Do you actually need a payroll scheme?

A common assumption among new company owners is that payroll is only for businesses with employees. In practice, most limited companies need a scheme from day one, because a director is an office holder and any salary paid to them must go through PAYE.

Dividends are not earnings for PAYE or National Insurance purposes, so a company that only ever pays dividends would not need a scheme. However, dividends can only be paid from profits, and you need distributable reserves to declare them. Many advisers therefore suggest a small salary at least equal to the personal allowance, which is also a straightforward way of building qualifying years for the State Pension.

• Any salary, bonus or fee paid to a director must be reported through PAYE.
• Benefits and expenses may create reporting duties even where pay is low.
• You need a scheme registered if you want to claim the Employment Allowance or reclaim statutory payments.

Registering as an employer with HMRC

Register online through your HMRC business tax account. You cannot register more than two months before your first payday, so time it carefully — HMRC can take up to 15 working days to issue your PAYE reference and Accounts Office reference. You need both before filing your first Full Payment Submission, which is due on or before the first payday. Registering late therefore risks late filing penalties.

Have your company registration details, the Corporation Tax Unique Taxpayer Reference and the directors' personal details to hand. Keep the references safe once they arrive, as you will use them for every submission and payment.

How much and how often should directors be paid?

Directors are office holders rather than workers, so the National Minimum Wage does not apply to their directorship — although it does apply to any other role they carry out as an employee, such as working in the shop or workshop. That flexibility means a director can be paid monthly, quarterly or once a year in a single lump sum.

Many accountants set salaries around the primary threshold and personal allowance — commonly up to £12,570 — to secure a qualifying year for National Insurance without triggering income tax. Others keep salary below the secondary threshold to avoid employer NIC, though the Employment Allowance often makes a slightly higher salary worthwhile. Whatever you choose, the salary must actually be paid, not simply credited to a director's loan account, for the company to obtain corporation tax relief.

Directors' National Insurance: the annual method

By default, directors are treated as having an annual earnings period. You calculate NIC cumulatively: each payday you work out the total due on earnings to date and deduct what has already been paid. This usually means a director earning the same total across the year pays the same NIC whether paid monthly or in one lump sum, and it avoids the underpayment that can happen when large bonuses are paid late in the year.

There is an important exception. If a director already has another job or directorship paying above the primary threshold, the ordinary table method should be used instead, with NIC worked out on the normal earnings period. HMRC's guidance also explains how the director's first year is handled, when a shorter annual period may apply. This is one of the most common small-company payroll errors, so take advice if any director has a second source of earnings.

Reporting duties and deadlines

• Full Payment Submission (FPS) — on or before every payday where a payment is made, however small.
• Employer Payment Summary (EPS) — by the 19th of the month following the tax month, to claim the Employment Allowance, reclaim statutory payments or tell HMRC no employees were paid.
• Payment to HMRC — normally by the 22nd of the following month if paying electronically, unless you qualify for the quarterly payment scheme for smaller employers.
• P60 — by 31 May for anyone on the payroll at 5 April.
• P11D and P11D(b) — by 6 July for benefits and expenses, with Class 1A NIC due by 22 July.
• Final submission — a final FPS or EPS after the last payday of the tax year.

Employment Allowance and practical points

The Employment Allowance reduces employer NIC by up to £10,500 a year. It is not available to companies where the only employee paid above the secondary threshold is a director, a restriction that catches many single-director companies. You must claim it each tax year through the EPS, and it is only available if your employer NIC liabilities were under £100,000 in the previous tax year.

You will need RTI-compliant payroll software. HMRC's Basic PAYE Tools is free and suits very small employers, but it has limits on how many employees it supports. Keep records of pay, deductions and payments to HMRC for at least three years after the end of the tax year they relate to.

If you decide to take no salary at all, you can still protect your State Pension by paying voluntary Class 3 contributions, but at roughly £18 a week it is often cheaper and more tax-efficient to run a modest salary through a registered scheme instead.