounting and bookkeeping services for SMEs (Keirstone Limited)

• Strategic tax advisory and accounting (Oasis Accountants)

• Cloud accounting software (Xero)

• Accounting and tax services (Co-Accounting Ltd)

• Accountants and business advisers (Newinton Accountancy)

• Chartered accountants (PB Partners LLP)

Conclusion

When people are paid correctly and on time, the whole organisation steadies. When your records are clear and your process is reliable, you free up attention for other work.

If you're setting payroll up for the first time, follow the steps, keep your records tidy and make use of the tools and support available to you.

If you've been running payroll for a while, a short review can reveal fixes that save time and reduce pressure.

Whatever stage you're at, the aim's simple: a payroll process that does its job without demanding constant thought. Once you reach that point, it becomes one less thing to worry about as your business grows.

Read more

• Payroll for SMEs: what you need to know

• How to avoid payroll mistakes in your small business

• HMRC and tax obligations: the London business starter's guide

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