How Payroll Processing Works in the UK

UK employers are responsible for calculating what their employees are paid, deducting Income Tax and National Insurance, and reporting each payment to HM Revenue and Customs (HMRC). Most employers do this through Pay As You Earn (PAYE), using payroll software to calculate deductions and submit reports on or before each payday.

Payroll follows the same sequence every pay period, with additional tasks at the end of the tax year. Understanding each stage and its deadline helps employers pay staff correctly, meet their obligations to HMRC, and avoid penalties for late reporting or late payment.

How Does Payroll Processing Work in the UK?

Employers normally operate PAYE as part of their payroll. PAYE is the system HMRC uses to collect Income Tax and National Insurance on employment income. The employer calculates what each employee has earned, deducts tax and National Insurance, pays the employee the remaining amount, and pays the deductions to HMRC.

Employers normally need to register with HMRC when they start employing staff. This also applies to a limited company with a single director who is its only employee.

Setting Up Payroll Before the First Payday

An employer needs to complete several tasks before paying staff for the first time.

Registering as an Employer

An employer must register with HMRC before the first payday. It is not possible to register more than two months before the employer starts paying people. HMRC then sends the employer a PAYE reference number by letter, so registration should be completed in good time.

Choosing Payroll Software

Employers report to HMRC online, so they need payroll software that can record employee details, calculate pay and deductions, and send reports to HMRC. Employers who do not wish to run the software themselves can use an accountant or payroll provider.

Collecting New Starter Information

Each new employee must be set up with the correct tax code. Employers usually take this information from the P45 issued by the previous employer. If an employee does not have a recent P45, they complete the HMRC starter checklist, and the employer uses it to work out the tax code.

What Does the Payroll Process Look Like in the UK?

Many employers pay monthly, and the same six steps apply to weekly and fortnightly pay.

Step 1: Calculate Gross Pay

Gross pay is the total an employee has earned before deductions. It includes salary or hourly wages, overtime, bonuses, commission, and statutory payments such as sick pay. For hourly paid workers, the rate must meet the National Minimum Wage for the age of the worker.

Step 2: Deduct Income Tax

The tax code of an employee determines how much they can earn before Income Tax applies. For the 2026 to 2027 tax year, the standard Personal Allowance is £12,570 a year, or £1,048 a month. In England, Wales, and Northern Ireland, earnings above the allowance are taxed at 20%, 40%, or 45%, depending on the band. Scotland has its own rates and bands.

Step 3: Deduct National Insurance

Both employees and employers pay National Insurance. Under the standard category A, employees pay 8% on monthly earnings above £1,048 and 2% on monthly earnings above £4,189. Employers pay a separate contribution of 15% on earnings above £417 a month. Eligible employers can reduce their annual National Insurance liability by up to £10,500 through the Employment Allowance.

Step 4: Deduct Pension Contributions and Other Amounts

Employers must automatically enrol eligible workers in a workplace pension. This applies to workers aged 22 up to the State Pension age who earn at least £10,000 a year. The total minimum contribution is 8% of qualifying earnings, and the employer must contribute at least 3% of qualifying earnings towards it. Other deductions, like student loan repayments, are also taken at this time.

Worked Example

The example below shows the main deductions for an employee in England who earns £2,500 a month on the standard tax code. 

Source: GOV.UK rates and thresholds for employers.

Step 5: Issue Payslips and Pay Employees

Employers must give employees and workers a payslip on or before payday. The payslip must show gross pay, deductions, and net pay, as well as the number of hours worked if pay varies with time worked. The employer then pays the net amount, usually by bank transfer.

Step 6: Report to HMRC

On or before payday, the employer sends HMRC a Full Payment Submission (FPS) showing the payments and deductions made. An Employer Payment Summary (EPS) is also required by the 19th of the following tax month if the employer paid no employees in that tax month or wants to claim a reduction, for example, for statutory pay.

Each pay run involves several calculations and a report that must reach HMRC on time. Everest Accountants Ltd. manages the full process using secure cloud payroll in the UK, helping employers pay their staff accurately and meet every reporting deadline. Contact us today for dependable payroll support!

How Is Payroll Processed in the UK After Payday?

Payroll does not end when employees have been paid. The employer must still pay HMRC and keep the required records.

Paying HMRC

Each tax month ends on the 5th. The tax and National Insurance owed for that month must reach HMRC by the 22nd if the employer pays electronically, or by the 19th if paying by post. HMRC may charge a penalty if payment is late.

Keeping Payroll Records

Employers must keep payroll records for three years after the end of the tax year they relate to. HMRC may check these records to confirm that the correct amount of tax has been paid. The records an employer must keep include:

• Pay and deductions: What each employee was paid and the deductions made.
• Reports to HMRC: The payroll reports submitted for each pay period.
• Payments to HMRC: The amounts paid to HMRC for each tax month.
• Leave and sickness absences: Records of employee leave and sickness.
• Tax code notices: Any tax code notices received for employees.
• Expenses and benefits: Details of taxable expenses or benefits provided to employees.

Key Payroll Deadlines for UK Employers

Most stages of UK payroll processing have a
fixed deadline. The table below summarises the main dates.

Sources: GOV.UK, Running payroll and GOV.UK, Payroll: annual reporting and tasks.

End of Tax Year Payroll Tasks

The tax year ends on 5 April. Employers send their final FPS on or before the last payday of the tax year and then update employee records and payroll software for the new tax year, which starts on 6 April. Employees who are working for the employer on 5 April must receive a P60 by 31 May. The P60 summarises their total pay and deductions for the year. Employers who provided taxable expenses or benefits must report them to HMRC by 6 July.

Running Payroll In-House or Outsourcing It

Employers can run payroll themselves or use an accountant or payroll provider. Running payroll in-house gives the employer direct control and can suit a small, stable team. Outsourcing involves a fee but reduces the administrative workload and gives access to specialist knowledge. The right choice depends on the size of the team, the time available, and how confident the employer is with payroll rules.