Running a micro company in the UK often means wearing many hats — director, manager, marketer, and sometimes even the bookkeeper. One area that frequently causes confusion for small business owners is payroll, especially when preparing Micro Entity Accounts.
Even though micro-entity legislation simplifies annual reporting, payroll still remains an essential part of financial management if your business employs staff or pays the director through PAYE. Understanding how payroll ties into Micro Entity Accounts is crucial for compliance, accuracy, and avoiding penalties.
In this article, we explain what payroll means for micro companies, how it fits into your statutory accounts, and why outsourcing payroll can often save time, reduce stress, and keep your business perfectly compliant.
What Is Payroll in a Micro Company?
Payroll is the process of paying employees (including directors) and reporting those payments to HMRC. Even if your business is a micro-entity, payroll requirements are the same as for larger companies.
This includes:
Calculating salaries and wages
Deducting tax and National Insurance contributions
Submitting Real Time Information (RTI) to HMRC
Managing statutory payments such as sick pay or maternity pay
Producing payslips
Handling year-end reports like P60s and P11Ds
If you pay yourself a director’s salary through PAYE, you also fall under payroll rules, even if you have no other employees.
Do Micro Entity Accounts Include Payroll?
Yes — payroll activity is part of your company’s financial picture, and it must be recorded in your accounting system.
However, because Micro Entity Accounts follow the simplified FRS 105 framework, payroll is only reflected in certain sections, mainly:
1. Balance Sheet
Payroll affects your balance sheet through:
Wages payable (if salaries are unpaid at year-end)
Taxes owed (PAYE/NIC liabilities)
Employer pension contributions
2. Profit and Loss Statement
Even though micro companies don’t file their P&L publicly, they must prepare it for tax purposes. Payroll-related expenses appear as:
Staff wages
Employer’s National Insurance
Pension contributions
Statutory payments
These figures also play a major role when preparing the company’s Corporation Tax Return.
Why Payroll Matters Even for Micro Companies
Some micro companies assume payroll only applies if they have employees. But in reality, many micro-entity directors pay themselves through a combination of:
Salary (PAYE)
Dividends
Reimbursed expenses
A small salary is common for tax efficiency — and paying yourself a salary means you must run payroll.
Here’s why payroll matters:
1. Legal Requirement
If you pay anyone a wage (including yourself as a director), you must operate PAYE and report it through RTI.
2. Accuracy in Micro Entity Accounts
Your payroll figures affect statutory accounts, corporation tax, and the balance sheet.
3. Avoiding HMRC Penalties
Late RTI submissions or incorrect payroll calculations can lead to fines.
4. Employee Rights and Records
Employees rely on payslips, proof of income, and statutory entitlements.
Challenges Micro Companies Face with Payroll
Even though micro companies are small, payroll can still become complicated. Common problems include:
Miscalculating PAYE or National Insurance
Missing RTI deadlines
Not understanding director-specific payroll rules
Incorrect pension enrolment
Confusing payroll with dividends
Not keeping proper records for year-end accounts
Unlike bookkeeping, which can be unpredictable, payroll runs on a strict monthly schedule, making consistency essential.
Payroll and FRS 105: What You Need to Know
Micro Entity Accounts are prepared under FRS 105, which simplifies many accounting rules.
However, payroll still must be treated correctly:
Wages must be recorded in the correct period
PAYE and NIC liabilities must appear as creditors
Year-end payroll tax liabilities must reconcile with HMRC
Director’s payroll can be handled differently than employee payroll
Statutory payments must follow specific accounting rules
Although micro accounts are simplified, they still must provide a true and fair view of the company’s financial position — and payroll accuracy is a key part of this.
Director Payroll vs Employee Payroll in Micro Companies
Many micro companies have only one salaried person: the director.
Director payroll differs from regular employee payroll in a few ways:
Director Payroll Advantages
National Insurance is calculated on an annual basis
Directors may take a low salary for tax efficiency
Directors often combine salary with dividends
Director salaries can be adjusted more flexibly
Employee Payroll Requirements
If your micro company has employees, you must:
Provide payslips
Enrol eligible employees in a pension scheme
Manage holiday pay
Process statutory payments
Keep detailed employment records
Even a single employee increases compliance significantly.
How Payroll Affects Your Micro Entity Accounts and Tax Return
Payroll costs directly impact your corporation tax calculation.
Here’s how payroll flows through your financial statements:
1. Salaries Reduce Company Profit
Wages and employer’s NIC are allowable business expenses, reducing taxable profit.
2. PAYE and NIC Liabilities Appear on the Balance Sheet
If unpaid, they show as short-term creditors.
3. Statutory Payments Are Offset
For example, maternity pay can be reclaimed from HMRC.
4. Pension Contributions Must Be Accounted For
Both employer and employee contributions need proper classification.
Having accurate payroll records ensures your Micro Entity Accounts and tax returns are correct, consistent, and compliant.
Should Micro Companies Outsource Payroll?
Many micro businesses choose to outsource payroll for several reasons:
1. It Saves Time
Monthly payroll processing, RTI submissions, and reporting take effort — outsourcing eliminates this workload.
2. Reduces Risk of Errors
Professionals ensure correct PAYE, NIC, and pension calculations.
3. Ensures Compliance
Deadlines, payroll codes, and salary updates are handled properly.
4. Keeps Your Accounts Accurate
Payroll feeds into your year-end accounts. Errors can cause problems with both Companies House and HMRC.
5. Affordable for Small Companies
Because micro companies have small teams, payroll outsourcing is typically cost-effective.
Choosing a Payroll Structure for Your Micro Company
Depending on your business size, you can choose from:
1. Director-Only Payroll
Ideal for single-director companies wanting tax-efficient salary payments.
2. Small Team Payroll
For companies with only a few employees.
3. Full Payroll Management
For micro companies planning to expand or needing administrative support.
Your payroll structure should reflect your business model, financial goals, and compliance needs.
Final Thoughts: Payroll Is a Key Part of Micro Entity Accounts
Even though micro-entity legislation simplifies statutory accounts, payroll remains a crucial area that cannot be overlooked. Whether you pay yourself a small salary or manage a team of employees, payroll must be accurate, timely, and compliant with HMRC requirements.
Understanding payroll ensures:
Accurate Micro Entity Accounts
Correct corporation tax calculations
Clean financial records
Avoidance of HMRC penalties
Smooth year-end filing
For many micro companies, outsourcing payroll makes compliance easier and gives business owners the freedom to focus on growth rather than administrative tasks.
