PAYE for Self-Employed Employers: 2025/26 Guide

So your business has grown to the point where you need to take someone on. That's a big step, and it comes with a new responsibility: operating PAYE.

When you work alone, you handle your own tax through Self Assessment. The moment you pay an employee, you become a tax collector for HMRC. You deduct their Income Tax and National Insurance, pay employer's National Insurance on top, and report it all in real time.

This guide walks you through it in plain English: when you must register, how to run payroll, the 2025/26 employer National Insurance changes, and how the £10,500 Employment Allowance can wipe out your employer NI bill if you're a small employer. It's written for sole traders and self-employed business owners hiring their first one or two staff.

What is PAYE, and when do you become responsible for it? {#what-is-paye}

PAYE stands for Pay As You Earn. It's HMRC's system for collecting Income Tax and National Insurance from employees by taking it straight out of their wages before they're paid.

Once you employ someone, you're responsible for:

• Deducting the right Income Tax from each employee's pay, based on their tax code
• Deducting employee National Insurance (Class 1 primary contributions)
• Paying employer National Insurance (Class 1 secondary contributions) out of your own business funds
• Reporting every payment to HMRC in real time, through Real Time Information (RTI) submissions
• Paying the tax and NI you've collected to HMRC by set deadlines
• Giving each employee a payslip showing gross pay, deductions and net pay
• Keeping accurate payroll records

It sounds like a lot. In practice, once you've registered and set up software, most of it runs the same way each pay period.

When must you register for PAYE as an employer? {#when-register}

You don't always have to register the moment you pay someone. It depends on what you pay and the worker's circumstances.

You must register for PAYE if any of these apply to an employee:

• You pay them at or above the National Insurance Lower Earnings Limit, which for 2025/26 is £125 a week, £542 a month or £6,500 a year
• They receive taxable benefits in kind, such as a company car or private medical cover
• They get expenses that aren't covered by an exemption
• They have another job or receive a pension
• They've recently received certain state benefits, such as Employment and Support Allowance or Jobseeker's Allowance

Even where none of these apply and you pay below the Lower Earnings Limit, it's worth keeping basic payroll records. If you're not sure whether you need to register, check the HMRC employer rates and thresholds for 2025/26 or ask your accountant.

Register before your first payday if you can. Late registration can leave you owing backdated tax and NI you should have deducted, plus possible penalties and interest. HMRC can take a few working days to process a new employer registration, so don't leave it until the day before payday.

How do you register for PAYE with HMRC? {#how-register}

Calculate your take-home pay →

You register online through the HMRC register as an employer service. Have these ready:

• Your business name and trading name, if different
• Your business address and contact details
• Your National Insurance number (sole trader) or Company Registration Number (limited company)
• The date you'll start paying employees
• How many employees you expect to have
• Contact details for whoever runs the payroll

Once you're registered, HMRC sends you an employer PAYE reference. You'll need it for every RTI report and payment, so keep it safe and pass it to your accountant or payroll provider. You'll also get access to HMRC's online services, where you can see what you owe and your payment history.

From your first payday onwards, you're legally on the hook to operate PAYE correctly, file RTI on time and pay HMRC by the deadline.

What payroll software do you need? {#software}

HMRC requires payroll reports to be filed digitally, so you'll need software that's recognised by HMRC for RTI. Doing the sums by hand and keying them in is slow and error-prone, and it isn't really an option for the reporting itself.

Broadly, you have three routes:

• HMRC Basic PAYE Tools. HMRC's own free software handles up to nine employees. It calculates PAYE and files RTI, but it's fairly basic and won't produce polished payslips or handle everything a commercial package does.
• Commercial payroll or cloud accounting software. Paid packages calculate tax and NI, produce payslips, file FPS and EPS submissions, handle pensions and student loans, and apply the Employment Allowance. Many integrate payroll with your wider bookkeeping.
• Outsourcing to an accountant or payroll bureau. Someone else runs it for you end to end. It costs more than software alone, but it removes the admin and the compliance risk.

Whichever you choose, make sure it's HMRC-recognised for RTI and that it's updated for the current 2025/26 rates. Good payroll software should calculate Income Tax from tax codes, work out employee and employer NI, handle student loan and pension deductions, file FPS and EPS, produce payslips and P60s, and apply your Employment Allowance automatically.

If running it yourself feels like a stretch on top of the day job, our payroll services take it off your plate.

How do you run payroll and calculate deductions? {#run-payroll}

You run payroll each time you pay staff, whether that's weekly, monthly or some other cycle. The steps are the same each time.

1. Gather employee details. Full name, address, date of birth, National Insurance number, tax code (from their P45, or HMRC's starter checklist for a new starter), student loan plan type if any, and pension details.

2. Work out gross pay. Salary, or hours times rate, plus any overtime, bonus or commission.

3. Deduct Income Tax. Your software uses the tax code to work this out. The standard code for 2025/26 is 1257L, giving the Personal Allowance of £12,570 tax-free across the year. Code BR taxes everything at the basic rate (often a second job), 0T gives no allowance, and K codes mean tax is owed from benefits or a previous year.

4. Deduct employee National Insurance. For 2025/26, Class 1 employee NI is 8% on earnings between £242 and £967 a week (about £1,048 to £4,189 a month), then 2% above that. Nothing is due below £242 a week.

5. Deduct student loan repayments, if any. For 2025/26 the thresholds are £26,065 (Plan 1), £28,470 (Plan 2) and £32,745 (Plan 4, Scotland), each repaid at 9% of income above the threshold. A Postgraduate Loan is 6% above £21,000.

6. Process pension contributions. Most employees must be auto-enrolled into a workplace pension. The minimum is 8% of qualifying earnings overall, made up of at least 3% from you as employer and the rest from the employee.

7. Arrive at net pay and produce a payslip showing gross pay, every deduction and the net figure, plus year-to-date totals.

Illustrative example: a monthly-paid employee in 2025/26

This is a worked illustration, not a real client. Suppose you pay an employee a gross salary of £3,000 a month on tax code 1257L, with a Plan 2 student loan and a 5% employee pension contribution.

On top of that salary, as the employer you also pay:

The Income Tax and both lots of NI go to HMRC, not the employee. Only the net pay reaches your member of staff.

What changed with employer National Insurance in 2025/26? {#ni-changes}

Three changes took effect from 6 April 2025, and they pull in different directions.

• The employer NI rate is now 15%. Employers pay 15% Class 1 secondary NI on earnings above the Secondary Threshold.
• The Secondary Threshold is £5,000 a year. That's £96 a week or £417 a month. Employer NI now kicks in on a larger slice of each employee's pay than before.
• The Employment Allowance has risen to £10,500. This relief, covered below, can cancel out the employer NI bill for small employers.

There's no upper limit on employer NI. Unlike the employee's contribution, you keep paying 15% on everything above the threshold, however high the salary.

Here's the annual employer NI on a few salaries for 2025/26, before any Employment Allowance:

These costs sit on top of the wage and come out of your business funds. When you're working out whether you can afford to hire, budget for the salary plus employer NI plus at least 3% pension. You can sense-check the deductions side using our National Insurance calculator.

How does the £10,500 Employment Allowance work? {#employment-allowance}

The Employment Allowance lets eligible employers reduce their annual employer Class 1 NI bill by up to £10,500 in 2025/26. For most small employers, that's enough to wipe out the bill entirely.

You can usually claim if you're a business or charity with employer NI to pay, you have at least one employee earning above the Secondary Threshold, and you're not a one-person limited company whose only employee is the director. You also can't claim against the wages of someone within the IR35 off-payroll rules, or someone you employ for personal or domestic work such as a nanny or gardener (carers and support workers can be included). Check the full eligibility rules on gov.uk before you claim.

From 6 April 2025, the old restriction that blocked employers with more than £100,000 of employer NI in the previous year no longer applies, so more businesses qualify.

You claim it through your payroll software, usually by ticking a box and filing an Employer Payment Summary (EPS) early in the tax year. The software then reduces your employer NI each pay run until the £10,500 is used up or the year ends.

Illustrative example: the allowance in action

These are illustrative figures, not real clients.

A business with two employees each on £25,000 (£50,000 total payroll) would owe employer NI of 15% on £40,000, which is £6,000. The £10,500 allowance covers it in full, so the net employer NI is £0, with allowance to spare.

A business with four employees each on £30,000 (£120,000 total payroll) would owe 15% on £100,000, which is £15,000. The £10,500 allowance reduces that to £4,500 of employer NI for the year.

A few things to remember: the allowance applies to your total employer NI across all staff, not per employee; any unused amount can't be carried forward or refunded; and you have to claim it afresh each tax year.

What are your RTI reporting obligations? {#rti}

PAYE isn't just about deducting tax. You have to tell HMRC about it in real time, through RTI.

There are two report types:

• Full Payment Submission (FPS). Your main report. File it on or before every payday, for every employee, even those paid below the tax and NI thresholds, and even if you only pay yourself as a director.
• Employer Payment Summary (EPS). File this only when you need to tell HMRC something the FPS doesn't cover: claiming the Employment Allowance, recovering statutory payments such as Statutory Maternity Pay, reporting CIS deductions if you're a subcontractor, or flagging a period where you paid no one.

Late RTI submissions can trigger penalties even when no tax is due, so timeliness matters.

Once you've reported what you owe, you pay HMRC by the 22nd of the following tax month if you pay electronically (the 19th if you still pay by post). For example, payroll run on 31 January is reported on or before 31 January, and the payment reaches HMRC by 22 February. If your average monthly PAYE bill is under £1,500 you can usually pay quarterly instead. Many employers set up a direct debit so they never miss the date.

Keep your payroll records for at least three years after the end of the tax year they relate to. Good software keeps most of this for you.

What happens if you get PAYE wrong? {#mistakes}

Mistakes happen, especially in your first year. What matters is fixing them promptly.

The common ones are the wrong tax code, the wrong NI category, a calculation slip, a missed student loan deduction, or forgetting to claim the Employment Allowance.

Here's how to put things right:

• Fix it in the next pay run where you can. A small under- or overpayment can often be corrected next period, with the FPS adjusted to match.
• File a corrected FPS if the error changes the Income Tax or NI you've already reported.
• Claim a missed Employment Allowance retrospectively through an EPS. HMRC will adjust your liability and can refund overpaid employer NI.
• Talk to your employee. If their pay or tax was affected, explain what happened and when they'll see it put right.
• Ask HMRC if it's a significant error you're unsure about, via the Employer Helpline.

If you under-deducted tax or NI, you may have to pay HMRC the shortfall from business funds. If you over-deducted, refund the employee and correct the FPS. HMRC is generally reasonable about genuine, promptly-corrected errors; it's repeated or ignored mistakes that cause trouble.

How can an accountant help with self-employed payroll? {#accountant}

Payroll is one of those jobs that's manageable but unforgiving, and it eats time you could spend earning. A good accountant takes it off your hands and keeps you compliant.

In practice, that means accurate calculations every pay run, FPS and EPS filed on time, the full Employment Allowance claimed from day one, payslips and P60s produced, statutory payments such as Statutory Sick Pay (£118.75 a week for 2025/26) calculated and recovered where possible, and your auto-enrolment pension duties handled. You also get someone to ask before you make a move, whether that's a new starter, a leaver, a bonus or a pay rise.

For most self-employed employers with one or two staff, the cost of professional payroll is easily outweighed by the time saved and the penalties and missed reliefs avoided.

Thinking about taking on staff? Talk to a Zmartly accountant. We'll model your real employment costs for 2025/26, including the 15% employer NI and your £10,500 Employment Allowance, run your payroll end to end, and give you a clear fixed-fee quote. Book a free call with Zmartly.

Frequently asked questions {#faqs}

Do I need to register for PAYE if I'm self-employed? Only if you employ staff. A self-employed person working alone handles their own tax through Self Assessment and doesn't need PAYE. Once you pay an employee at or above the Lower Earnings Limit (£6,500 a year for 2025/26), or they meet another trigger such as having a second job or taxable benefits, you must register as an employer.

What changed with employer National Insurance in 2025/26? From 6 April 2025 the employer NI rate is 15% and the Secondary Threshold is £5,000 a year. The Employment Allowance also rose to £10,500, which means most small employers with one or two staff still pay little or no employer NI.

How much does it cost to employ someone in 2025/26? Budget for the gross salary plus employer NI of 15% on earnings above £5,000, plus a pension contribution of at least 3%. On a £30,000 salary that's £3,750 of employer NI before relief, but the £10,500 Employment Allowance can remove the NI cost entirely for a small employer.

Can I run payroll myself, or do I need an accountant? You can do it yourself with HMRC's free Basic PAYE Tools or commercial software. Many self-employed employers use an accountant because the rules are detailed, the deadlines are unforgiving, and mistakes or a missed Employment Allowance can be costly.

When do I pay HMRC for PAYE? By the 22nd of the following tax month if you pay electronically, or the 19th by post. Payroll run on 31 January is paid to HMRC by 22 February. A direct debit helps you avoid missing it.

What is an FPS, and when do I submit it? A Full Payment Submission is the main RTI report showing every employee payment and deduction. File it on or before every payday, even if you pay below the tax and NI thresholds. Late filing can trigger penalties.

How do I claim the £10,500 Employment Allowance? Claim it through your payroll software, normally by ticking a box and filing an Employer Payment Summary early in the tax year. The software then reduces your employer NI each pay run until the allowance is used up. You have to claim again each tax year.