Setting Up Payroll as a Company Director

Before you start: what you need

Before setting up payroll, have the following to hand:

• Company registration number and registered office address
• Director's full name, date of birth, National Insurance number, and home address
• Your planned salary level (see the optimal director salary guide)
• A Government Gateway account for the company

Step 1: Register as an employer with HMRC

You must register before making any salary payment. Do not pay yourself and sort the registration later — retrospective registration is complicated and can cause problems with NI records.

Register online at gov.uk/register-employer. HMRC will issue two references by post within 5–10 working days:

• Employer PAYE reference — used in payroll software (format: 123/AB45678)
• Accounts Office reference — used when making PAYE payments to HMRC (format: 123PA00045678)

You cannot set up payroll or submit RTI returns without these references. Allow time — register at least 2 weeks before the intended first payment date.

Step 2: Choose your payroll software

All employers must use HMRC-approved RTI software. Options for sole directors:

Step 3: Set up the director's pay record

In your payroll software, add an employee record for yourself. The key fields:

• Employee type: Director
• NI category: A (standard) for most directors. Category M if under 21, Category Z if over state pension age
• Tax code: 1257L (standard personal allowance code for 2026-27)
• Annual salary: £12,570 (or your chosen amount)
• Payment frequency: monthly or annual — see below
• Director's NI calculation method: annual (cumulative) rather than the standard per-period method

Step 4: Monthly payroll or annual payroll?

Sole directors have a choice that most regular employees do not:

For a director on £12,570 with no income tax or employee NI due, annual payroll is popular — declare the annual salary at the start of the year, pay it in one lump sum (or whenever convenient), and submit one FPS. Most accountants who handle sole director payroll use this approach.

Step 5: Running payroll — the RTI submissions

Real Time Information (RTI) requires an FPS (Full Payment Submission) on or before each payment date:

Step 6: Paying HMRC

If any PAYE tax or employer NI is due:

• Pay by the 19th of the following month (cheque) or 22nd (electronic payment)
• Use your Accounts Office reference as the payment reference
• Even small amounts (e.g., £50 employer NI) must be paid on time — late payment interest applies from day 1

For a director on £12,570 with no other employees, employer NI of £1,135.50 is due for the year. On a monthly payroll, this is £94.63/month. On annual payroll, it is one payment of £1,135.50 by 19 April (for the prior year's only payment).

Step 7: Year-end tasks

• P60: generate and retain the director's P60 (required for mortgage applications, Self Assessment) by 31 May
• P11D (if applicable): report any benefits-in-kind by 6 July; pay Class 1A NI by 22 July
• Employer payment reconciliation: ensure all FPS and EPS submissions match HMRC's records — check via your PAYE online account

Common mistakes

• Late registration: paying salary before registering as an employer creates a late registration penalty
• Wrong NI calculation method: not setting director NI to annual (cumulative) calculation leads to incorrect monthly deductions
• Missing FPS submissions: submitting after the payment date (even by one day) is technically non-compliant — late FPS penalties apply if persistent
• Forgetting P11D: if you took any benefits-in-kind during the year, a P11D is required even if the benefit is small