Payroll Services for Small Businesses: Options & Costs

Your payroll options explained

There's no single right answer here. The best approach depends on how many people you employ, how complex your payroll is and how much of your time you can give to admin. Here's what each option involves.

 

Option 1: Do it yourself with HMRC's free tools

HMRC's Basic PAYE Tools (BPT) is free payroll software designed for employers with fewer than 10 employees. It lets you calculate Income Tax and National Insurance, produce PDF payslips and file RTI (Real Time Information) returns directly to HMRC. RTI is the system that requires you to report every payment you make to employees, on or before the day you pay them. BPT also handles statutory payment calculations such as Statutory Sick Pay and Statutory Maternity Pay.

If your payroll is genuinely simple (a handful of salaried employees paid monthly, no overtime or commission), BPT might be all you need.

What it won't do: BPT does not handle auto-enrolment (your legal duty to enrol eligible staff into a workplace pension). You'll need to manage pension assessments and contributions separately, using The Pensions Regulator's basic toolkit or another method. It's a desktop application with no cloud access, no integration with accounting software and no employee self-service portal. There's no phone support if something goes wrong.

Important: HMRC recommends commercial payroll software once you have 10 or more employees. BPT has a hard limit, so it's a starting point rather than a long-term solution for growing businesses.

Cost: Free.

For more on the recognition scheme and what qualifies, see our guide to HMRC-recognised payroll software.

 

Option 2: Standalone payroll software

Commercial payroll software gives you more features and flexibility than HMRC's free tools, while keeping you in control of the payroll process. Most options are now cloud-based (you can access them from any device and your data is backed up automatically), though desktop versions are still available. For a deeper look at cloud options specifically, see our guide to cloud payroll software.

Look for software that includes RTI filing, auto-enrolment, BACS payment processing, digital payslips, year-end reporting and employee self-service. Products like Sage, Xero and BrightPay are widely used by UK small businesses.

Who it suits: businesses with some payroll knowledge (or willingness to learn), typically with 5 to 50 employees, who want to stay hands-on.

Cost: typically £5 to £30 per month as a base fee, plus £1 to £3 per employee. Most offer a free trial.

For a detailed evaluation of what to look for, see our guide to payroll software for small businesses.

 

Option 3: Your accountant

Many small businesses have their accountant run payroll, either bundled into their monthly accounting fee or charged as a separate per-employee add-on. If you already have a trusted relationship with your accountant and your payroll is straightforward, this can feel like the simplest option.

The advantages are real: one relationship to manage, someone who already understands your finances, and less to think about each month.

But there are trade-offs worth considering. Accountants are generalists, not payroll specialists. They may not keep pace with every legislative change (the 2026 SSP reforms are a good example of how quickly the rules can shift). The cost per employee is often higher than a dedicated payroll provider, and the service scope can be limited: you're unlikely to get employee self-service, real-time reporting dashboards or automated pension submissions.

Questions to ask your accountant before relying on them for payroll:

• Are you or your team CIPP-qualified or payroll-accredited?
• What HMRC-recognised software do you use for payroll processing?
• How do you handle auto-enrolment assessments and pension submissions?
• What's included in the fee, and what costs extra (year-end, ad-hoc queries, mid-year starters)?
• How quickly do you turn payroll around each month?

Cost: typically £5 to £15 per employee per month when charged separately. When bundled into accounting fees, the payroll cost can be less visible, but it's still there.

 

Option 4: A payroll bureau

A payroll bureau is an external provider that processes your payroll on your behalf. You supply the employee data (hours worked, starters, leavers, pay changes), and they handle the calculations, produce payslips and file your RTI submissions to HMRC.

The key difference between a bureau and a fully managed service is where the responsibility sits. With a bureau, you're still responsible for collecting and providing accurate data and for answering your employees' payroll queries. The bureau handles the processing.

Who it suits: businesses that want to offload the technical processing but are comfortable managing the data input and employee-facing side.

Cost: typically £3 to £8 per employee per month (often described as PEPM, meaning "per employee per month"). Auto-enrolment administration, year-end charges and ad-hoc queries may cost extra, so check what's included before you sign up.

 

Option 5: A fully managed payroll service

A managed payroll service handles the payroll process on your behalf. Your provider collects the data, runs the calculations, files RTI submissions to HMRC, handles employee queries, administers pension contributions and manages year-end reporting. You still approve the payroll run and provide accurate employee information, but the operational burden shifts to the provider.

Who it suits: businesses that want to hand payroll off completely, growing businesses adding headcount, and anyone whose primary concern is compliance confidence rather than cost alone.

What to look for at this scale: no minimum headcount requirements, flexible contract terms (avoid long lock-ins), a named contact rather than a ticket queue, HMRC-recognised technology and CIPP-qualified payroll staff.

Cost: typically £4 to £12 per employee per month, plus a one-off setup fee. Pricing varies depending on payroll complexity, pay frequency and the services included. For a detailed breakdown, see our guide to payroll outsourcing costs in the UK.

If you're weighing up whether to keep payroll in-house or hand it over entirely, our guide to comparing in-house and outsourced payroll covers both sides honestly.

 

How the options compare

 

Option	At a glance
HMRC Basic PAYE Tools	Cost: Free. Includes: Tax/NI calculations, payslips, RTI filing, statutory pay. You handle: Auto-enrolment, queries, record-keeping, everything else. Best for: Micro-businesses with fewer than 10 employees and simple monthly payroll.
Payroll software	Cost: £5–£30/mo + £1–£3/employee. Includes: Full payroll processing, RTI, auto-enrolment, payslips, year-end. You handle: Running payroll each period, data input, queries. Best for: 5–50 employees, want control, some payroll knowledge.
Your accountant	Cost: £5–£15/employee/mo. Includes: Payroll processing, RTI filing, payslips (varies by practice). You handle: Data provision, queries, potentially pensions. Best for: Very small, simple payroll, existing trusted relationship.
Payroll bureau	Cost: £3–£8/employee/mo. Includes: Calculations, payslips, RTI submissions. You handle: Data collection, employee queries, possibly pensions. Best for: Want to offload processing, comfortable providing data.
Managed payroll	Cost: £4–£12/employee/mo + setup. Includes: Data collection, processing, HMRC submissions, pensions, queries, year-end. You handle: Approving the payroll run, providing accurate employee data. Best for: Want to hand over the operational burden, compliance priority, growing team.

 

What the law requires: payroll compliance for small businesses

If you employ anyone in the UK, you have legal obligations around payroll. These aren't optional, and they apply from your very first employee. Here's what you need to know, in plain English.

 

Registering as an employer

Before your first payday, you must register as an employer with HMRC. You can do this on GOV.UK. HMRC will issue you an employer PAYE reference and an Accounts Office reference. You'll need both to file payroll returns and make PAYE payments. Allow enough time for these to arrive before your first pay run.

 

RTI: reporting to HMRC in real time

RTI means you must tell HMRC about every payment you make to an employee, on or before the day you pay them. This is done through a Full Payment Submission (FPS), filed using HMRC-recognised payroll software.

This isn't something you can batch up at the end of the month or deal with at year-end. Every payday, your FPS needs to go to HMRC. If no payments are made in a tax month, you send an Employer Payment Summary (EPS) instead, by the 19th of the following month.

Late filing triggers penalties that scale with your headcount:

 

Number of employees	Monthly penalty
1 to 9	£100
10 to 49	£200
50 to 249	£300
250 or more	£400

 

The first late filing in a tax year is penalty-free, and HMRC operates a three-day grace period (though this is a concession, not an extension of the deadline). If you're more than three months late, an additional penalty of 5% of the unreported tax and National Insurance applies. You can find full details on the GOV.UK running payroll page.

 

Auto-enrolment: workplace pensions from day one

Auto-enrolment applies to all UK employers, regardless of size. If you have even one employee who is aged 22 to State Pension age and earns more than £10,000 a year, you must automatically enrol them in a qualifying workplace pension scheme.

For the 2026/27 tax year, the key thresholds (all unchanged from the previous year) are:

• Earnings trigger: £10,000 per year
• Qualifying earnings band: £6,240 to £50,270
• Minimum total contribution: 8% of qualifying earnings (at least 3% from the employer, the remainder from the employee)

The Pensions Regulator enforces compliance and can issue fixed penalty notices and escalating daily penalties if you don't meet your duties.

Important: auto-enrolment is not something you can put off until your team reaches a certain size. Your duties begin from the day your first eligible employee starts work.

 

Minimum wage, sick pay, payslips and year-end

National Minimum Wage and National Living Wage (2026/27): you must pay at least the statutory minimum for each employee's age band. For workers aged 21 and over, the National Living Wage is £12.71 per hour from 1 April 2026. HMRC enforces compliance, and penalties for underpayment can reach 200% of the arrears owed, plus public naming. Check the current rates on GOV.UK.

Statutory Sick Pay changed significantly from 6 April 2026. Under the Employment Rights Act 2025, SSP (Statutory Sick Pay) is now payable from the first day of sickness (the three-day waiting period has been abolished) and the lower earnings limit has been removed, meaning all employees are eligible regardless of their weekly earnings. The rate for the 2026/27 tax year is £123.25 per week or 80% of average weekly earnings, whichever is lower. This is a meaningful cost change for small businesses and a practical example of why staying current with legislation matters. ACAS has a full overview of the changes.

Payslips are a legal requirement for all employees, including those on zero-hours contracts. Each payslip must show gross pay, deductions and net pay.

Year-end requires a final FPS by 5 April and P60s issued to all employees by 31 May. You must keep payroll records for a minimum of three years after the end of the relevant tax year.

How to choose the right payroll service for your business

Once you know which type of service suits your situation, you need to pick a provider. Here's a quick decision framework and the questions that matter most. For the full evaluation process, see our comprehensive guide to how to choose a payroll provider.

If you're also thinking about bringing HR processes together with payroll, our guide to HR software for small businesses covers what to look for.

 

What matters most to you?

• Cost is the priority? Start with HMRC's free tools or low-cost payroll software
• Control matters most? Payroll software or a bureau arrangement
• Time is your scarcest resource? Bureau or managed service
• Compliance confidence is what you need? Managed payroll service with CIPP-qualified staff
• You're growing quickly? A managed service that can scale with you

 

Key questions to ask any provider

• What's included in the base price, and what costs extra?
• How do you handle auto-enrolment assessment and pension submissions?
• What HMRC-recognised software do you use?
• Are your payroll staff CIPP-qualified?
• What's the contract term and notice period?
• How do you keep up with legislative changes (such as the recent SSP reforms)?
• Do you offer employee self-service (online payslips, P60 access)?
• What does the transition process look like, and how long does it take?

 

What good looks like

A good payroll provider for a smaller business should be able to offer:

• Transparent pricing: a clear breakdown of what's included in the base fee and what costs extra, available before you commit to a lengthy sales process
• Flexible contract terms: a reasonable notice period and the ability to leave if the service isn't working, rather than being locked in for years
• Inclusive service scope: year-end processing, pension submissions and standard queries included in the core price, not charged as extras
• A named contact: someone who knows your business, rather than a ticket queue every time you have a question
• HMRC-recognised software: your provider's technology should appear on HMRC's list of recognised payroll software

Frequently asked questions

How much does a payroll service cost for a small business?

Most UK payroll providers charge between £3 and £12 per employee per month, depending on the level of service. A basic payroll bureau typically falls at the lower end, while a fully managed service that handles HMRC submissions, pension administration and employee queries will cost more. Many providers also charge a one-off setup fee. HMRC's Basic PAYE Tools is free if you have fewer than 10 employees, though it won't handle auto-enrolment.

 

Can I do my own payroll as a small business?

Yes. HMRC's Basic PAYE Tools lets you calculate tax and National Insurance, produce payslips and file RTI returns at no cost, provided you have fewer than 10 employees. You'll need to manage auto-enrolment separately. Many small businesses run payroll themselves successfully, but it takes time each month and you're responsible for keeping up with legislation.

 

Should I use my accountant for payroll?

Your accountant can be a convenient option, especially if your payroll is simple and you have a trusted relationship. However, accountants are not always payroll specialists, and the cost per employee can be higher than a dedicated provider. Ask whether they use HMRC-recognised software, how they handle auto-enrolment, and whether the fee covers year-end processing and ad-hoc queries.

 

When should a small business outsource payroll?

Most businesses find that manual payroll becomes difficult to sustain around 10 to 15 employees. The case for outsourcing strengthens as headcount grows beyond 20 to 30. Other triggers include frequent errors, legislation anxiety, rapid growth, or simply wanting to reclaim the hours you currently spend on admin each month.

 

What is auto-enrolment and do I have to do it?

Auto-enrolment is a legal requirement for all UK employers. If you have even one eligible employee (aged 22 to State Pension age, earning over £10,000 a year), you must enrol them into a qualifying workplace pension scheme and contribute at least 3% of their qualifying earnings. The Pensions Regulator enforces this, and penalties apply for non-compliance.

 

What's the difference between a payroll bureau and a managed payroll service?

A payroll bureau processes your calculations, produces payslips and files RTI returns to HMRC, but you provide the employee data and handle queries. A managed payroll service handles the process on your behalf: collecting data, running payroll, submitting to HMRC, handling queries, managing pensions and processing year-end. You still provide accurate employee information, but the operational burden shifts to the provider. The managed option typically costs more per employee.

 

Do I need payroll software if I only have a few employees?

If you have fewer than 10 employees, HMRC's Basic PAYE Tools may cover your needs for RTI filing and basic calculations. However, it doesn't handle auto-enrolment and has limited functionality. Even for small teams, commercial payroll software (from around £5 per month) saves time, reduces the risk of errors and grows with your business.

 

What happens if I file payroll late with HMRC?

HMRC issues penalties for late FPS submissions based on employee numbers: £100 per month for 1 to 9 employees, £200 for 10 to 49, £300 for 50 to 249, and £400 for 250 or more. The first late filing in a tax year is penalty-free, and there is a three-day grace period. After three months, an additional 5% penalty applies on the unreported tax and National Insurance.