Running a small business comes with plenty of responsibilities and one of the most complex areas is employment tax compliance. Whether you have one employee or fifty, understanding your employment tax obligations is essential to avoid penalties and to keep your payroll running smoothly.
In this blog, we break down the key types of employment taxes, explain what they mean for your business, and share practical tips to help SME owners stay compliant, save time, and reduce risk.
What Are Employment Taxes?
Employment taxes are the statutory payments and deductions associated with employing staff in the UK. They include:
- Income Tax – deducted from employees’ wages through PAYE (Pay As You Earn).
- National Insurance Contributions (NICs) – paid by both employer and employee.
- Apprenticeship Levy – paid by larger employers with annual wage bills over £3 million.
- Benefits in Kind and P11D reporting – additional taxes on non-cash benefits such as company cars, private healthcare, or gym memberships.
Every business with employees must correctly calculate, deduct, and pay these taxes to HMRC, often monthly. Getting it wrong can lead to fines, interest charges, or even compliance investigations.
PAYE
PAYE (Pay As You Earn) is HMRC’s system for collecting Income Tax and National Insurance from employment. Employers are responsible for operating PAYE each time staff are paid.
As an employer, you must:
- Register with HMRC before your first payday.
- Calculate tax and NICs on gross pay.
- Make Real Time Information (RTI) submissions every time you pay employees.
- Pay the correct amounts to HMRC, usually by the 22nd of the following month.
Even if you only pay yourself through your company payroll as a director, you’re still required to meet PAYE filing and payment deadlines.
Tip: Automating payroll using software like Xero, Sage, or QuickBooks can simplify RTI submissions and reduce human error.
Employer National Insurance Contributions
In addition to the deductions from employee pay, employers must also pay their own share of Class 1 National Insurance Contributions. The rate depends on how much your employees earn and their individual circumstances.
Common reliefs for SMEs:
- Employment Allowance: Eligible employers can reduce their annual NIC liability by up to £5,000 (2025/26).
- Zero-rate NICs for certain apprentices or young employees: These can apply in specific cases, offering valuable savings.
Review your eligibility annually, many small businesses miss out on this allowance simply because they don’t claim it.
Benefits in Kind and P11D Reporting
Non-cash perks such as company cars, medical insurance, or staff gifts can trigger additional tax and National Insurance obligations. These are known as Benefits in Kind (BIKs).
Employers must:
- Report benefits to HMRC using form P11D (or through payrolling).
- Pay Class 1A NICs on the value of those benefits.
If you offer employee benefits, make sure you understand the tax treatment, remember, not everything is taxable. For example, “trivial benefits” under £50 (such as small gifts or vouchers) are generally exempt.
Properly managing BIKs helps keep your payroll compliant and ensures your staff understand the value of their total reward package.
Employment Taxes for Directors and Shareholders
If you’re a company director, your tax position may differ from that of regular employees. You’ll typically receive income through a combination of salary and dividends.
Key points to remember:
- Directors are included in PAYE reporting, even if paid irregularly.
- National Insurance for directors is calculated on an annual basis.
- Dividends are not subject to NICs but do attract personal tax liabilities.
A qualified accountant can help you structure your income tax-efficiently and ensure all PAYE and dividend reporting requirements are met.
Avoiding Common Employment Tax Pitfalls
Even the most diligent business owners can make mistakes. Here are some of the most common errors we see:
- Missing RTI submission deadlines.
- Failing to update employee tax codes.
- Not reporting all benefits in kind.
- Overlooking the Employment Allowance.
- Misclassifying workers (employee vs. contractor).
Regular payroll audits and professional advice can help you identify issues before HMRC does.
How to Stay Compliant Year-Round
To keep your business compliant:
- Use up-to-date, HMRC-approved payroll software.
- Review your payroll and benefits annually.
- Keep detailed employment records for at least three years.
- Plan ahead for PAYE and NIC payment deadlines.
- Seek professional advice when your business structure or staffing changes.
Employment taxes can seem daunting, but with the right systems and support, they don’t have to be.
Get Expert Support with Employment Taxes
At year-end or any time of year, accurate payroll and employment tax management are vital to your business’s success. From PAYE submissions and P11D compliance to director tax planning, our specialists can help you stay compliant while maximising efficiency.
If you’d like to review your employment tax position or need help setting up payroll, get in touch with our advisory team today. We’ll make sure your business is fully compliant and your staff are paid correctly, on time, every time.
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