What is payroll? Learn how UK payroll works, how to calculate PAYE, NI, and pension contributions, and how to automate it all. Free demo available.
What Is Payroll? Complete Guide for UK Small Businesses
What is payroll? If you employ even one person in the UK, you need to understand this. Payroll is the process of calculating and paying your employees accurately — and reporting every payment to HMRC on time.
Payroll covers everything from working out gross pay, to deducting income tax and National Insurance, to generating payslips, to submitting your figures to HMRC before every single pay day. Get it wrong and HMRC issues penalties. Get it right every time and your business stays compliant, your staff stay happy, and your finances stay clean.
For UK businesses, payroll is not optional. The moment you hire your first employee, PAYE begins. The rules are strict. The deadlines are fixed. And the paperwork is significant.
This guide explains everything. What payroll is. How it works in the UK. What you must calculate. What you must submit. And how the right software makes all of it automatic.
Learn more about payroll features.
Payroll in the UK involves more than just paying salaries.
Every time you pay an employee, you must calculate four separate figures. First, income tax under PAYE. Second, employee National Insurance contributions. Third, employer National Insurance contributions. Fourth, pension contributions under auto-enrolment.
Then you must submit all of this to HMRC before the pay day happens. Not after. Before. This is called Real Time Information, or RTI. Miss the deadline and HMRC issues a penalty automatically.
Additionally, your calculations change constantly. Tax codes change when employees' circumstances change. National Insurance rates change at the start of each tax year. Minimum wage thresholds change. Pension contributions change.
Most small business owners find payroll overwhelming. Therefore, many get it wrong. Consequently, penalties follow. The good news is that modern payroll software handles all of this automatically.
Payroll in the UK has six core components. Every pay run involves all six.
Gross pay is what your employee earns before any deductions. For salaried employees, this is their annual salary divided by 12 for monthly pay. For hourly employees, this is hours worked multiplied by their hourly rate.
Additionally, gross pay includes overtime, bonuses, commission, and statutory payments like sick pay or maternity pay. Therefore, it is rarely the same number every month for every employee.
PAYE stands for Pay As You Earn. It is the system HMRC uses to collect income tax from employees through their employer.
Every employee has a tax code. The most common is 1257L, which means the employee has a personal allowance of £12,570 — the amount they can earn tax-free each year. Above that, income tax applies at the following rates:
You deduct the correct income tax from your employee's gross pay using their tax code. Then you pay this to HMRC on their behalf.
Both employees and employers pay National Insurance (NI).
Employee NI is deducted from the employee's pay. The current rate is 8% on earnings between the Primary Threshold (£12,570 annually) and the Upper Earnings Limit (£50,270 annually). Above £50,270, employees pay 2%.
Employer NI is an additional cost on top of the employee's salary. Employers pay 13.8% on all earnings above the Secondary Threshold (£9,100 annually). This is money you pay directly to HMRC — it doesn't come from the employee's pay.
This means hiring someone at £30,000 per year actually costs you more than £30,000. Furthermore, employer NI adds approximately £2,884 to that cost.
Since 2012, UK employers must automatically enrol eligible employees into a workplace pension scheme. This is not optional.
Eligible employees are those aged between 22 and State Pension age who earn above £10,000 per year. You must enrol them automatically. Additionally, you must contribute to their pension.
Current minimum contributions are:
You deduct the employee contribution from their pay. You add your employer contribution on top. Both go to the pension provider each month.
Net pay is what the employee actually receives in their bank account. It is gross pay minus income tax, minus employee National Insurance, minus employee pension contribution.
This is the figure that matters most to your employees. Therefore, getting it right every month builds trust with your team.
Every employee must receive a payslip on or before their pay day. This is a legal requirement under the Employment Rights Act 1996.
The payslip must show gross pay, every deduction itemised, net pay, and year-to-date figures. Failure to provide payslips is a legal violation. Additionally, inaccurate payslips damage employee trust.
Every pay run follows the same process. Here is exactly what happens.
For salaried staff, gross pay is fixed. For hourly staff, you collect timesheet data. For staff with bonuses or commission, you add those amounts. Additionally, you check for any statutory payments due such as SSP or SMP.
Add up all earnings for the pay period. Include basic salary or wages, overtime, bonuses, commission, and any statutory payments. This gives you gross pay for each employee.
Using each employee's tax code, calculate how much income tax to deduct. Your payroll software does this automatically using HMRC's tax tables. Consequently, the calculation is always accurate.
Calculate employee NI and employer NI separately for each employee based on their gross earnings. These rates change at the start of each tax year on 6 April.
Calculate the employee pension contribution and employer pension contribution based on qualifying earnings. Deduct the employee portion from their pay.
Subtract income tax, employee NI, and employee pension from gross pay. The result is net pay — what goes into your employee's bank account.
Generate a payslip for every employee showing all figures. Distribute on or before pay day. This is a legal requirement.
Before paying your employees, submit a Full Payment Submission (FPS) to HMRC. This tells HMRC exactly what you paid each employee and what you deducted. Submitting on time is critical. Late FPS submissions trigger automatic penalties.
Transfer net pay to each employee's bank account on pay day.
By the 19th of the following month, pay HMRC the income tax deducted, plus employer and employee NI combined. This is your PAYE liability for the month.
Learn how OpesFlux automates every step.
Small retail shop, 4 employees:
Before automating payroll, the owner spent every month-end calculating wages manually. She checked the HMRC tables, calculated tax codes by hand, and emailed payslips in spreadsheet format. Each pay run took 4-5 hours. Additionally, she lived in fear of making a mistake.
Now her payroll software calculates everything automatically. She approves the figures in 10 minutes. Payslips go out automatically. RTI submits to HMRC automatically. Her month-end stress disappeared entirely.
Restaurant group, 28 employees across 4 locations:
Managing payroll across four restaurants with different shift patterns was chaos. Staff had different hourly rates, different hours each week, and different tax codes. The finance manager spent two full days on payroll every month.
Now timesheets feed directly into payroll automatically. Hours are pulled from the rota system. Pay is calculated instantly. The finance manager reviews and approves in 30 minutes. Two days became 30 minutes.
Wholesale distributor, 15 employees:
Their biggest challenge was auto-enrolment. Three employees had opted out. Two had rejoined. Contribution rates had changed. Keeping track manually was impossible.
Now the payroll system tracks auto-enrolment status for every employee automatically. Opt-outs are recorded. Re-enrolment happens automatically every three years as required by law. Pension contributions go to the provider automatically each month.
Learn more about industry solutions.
RTI stands for Real Time Information. It is HMRC's system for receiving payroll data from employers.
Before RTI, employers submitted an annual return to HMRC summarising all pay and deductions for the year. Since April 2013, employers must submit data in real time — meaning before or on each pay day.
Every time you pay an employee, you submit a Full Payment Submission (FPS) to HMRC. This contains each employee's name, NI number, tax code, gross pay, income tax deducted, and NI contributions.
HMRC uses this data to:
Missing an RTI deadline triggers an automatic penalty. For employers with 1-9 employees, the penalty is £100 per month. For 10-49 employees, it is £200 per month. Therefore, getting RTI right every month is not optional.
Auto-enrolment is one of the most important compliance obligations for UK employers. Many small businesses still get this wrong.
You must automatically enrol employees who are:
Employees can opt out after being enrolled. However, you cannot encourage them to opt out. Additionally, you cannot make opting out a condition of employment. Every three years, you must re-enrol anyone who has opted out.
Qualifying earnings are earnings between £6,240 and £50,270 annually. Therefore, if an employee earns £25,000, qualifying earnings are £18,760.
The Pensions Regulator issues penalties for non-compliance. Fixed penalties start at £400. Escalating daily penalties can reach £10,000 per day for large employers. Consequently, getting auto-enrolment right from day one matters enormously.
Many UK small businesses still run payroll manually. Here is what that actually costs.
For 10 employees: 3-5 hours every month. At £25/hour management time, that's £75-125 per month. Additionally, one error can cost hundreds in penalties.
For 10 employees: 20-30 minutes every month. Cost of software: £30-80/month. Time saved: 2-4 hours. Stress saved: Enormous.
Payroll is the process of calculating what each employee earns, deducting income tax, National Insurance, and pension contributions, paying employees their net wages, and reporting everything to HMRC before each pay day.
Most UK businesses run payroll monthly. However, some businesses with hourly workers run payroll weekly or fortnightly. Your pay frequency must be consistent and agreed in the employment contract.
Gross pay is what an employee earns before deductions. Net pay is what they receive after income tax, National Insurance, and pension contributions are deducted. Net pay is what appears in their bank account.
If you submit your RTI FPS late, HMRC issues an automatic penalty. For 1-9 employees, this is £100 per month. Additionally, if you pay HMRC late, interest accrues on the outstanding amount.
You are not legally required to use software. However, HMRC's own free tool (Basic PAYE Tools) only covers the basics. For more than 5 employees, dedicated payroll software saves significant time and reduces errors dramatically.
A P60 is a certificate you give every employee at the end of each tax year (5 April). It summarises their total pay and deductions for the year. Employees use it to complete self-assessment tax returns or claim tax refunds. You must provide P60s by 31 May each year.
A P45 is given to an employee when they leave your business. It shows their total pay and tax deducted in the current tax year. The employee gives it to their next employer so their tax code is applied correctly.
Never miss a deadline. Here are the critical dates every UK employer must know.
| Date | What Happens |
|---|---|
| 6 April | New tax year begins. New tax codes, NI rates, and thresholds apply. |
| 19 April | Deadline to pay HMRC for PAYE in the previous tax year. |
| 31 May | Deadline to give all employees their P60. |
| 6 July | Deadline to submit P11D forms for employee benefits. |
| 19 of each month | Monthly PAYE payment due to HMRC (if paying by cheque). |
| 22 of each month | Monthly PAYE payment due to HMRC (if paying electronically). |
| On or before pay day | RTI Full Payment Submission must reach HMRC. |
The right time to set up proper payroll is before your first employee starts. Not after. Not at month end when panic sets in.
Proper payroll from day one means your employees are paid correctly every time. HMRC receives accurate RTI submissions on time. Auto-enrolment runs automatically. Your PAYE liability is always right. Penalties never happen.
Your business deserves payroll that runs without stress. It deserves payslips that generate automatically. It deserves RTI that submits itself. It deserves auto-enrolment that tracks itself.
The question isn't "Should I sort out my payroll?" It's "How much has doing it manually already cost me?"
Book Your Free Demo — See how OpesFlux payroll works in 20 minutes.
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OpesFlux is the all-in-one ERP and POS platform built for businesses worldwide. Payroll, inventory, point of sale, accounting, and tax compliance — all in one place.
Automatic PAYE calculations. RTI submissions to HMRC. Auto-enrolment tracking. Payslips generated instantly. Everything your payroll needs, built in.
No setup fees. No infrastructure costs. Most businesses are live within 24 hours.
Visit OpesFlux — opesflux.devsandvisuals.com
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