Payroll Basics: Everything Employers Need to Know
Running payroll is one of the most important responsibilities for any employer. Getting it wrong can result in unhappy employees, HMRC penalties, and serious compliance issues. This comprehensive guide covers everything you need to know about UK payroll.
Getting Started with Payroll
Before You Pay Your First Employee
You must complete these steps before making your first payment:
Register as an Employer with HMRC
Register online at least 4 weeks before paying employees. You'll receive your PAYE reference number and Accounts Office reference.
Choose Payroll Software
You must use HMRC-recognised payroll software to report through Real Time Information (RTI). Popular options include:
- • Xero Payroll
- • QuickBooks Payroll
- • Sage Payroll
- • HMRC's Basic PAYE Tools (free for up to 9 employees)
Collect Employee Information
Get from each employee:
- • Full name and address
- • Date of birth
- • National Insurance number
- • P45 from previous employer (if applicable)
- • Student loan information
- • Bank details for payment
Set Up Workplace Pension
You must enrol eligible employees into a workplace pension scheme. Contact The Pensions Regulator to register and choose a pension provider.
Understanding PAYE (Pay As You Earn)
PAYE is the system used to collect Income Tax and National Insurance from employees' wages. As an employer, you're responsible for:
What You Deduct
- Income Tax - Based on their tax code and earnings
- Employee's National Insurance - 12% on earnings between £12,570-£50,270
- Student Loan Repayments - If applicable
- Pension Contributions - Employee's portion
What You Pay
- Employer's National Insurance - 13.8% on earnings above £9,100
- Employer's Pension Contribution - Minimum 3% of qualifying earnings
- Apprenticeship Levy - 0.5% if payroll exceeds £3 million
Real Time Information (RTI) Reporting
Critical Requirement
You must report PAYE information to HMRC on or before each payday using Full Payment Submission (FPS). Late submissions can incur penalties.
Full Payment Submission (FPS)
Submit every time you pay employees, including information about:
- • Pay and deductions
- • Income Tax
- • National Insurance
- • Student loans
- • Statutory payments (SSP, SMP, etc.)
- • New starters and leavers
Employer Payment Summary (EPS)
Submit when you need to report:
- • Statutory payment recoveries (SMP, SPP, etc.)
- • Employment Allowance claims
- • Construction Industry Scheme deductions
- • No payment for the month
Pension Auto-Enrolment
All UK employers must provide a workplace pension scheme and automatically enrol eligible employees.
| Employee Type | Age | Earnings | Action Required |
|---|---|---|---|
| Eligible | 22 - State Pension age | Over £10,000/year | Auto-enrol |
| Non-eligible | 16-21 or SPA-74 | Over £10,000/year | Can opt in |
| Entitled | 16-74 | Under £10,000/year | Can opt in |
Minimum Contributions
*Based on qualifying earnings (£6,240 - £50,270)
Your Responsibilities
- Auto-enrol eligible employees
- Pay minimum contributions
- Re-enrol leavers every 3 years
- Keep records for 6 years
Monthly Payroll Calendar
On or Before Payday
- • Calculate gross pay, deductions, and net pay
- • Submit Full Payment Submission (FPS) to HMRC
- • Pay employees via BACS or other method
- • Provide payslips to employees
19th of Each Month
- • Pay HMRC (Income Tax, NI, student loans)
- • Payment can be made by 22nd if paying online
Other Monthly Tasks
- • Pay pension contributions to provider
- • Submit EPS if claiming recoveries or Employment Allowance
- • Reconcile payroll accounts
April (Year End)
- • Submit final FPS for tax year
- • Provide P60s to employees by 31 May
- • Submit P11D forms for benefits by 6 July
Common Payroll Mistakes
Late RTI Submissions
£100-£400 penalty per month. Submit FPS on or before payday.
Incorrect Tax Codes
Using wrong tax codes leads to under or over-deduction. Use P45 info or emergency code for new starters.
Forgetting Employer's NI
Don't forget 13.8% employer's contribution on top of salary. Factor this into hiring costs.
Not Auto-Enrolling Employees
Pension Regulator can fine up to £10,000 per day. Set up auto-enrolment immediately.
Let Us Handle Your Payroll
Focus on running your business while we ensure your payroll is accurate, compliant, and submitted on time. No more worrying about RTI deadlines or pension regulations.
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