How to avoid common payroll mistakes in your small business

Running payroll can be one of the more stressful admin tasks for small business owners – especially if you're managing it yourself.

With HMRC rules, tax codes and ever-changing thresholds, it's all too easy to make a mistake. But a few simple checks and good habits can help you stay on top of it and avoid costly errors.

Here's how to steer clear of the most common payroll slip-ups in 2025/2026.

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1. Not registering for PAYE when you should

Some new employers don't realise they need to register for PAYE until it's too late – and they're facing a fine.

If you're paying any employee £96 or more a week, you need to register as an employer with HMRC and operate PAYE (Pay As You Earn).

This is because you may be liable to deduct tax or National Insurance contributions (NICs), even if the employee's annual income is below the personal allowance.

Keep in mind: if your team earns below this threshold and you're not offering benefits like pensions, you may not need to register – but it's worth double-checking.

2. Using the wrong tax code

One of the most frequent mistakes? Leaving a new employee on the wrong tax code, which means they either overpay or underpay tax. Not ideal for morale – or for your compliance record.

For 2025/2026, the standard tax code is 1257L, which covers the personal allowance of £12,570.

If you're not sure which code to use:

• wait for HMRC to send a P6 notice, or

• use the emergency tax code (1257L W1/M1) temporarily

Make sure you're also collecting a starter checklist (which replaced the old P46 form) from every new employee.

3. Missing deadlines for submitting payroll info

HMRC expects real-time information (RTI) submissions on or before every payday. If you miss these deadlines, you could face an automatic penalty.

Set reminders or use payroll software that automates submissions. And always double-check your submission has gone through – don't assume.

4. Ignoring National Insurance thresholds

National Insurance (NI) can get complicated fast, especially with recent changes. Here's what you need to know for 2025/2026:

• Employee (primary) NI threshold: £242 per week

• Employer (secondary) NI threshold: £96/week (previously £175 per week)

• Employer NI rate: 15% on earnings above that £96 threshold

So, if you're paying someone even just over £96 per week, employer NICs kick in.

5. Not claiming the Employment Allowance

If your total bill for employer NICs is under £100,000 a year, you could reduce your bill by up to £10,500 thanks to the Employment Allowance – now increased for 2025/2026.

Many small businesses miss this entirely. Claim it via your payroll software or through HMRC's online service.

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6. Getting statutory pay wrong

Whether it's sick pay, maternity leave or the new Neonatal Care Pay, statutory payments come with their own set of rules. Here are some key 2025/2026 rates:

• Statutory Sick Pay (SSP): £118.75 per week

• Statutory Maternity/Paternity/Adoption Pay (SMP/SPP/SAP): £187.18 or 90% of average weekly earnings (whichever is lower)

• Statutory Neonatal Care Pay: Introduced April 2025; same rate as SMP/SPP

You can usually reclaim some or all of this from HMRC, but you need to report it correctly.

7. Not keeping proper records

HMRC expects you to keep detailed payroll records for at least three years. This includes:

• payments and deductions

• employee details

• tax code notices

• pension contributions

Most payroll software handles this for you, but it's still your responsibility to make sure it's accurate.

8. Not staying up to date

Rules change – often quietly. Employer NIC rates, thresholds and allowances are all different this year compared to 2024/2025.

The easiest way to stay informed is to:

• subscribe to HMRC's employer email bulletins

• follow trusted payroll blogs or software providers on social media

• set a yearly date in your diary to review your payroll set-up in April

Final tip: Get the right tools or support

If payroll is taking up too much of your time, consider:

• switching to payroll software (like QuickBooks, Xero or Sage)

• outsourcing to a bookkeeper or accountant

• getting free advice from your local Growth Hub or an Enterprise Nation adviser

It's not just about avoiding mistakes – it's about freeing up your time to run your business.

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