PAYE — Pay As You Earn — is the system HMRC uses to collect income tax and National Insurance from employees’ wages before they reach a pay packet. For employers, it means registering with HMRC, running payroll each pay period, reporting in real time, and making sure the right amounts reach HMRC on time.

It sounds mechanical, and in many ways it is. But PAYE is also one of the areas where small business owners make costly mistakes — often without realising until HMRC comes knocking. Late submissions, wrong tax codes, and missed rate changes are more common than you’d think, and the consequences range from penalty notices to full compliance reviews.

From 6 April 2026, there have been some meaningful changes to National Insurance rates and employer benefits rules that every employer should be across. In this post, we’ll cover the basics of how PAYE works, what’s new for 2026/27, and the errors we see most often when helping clients get their payroll in order.

If any of your employees earns £96 or more per week, receives expenses or company benefits, or is drawing a pension through your business, you need to be registered for PAYE. That threshold catches most employers — even those with just one or two part-time staff.

Once registered, the core obligations are:

• Running payroll each pay period — calculating income tax and National Insurance for each employee using the correct tax code and the current rates.
• Submitting a Full Payment Submission (FPS) to HMRC on or before each payday — this is Real Time Information (RTI), and the timing matters. Submitting late, even by a day, can result in penalty notices.
• Paying HMRC what you owe — most employers pay monthly, by the 22nd of the following month (or 19th by post). Small employers expecting to pay less than £1,500 per month in PAYE and National Insurance can arrange to pay quarterly instead.

Employer National Insurance is also due on each employee’s earnings above the weekly threshold. This is a cost to the business on top of the employee’s own NI contributions — and it’s the figure that catches some newer employers off guard when they first take someone on.

Payroll software handles the calculations automatically, but it’s only as good as the information you feed it. Wrong tax code, wrong start date, wrong employment status — any of these can produce incorrect figures that compound over time.

The 2026/27 tax year brought a cluster of changes that employers need to have accounted for in their payroll setup by now.

Employee National Insurance

The Class 1 employee National Insurance rate increased to 9% from 6 April 2026. If your payroll software wasn’t updated before your first April 2026 pay run, your employees may have had the wrong amount deducted. It’s worth checking this was applied correctly — and correcting through HMRC’s proper procedures if not.

Small Employers’ Relief

If you qualify for Small Employers’ Relief (broadly, employers whose total NI liability in the previous tax year was £45,000 or less), the compensation rate you can reclaim on statutory maternity, paternity, and similar payments has also moved — up to 9% to align with the new employee NI rate.

Changes to homeworking expenses

From 6 April 2026, the tax relief that employees could previously claim on non-reimbursed homeworking expenses has been removed. At the same time, new exemptions have been introduced for expenses that are reimbursed by the employer — including eye tests, flu vaccinations, and homeworking equipment. If you’re reimbursing these through payroll, the good news is they now attract both income tax and National Insurance exemptions, provided you handle them correctly.

These changes are detailed enough to warrant a review of your expenses and benefits processes — not just your payroll rates.

Running payroll for a small business rarely goes perfectly every time. The problems we encounter most often when helping clients sort out their payroll situation tend to fall into a handful of categories.

Late RTI submissions

HMRC expects your Full Payment Submission on or before the date you pay your employees. Submitting after the fact — even if the payment itself is on time — can generate an automatic late filing notice. This catches employers who process payroll manually or who use software but don’t submit the FPS until after the bank transfer has already gone out.

Incorrect tax codes

Using the wrong tax code is one of the most common errors, and it often persists for months before anyone notices. New starters on the wrong code, employees who have had a code change letter from HMRC that wasn’t picked up, or leavers who weren’t processed correctly — all of these lead to incorrect deductions that can create problems for employees at self-assessment time and liabilities for the employer.

Errors with overtime, statutory pay, and deductions

Overtime miscalculations, incorrect statutory sick or maternity pay figures, and errors with other deductions — such as pension contributions or court orders — are also persistent issues. Persistent inaccuracies across multiple periods can be enough to trigger an HMRC compliance review, which is considerably more disruptive than fixing a mistake as soon as it’s spotted.

The consistent theme is that payroll errors are far easier to correct early than once several months have passed.

If you’re a small employer expecting your total PAYE and National Insurance liability to be less than £1,500 per month, you can arrange to pay HMRC quarterly rather than monthly. For businesses with one or two employees, this can simplify cash flow planning — you’re dealing with one payment every three months rather than twelve.

It’s worth knowing, though, that the quarterly arrangement has to be set up with HMRC in advance. You can’t simply decide to pay quarterly without agreeing it with them. And if your liability grows during the year and tips over the threshold, you’re expected to switch back to monthly payments.

There’s also a practical pitfall that catches some employers: HMRC’s systems can flag a PAYE payment made on the last working day of the month as late, because their target date is the 22nd. If you’re paying at month-end out of habit, it’s worth adjusting to ensure you’re comfortably inside that window — late payments can attract interest charges, and repeated lateness can escalate.

If you’re unsure which payment schedule applies to you, or whether your current arrangement is still appropriate given how the business has grown, it’s a straightforward thing to clarify — either directly with HMRC or through your accountant.