How To Do My Own Payroll? 9 Simple Steps

Running a small business means wearing multiple hats—you’re the strategist, financial planner, HR expert, and more. Among these non-negotiable responsibilities, setting up a payroll scheme often feels like a complex puzzle. After all, payday is the moment everyone looks forward to!

But how to do payroll yourself without getting tangled in tax calculations, compliance rules, and endless paperwork? Don’t worry!

This guide simplifies the process into nine easy steps so you can set up payroll smoothly, avoid costly mistakes, and ensure your team gets paid accurately and on time. Let’s dive in!

Payroll 101: What You Really Need to Know

Payroll calculates and distributes employee wages while ensuring compliance with PAYE reference regulations, National Insurance contributions, and student loan repayments. Whether you’re a new employer handling payroll or using a third-party provider, understanding PAYE online processes is crucial for accurate payroll information and avoiding unhappy employees due to errors.

If you’re handling payroll for the first time, it involves more than just issuing payslips. You must track employee hours, calculate wages in line with the national minimum wage, and deduct the correct rate of pay based on each employee’s tax code.

Employers must also manage statutory sick pay, pension contributions, and workplace pension scheme deductions. Additionally, businesses must submit a Full Payment Submission (FPS) to HMRC every tax month and ensure compliance with the new tax year rules.

For limited companies, even the only director must follow PAYE scheme guidelines and provide an Employer PAYE reference number. Keeping accurate records, including accounts office reference, national insurance number, and personal details, is essential.

Filing errors or late submissions can result in a late filing notice. Seeking professional advice is the easiest way to avoid human error and ensure compliance when managing payroll for a new employee or dealing with a previous tax year.

Take Control of Your Payroll Process

Managing payroll goes beyond just paying wages. Whether you’re a new employer or running a limited company, setting it up correctly ensures you stay compliant and your employees get paid on time—without errors or penalties.

To get started, you’ll need to register for a PAYE scheme, track employee hours, calculate deductions, and report to HMRC. Each of these steps plays a key role in avoiding fines, reducing admin headaches, and keeping your team happy.

Let’s walk you through the payroll setup—step by step. From registration to your first payday, each stage is designed to make the process smooth, accurate, and efficient.

Step 1: Obtain Necessary Legal and Tax Documentation

The onboarding of a PAYE (Pay As You Earn) scheme is the first step in managing your own payroll in the UK. Registering for a PAYE scheme is quick, free, and can be done online through HM Revenue & Customs (HMRC). This process involves obtaining an Employer PAYE Reference, which is essential for managing payroll taxes and submitting reports to HMRC.

While an individual uses their National Insurance Number (NINO) for personal tax purposes, businesses in the UK use various identifiers for tax purposes, such as the Unique Taxpayer Reference (UTR) for self-assessment and corporate taxes, and the VAT Registration Number for VAT-related activities.

Remember that you may also need other tax identifiers depending on your business activities. For example, if your business is VAT-registered, you will need a VAT Registration Number. Additionally, ensure you have all necessary legal and tax documents in place to avoid potential issues with payroll management.

Step 2: Collect and Organize Employee Information

Once the necessary legal and tax documentation is in place, the next step is to gather vital information for each employee. This would mainly include:

Step 3: Choose a Payroll Schedule

The payroll schedule defines when your employees get paid. In the UK, common pay frequencies include weekly, fortnightly, four-weekly, and monthly. Employers have flexibility in choosing a pay frequency that suits their business needs, but it’s essential to ensure compliance with HM Revenue & Customs (HMRC) regulations and employee satisfaction.

Employers must consider factors such as real-time information (RTI) submission deadlines to HMRC, employee financial preferences, and the administrative workload associated with different pay frequencies. For example:

• Monthly Pay: Simplifies RTI submissions and accounting processes but may create financial strain for employees due to longer payday gaps.
• Weekly or Fortnightly Pay: Supports employees in managing cash flow but requires more frequent payroll processing and RTI submissions.
• Four-Weekly Pay: Offers a balance between frequent payments and simplified administration but may affect benefits like Universal Credit calculations.

Employers should carefully evaluate their business operations and workforce needs before finalizing a payroll schedule. Ensuring accurate and timely payments fosters employee trust and compliance with UK employment laws.

Step 4: Calculate Employee Gross Pay

In math, gross pay is calculated by multiplying the number of hours worked by the pay rate. But this varies depending on the type of employee:

• Salaried Employees:
  Gross Pay = Annual Salary ÷ Number of Pay Periods
• Hourly Employees:
  Gross Pay = (Regular Hours × Hourly Rate) + (Overtime Hours × Overtime Rate)

Don’t forget to add commissions, bonuses, or other incentives earned during the pay period.

The final result is the employee’s gross pay — their total earnings before any taxes or deductions are applied.

Example (Hourly):
40 regular hrs × £15 = £600
5 OT hrs × £22.50 = £112.50
Bonus = £100
Gross Pay = £812.50

Example (Salaried):
£36,000 ÷ 12 months = £3,000

Step 5: Make Necessary Deductions and Withholdings

Once you’ve calculated the gross pay, the next step is to make the necessary payroll deductions.

The biggest chunk of these are tax withholdings. As an employer, you’re required to:

• Withhold federal income tax
• Deduct Social Security and Medicare taxes (which you also match as the employer)

You’ll also need to account for other deductions, which typically fall into three categories:

• Pre-tax deductions – Health insurance, retirement contributions, etc.
• Tax withholdings – Federal, state, and local taxes
• Post-tax deductions – Wage garnishments, Roth IRA plans, etc.

After applying all these, what’s left is the net pay — the actual amount your employee takes home.

Step 6: Calculate Employee Net Pay

Once you’ve deducted all necessary withholdings from each employee’s gross wages, the remainder is their net or take-home pay.

At this stage, your employees’ paychecks should reflect all their earnings for the pay period minus any relevant deductions and withholdings.

Net pay is calculated as:
Gross Pay – Total Deductions = Net Pay

This is the actual amount that you will physically pay to your employees.

Always remember to review and double-check calculations at each step to ensure accuracy, leaving no room for payroll mistakes that could be costly.

Step 7: Distribute Payments

The final step is giving employees their paychecks. There are a couple of payment methods: direct deposit or paper checks.

Direct deposit is a popular choice as it reduces paperwork and the risk of lost or stolen checks.

However, keep in mind that certain states have specific requirements for using direct deposit.

Ensuring well-timed and accurate payments not only boosts employee morale but also builds a trusted reputation for your organization.

Step 8: File and Pay Payroll Taxes

When taking the reins of payroll management, one cannot overlook the importance of filing and paying payroll taxes.

These are essentially the taxes you withhold from your employee’s paychecks along with your employer tax responsibilities.

They include:

• Federal Income Tax
• Social Security Tax
• Medicare Tax
• Federal Unemployment Tax (FUTA)

Your payroll tax obligations in the UK include reporting wages paid and taxes withheld to HM Revenue & Customs (HMRC). The most common requirements involve operating the Pay As You Earn (PAYE) system to collect Income Tax and National Insurance contributions.

Alongside the federal obligations, remember that certain state and local taxes will also need to be filed and paid. Hence, understanding your tax obligations is crucial in keeping your payroll legally compliant.

Step 9: Keep Accurate Records and Maintain Compliance

Detailed records of all payroll data must be maintained securely, as required by HM Revenue & Customs (HMRC) regulations and UK employment laws.

It’s crucial to keep track of:

• Employee time and attendance
• Pay rates
• Paychecks
• Tax withholding amounts, and more

Good record-keeping practices not only ensure smooth payroll processing every pay period but also assist during audits or disputes.

It’s an essential part of compliance management, helping you stay updated with regulatory changes and adapt your payroll system accordingly.

Moreover, accurate records serve as a resource of truth, helping to validate reporting and tax payments.

Choosing the Right Payroll Fit: One Size Doesn’t

While manual payroll management might work for some, many businesses prefer turning to technology or professionals to avoid potential pitfalls. Alternative options comprise opting for payroll software that automates most processes or completely outsourcing your payroll to a professional service. These options reduce the risk of mistakes, ensure compliance, and allow you to focus more on your core business operations.

1. Managing Payroll Manually

Managing payroll manually involves doing all calculations yourself or using a simple spreadsheet. This DIY approach might seem cost-effective for smaller businesses with minimal staff. However, maintaining accuracy and compliance manually can become highly complex and time-consuming as your business grows.

Plus, the consequences of payroll errors or non-compliance can be severe, leading to financial penalties and loss of trust among employees. Hence, unless you are a tax expert, the manual method carries its own risks.

2. Using Payroll Software

Payroll software offers a more automated and streamlined option for handling your payroll. From calculating wages and taxes to generating paystubs and tax forms, payroll software can effectively automate many of these tasks. Some payroll solutions offer integrated time tracking, visual calendars, and reminders.

Additionally, software platforms ensure accurate and timely tax filing, reducing the risk of penalties for late or inaccurate payments. Overall, payroll software is a viable option for businesses looking for a balance between control and convenience regarding payroll management.

3. Outsourcing Payroll to a Professional Service

A common choice for many businesses is to outsource their payroll to a professional service. This option lets you offload the task to experts and achieve peace of mind knowing that your payroll is in trusted hands.

An outsourced payroll service would handle all tasks—calculating wages, deductions, taxes, distributing payments, complying with federal, state, and local tax laws, and keeping records. This can be especially beneficial for businesses that lack in-house financial expertise or do not have the resources and time to keep up with complex tax laws and regulations.

That’s where services like Direct Payroll Services come in.

With over 250+ clients across the UK, Direct Payroll offers comprehensive, fully managed payroll solutions—from processing wages and tax deductions to ensuring compliance with HMRC and maintaining secure offsite backups. Their services are tailored to reduce the risk of penalties, improve productivity, and save operational costs.

Whether you’re a small business, a director, or part of a larger HR or accounting team, outsourcing payroll gives you peace of mind—so you can focus on what matters most: growing your business.

What Are the 3 Most Common Payroll Mistakes and How Can You Avoid Them?

When managing payroll, it’s only too easy to trip over multiple stumbling blocks. Misclassifying workers, maintaining inaccurate payroll records, or making late tax payments – such errors are costly and detrimental to your business’s reputation. However, awareness coupled with cautiousness can help avoid these common pitfalls. Thus, understanding the common payroll mistakes helps ensure you’re taking the right steps towards error-free payroll processing.

1. Misclassification of Employees

Incorrectly classifying employees can lead to hefty penalties and unsettled wage disputes. UK employment law requires employers to accurately determine individuals’ employment status, including identifying employees, workers, and self-employed individuals.

This distinction is crucial for applying the correct employment rights and obligations, such as minimum wage, holiday pay, and tax treatment. To avoid potential penalties, employers must ensure compliance with UK laws and regulations, including the Employment Rights Act 1996 and the Working Time Regulations 1998.

2. Inaccurate Payroll Records

Both federal and state mandates require businesses to maintain payroll records for specific periods. Regardless of how well-established or well-meaning a business might be, lacking or inaccurate documentation could land them in hot water.

Maintaining precise payroll records not only saves your business from potential legal issues but also helps maintain transparency with your employees. Hence, it is of utmost importance to ensure that payroll data is recorded correctly and stored securely, as per mandated timelines.

3. Late Tax Payments

Late tax payments are another widespread payroll pitfall. Delays in payroll tax payments can result in substantial late fees and penalties. Setting up a payroll calendar, tracking payment dates, and creating tax deadline reminders are potential preventive measures. Also, opting for automatic payroll solutions or outsourcing payroll services can ensure timely tax payments.

Avoid Costly Payroll Errors That Hurt Your Business

Payroll mistakes can do more than just trigger penalties—they can lead to delayed payments, frustrated employees, and even damage to your business’s credibility. From navigating tax codes to keeping up with changing regulations, many businesses struggle to stay on top of it all.

A well-structured payroll process doesn’t just ensure compliance—it also builds trust with your team, boosts morale, and keeps operations running smoothly.

By following a step-by-step approach, managing payroll in-house is possible—but one misstep can cost you. That’s why many businesses today are turning to payroll software or outsourcing services to minimize risk and maximize accuracy.

Whether you’re a small business, an accountant, or a care home juggling multiple responsibilities, Direct Payroll Services offers expert-backed, compliant payroll solutions—so you never have to worry about errors or delays again.

Expert Payroll Services in London

At Direct Payroll Services, we take the stress out of payroll so you can focus on growing your business. With a sharp eye for detail and a deep understanding of compliance, we deliver efficient, accurate, and fully compliant payroll solutions—trusted by over 250+ businesses across the UK.

No matter your business size or sector, we offer tailored payroll services designed to meet your unique needs.

Whether you’re just starting or scaling up, we’re here to make your payroll process faster, smoother, and stress-free.

Ready to get started? Call us at 0203 0867670 or Make an Appointment today to streamline your payroll with confidence.

Conclusion

Payroll isn’t just a back-office task—it’s a reflection of how you value your team. Done right, it fosters trust, boosts morale, and reinforces a professional culture within your company. But it also comes with legal responsibilities that, if mishandled, can lead to costly consequences.

So, whether you’re doing it yourself or seeking expert help, remember that mastering payroll is not just about compliance—it’s about creating a workplace where people feel secure, respected, and fairly compensated.

Invest the time or partner with professionals who can ensure it’s done right. Because at the end of the day, a reliable payroll system doesn’t just pay people—it empowers them. And that’s what fuels real business growth.

Frequently Asked Questions

How do I choose the right payroll service for my business?

Choosing the right payroll service for your business depends primarily on its size, budget, and payroll complexity. Look for a service that offers tailored solutions for your business size, ensures tax compliance, provides efficient customer support, and fits within your budget.

What are the benefits of outsourcing payroll?

Outsourcing payroll can save time, reduce the costs of staffing an in-house payroll team, ensure accurate calculations and tax compliance, and provide extra data security. It allows businesses to focus more on their core operations while having experts handle their payroll.

How can I ensure accuracy in payroll calculations?

Ensuring accuracy in payroll calculations involves careful data input, cross-checking calculations, staying updated about tax laws, using good quality payroll software or services, and regular audits of payroll processes.

What are some common payroll terms I should know?

Some common payroll terms include Gross Pay, Net Pay, Income Tax, National Insurance Contributions (NICs), PAYE (Pay As You Earn), Tax Code, Pension Contributions, RTI (Real Time Information), P60, P45.