A Simple Guide to PAYE & NIC for Small Employers
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Jul 17 2026

A Simple Guide to PAYE & NIC for Small Employers

Hiring staff is a big step for any small business. It brings new talent and capacity for growth, but it also means taking on important responsibilities as an employer. PAYE (Pay As You Earn) and National Insurance Contributions (NIC) are two of the most critical areas to understand. Getting them right helps you stay compliant with HMRC, avoid penalties, and manage employment costs effectively.

At Jan McDermott Chartered Accountants in Birkenhead, Wirral, we support many small businesses and growing companies across Merseyside, Cheshire, and beyond with payroll, PAYE setup, NIC calculations, and ongoing compliance. Our practical, straightforward approach takes the complexity out of employer obligations so you can focus on running and growing your business. Whether you’re hiring your first employee or expanding your team, we provide expert guidance and efficient payroll services tailored to small employers.

This simple guide explains the essentials of PAYE and NIC for small businesses in the 2026/27 tax year.

What Is PAYE?

PAYE is the system HMRC uses to collect Income Tax and National Insurance from employees’ wages. As an employer, you act as a collector for HMRC, deducting the correct amounts from pay and paying them over monthly.

Key features of PAYE:

  • Operates in real time through RTI (Real Time Information) submissions.
  • Requires a Full Payment Submission (FPS) every time you pay an employee.
  • Covers Income Tax, Employee NIC, and Employer NIC.
  • Handles statutory payments like Statutory Sick Pay, Maternity Pay, etc.

You must register as an employer with HMRC before the first payday,  ideally as soon as you know you will hire someone.

National Insurance Contributions (NIC) Explained

There are two main types of Class 1 NIC:

1. Employee NIC (Primary Contributions) Deducted from the employee’s gross pay.

For 2026/27:

  • 8% on earnings between the Primary Threshold (£12,570 per year / £1,048 per month / £242 per week) and the Upper Earnings Limit (£50,270 per year / £4,189 per month / £967 per week).
  • 2% on earnings above the Upper Earnings Limit.

2. Employer NIC (Secondary Contributions) Paid by the business on top of the employee’s gross salary.

For 2026/27:

  • 15% on earnings above the Secondary Threshold (£5,000 per year / £417 per month / £96 per week).

This rate and lowered threshold (introduced in previous years) mean employment costs more for many businesses than before, making accurate planning essential.

Employment Allowance – A Valuable Relief for Small Employers

Most small businesses can reduce their Employer NIC bill by up to £10,500 per tax year through the Employment Allowance.

Eligibility:

  • Available to most employers whose total Employer NIC liability is below certain limits.
  • From 2025/26 onwards, the previous £100,000 cap was removed, widening access.
  • Not available to companies where a director is the sole employee in many cases.

You claim via your payroll software or EPS (Employer Payment Summary). We help clients check eligibility and make the most of this relief.

Example: Monthly Cost Breakdown (2026/27)

Assume a full-time employee earning £2,500 gross per month (£30,000 per year).

  • Employee side:
    • Income Tax: Approx. £260–£300 (after personal allowance).
    • Employee NIC: Approx. £120–£140.
  • Employer side:
    • Employer NIC: Approx. £310 (15% above £417 monthly threshold).
    • Total cost to business: £2,500 + £310 = £2,810 per month.

Over a year, this adds up. Accurate forecasting prevents cashflow surprises. Our team provides support and guidance to help you plan effectively.

Auto-Enrolment Pensions

If your employee earns over £10,000 annually (and meets age and other criteria), you must enrol them into a qualifying workplace pension.

Minimum contributions (total 8%):

  • Employer: 3%
  • Employee: 5%

You must register with The Pensions Regulator. We guide clients through scheme selection, staging dates, and ongoing compliance.

Other Statutory Payments and Obligations

  • National Minimum/Living Wage: Must be paid at current rates.
  • Holiday Pay: Minimum 5.6 weeks (28 days for full-time staff).
  • Statutory Sick Pay (SSP): This is now payable from the first day of sickness.
  • Maternity / Paternity / Shared Parental Pay: With possible recovery from HMRC.
  • Right to Work Checks: Legal requirement before employment starts.

Failure to comply can result in fines, back payments, and reputational damage.

national insurance guide

Common Challenges for Small Employers

  • Underestimating total employment costs (often 20–30%+ on top of salary).
  • Late or incorrect RTI submissions.
  • Confusion over tax codes and starter declarations.
  • Managing payroll during employee changes or absences.
  • Keeping up with annual rate changes and thresholds.

Many small businesses find that outsourcing payroll to a trusted accountant saves time and reduces risk.

How Jan McDermott Chartered Accountants Supports Small Employers

We understand the pressures faced by owner-managed businesses in Wirral, Liverpool, and the North West. Our payroll compliance services include:

  • Full PAYE registration and setup
  • Monthly payroll processing and RTI submissions
  • Employer NIC calculations and Employment Allowance claims
  • Auto-enrolment pension compliance
  • P60s, P11Ds, and year-end returns

We offer clear, fixed-fee packages where possible, so you know your costs upfront. Many clients describe us as their “outsourced finance team”, handling the detail while they focus on business growth.

Best Practices for Staying Compliant

  • Instruct professional help early when hiring.
  • Keep excellent records for at least 6 years.
  • Review payroll regularly, especially after pay rises or new hires.
  • Budget for the true cost of employment.
  • Stay informed about HMRC changes (or let us keep you updated).

Conclusion: Make PAYE & NIC Simple

Running payroll and managing PAYE and NIC doesn’t need to be overwhelming. With the right systems, knowledge of thresholds, and professional support, small employers can meet their obligations efficiently while controlling costs.

At Jan McDermott Chartered Accountants, we make compliance straightforward and cost-effective. Our experienced team delivers accurate, timely payroll services with proactive advice that helps your business grow sustainably.

If you’re about to hire staff, currently managing payroll in-house, or simply want a review of your existing arrangements, contact us today. We offer friendly, no-obligation initial discussions to see how we can support you.