UK HR and payroll: a starter guide
Reviewed by Mellow Editorial Team, HR & payroll content team
Running payroll and HR in the UK means operating within a tightly defined legal framework — get the core obligations right from day one and you avoid costly penalties, unhappy employees and HMRC investigations.
Employment status comes first
Before you process a single payment, you need to know how each person you engage is classified. The three main categories are employee, worker and self-employed contractor. The distinction matters enormously: employees and workers attract the most obligations (tax, National Insurance, statutory leave, pension auto-enrolment), while genuinely self-employed contractors manage their own tax affairs.
HMRC's Check Employment Status for Tax (CEST) tool is the standard starting point. Be honest when you use it — if someone works fixed hours, uses your equipment and cannot send a substitute, they are unlikely to be genuinely self-employed regardless of what a contract says. Getting this wrong is called misclassification and it can result in significant back-payments of tax and NI.
Setting up PAYE
For any employee or worker you pay, you must register as an employer with HMRC and operate Pay As You Earn (PAYE). Under the Real Time Information (RTI) system, you submit a Full Payment Submission (FPS) on or before every payday — not monthly, not quarterly, on or before. Late submissions attract automatic penalties.
Income tax is deducted based on each employee's tax code. The standard personal allowance is £12,570, meaning earnings up to that threshold attract no income tax. Above it, the basic rate is 20%, the higher rate is 40% and the additional rate is 45%. You collect these amounts from employees and remit them to HMRC, along with National Insurance contributions.
For National Insurance, employees contribute 8% on earnings within the standard band and 2% above the upper earnings limit. As the employer, you pay 13.8% on top of gross earnings above the secondary threshold. These employer NI costs are your direct cost of employment, separate from gross salary — factor them into every hiring decision.
Year-end obligations include issuing a P60 to every employee still on your payroll by 31 May following the tax year end, and filing a P11D (for expenses and benefits in kind) by 6 July.
Pension auto-enrolment
If you employ anyone aged 22 or over who earns above the earnings trigger, you must automatically enrol them into a qualifying workplace pension scheme. The minimum contributions are 3% from you as the employer and 5% from the employee, both calculated on qualifying earnings. You cannot opt out of this or delay it without a valid legal reason — The Pensions Regulator enforces compliance actively and issues fixed-penalty notices.
New starters should be assessed on their first day. Keep records of enrolment, contributions and any opt-outs; you will need them for your re-enrolment declaration every three years.
Core employment rights
Employees are entitled to 5.6 weeks of statutory annual leave per year — that is 28 days including bank holidays for someone working a standard five-day week. Leave accrues from day one of employment.
Statutory Sick Pay applies when an employee is off sick for qualifying periods, and various family-leave entitlements (maternity, paternity, shared parental, adoption) carry statutory minimum pay rates. You recover some of these costs through your PAYE remittances.
The Employment Rights Act 2025 significantly extends day-one rights. Unfair dismissal protection, which previously required two years of continuous service, now applies from day one for most employees. This changes how you should approach probation periods, performance management and disciplinary procedures — you need fair and documented processes from the moment someone joins, not six months in.
Contracts of employment must be provided on or before the first day of work, not within two months as was previously acceptable. Make sure your contracts are up to date and cover the required written statement of particulars.
Keeping payroll accurate day to day
Payroll errors compound quickly. A wrong tax code, a missed pay element or a late RTI submission can trigger HMRC queries, employee complaints and correction processes that take time to unwind.
A few habits that help:
- Run a payroll checklist before every pay run covering starters, leavers, salary changes and any statutory payments due.
- Reconcile your payroll costs to your bank and accounts each month — discrepancies usually signal a data entry error or a missed deduction.
- Keep a clear audit trail. HMRC can request payroll records going back several years.
- Stay current on threshold and rate changes that take effect each April. The personal allowance, NI thresholds and minimum wage rates all change, sometimes significantly, at the start of each tax year.
If you are running payroll across multiple countries as well as the UK, the compliance complexity multiplies — each jurisdiction has its own equivalents of RTI, auto-enrolment and employment law, and they rarely align neatly.
The payroll and HR framework in the UK is detailed but logical once you understand the structure. The risk is not usually the complexity itself — it is operating on assumptions rather than verified rules.
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