UK payroll explained for small businesses
Reviewed by Mellow Editorial Team, HR & payroll content team
Running payroll in the UK means calculating each employee's gross pay, deducting the correct income tax and National Insurance, paying HMRC what you owe, and reporting everything in real time. Get the process right and it becomes routine; get it wrong and you face penalties, unhappy staff, and a backlog that compounds quickly.
Register as an employer first
Before you pay anyone, you need to register with HMRC as an employer. This gives you a PAYE reference number, which you use on every submission. Registration must happen before your first payday — HMRC recommends doing it at least two weeks in advance, though it can take longer, so act early.
You also need to enrol in the Government Gateway and choose how you will submit payroll data. Most small businesses use payroll software; HMRC maintains a list of approved providers, including some free options suitable for businesses with fewer than ten employees.
How tax and National Insurance are calculated
Every employee has a tax code, usually based on their Personal Allowance of £12,570 for 2026/27. Earnings up to that threshold are tax-free. Above it, the basic rate of income tax is 20%, the higher rate is 40%, and the additional rate is 45%. Your payroll software applies the code and calculates the deduction automatically for each pay period.
National Insurance works alongside income tax but follows its own thresholds and rates. Employees pay 8% on earnings within the main band, then 2% above the upper earnings limit. As the employer, you pay a separate Class 1 contribution of 13.8% on earnings above the secondary threshold — this is a cost on top of the employee's gross wage, not deducted from it. That distinction matters when you are budgeting for a new hire: the true cost to your business is the gross salary plus employer NI, plus employer pension contributions.
Pension auto-enrolment
If you employ staff aged between 22 and State Pension age who earn above the earnings trigger, you must enrol them into a qualifying workplace pension scheme. The minimum employer contribution is 3% of qualifying earnings; employees must contribute at least 5%. Auto-enrolment is not optional, and failing to comply draws scrutiny from The Pensions Regulator.
New starters must be assessed on day one. If they meet the criteria, enrolment happens automatically unless they choose to opt out. Even if someone opts out, you must re-enrol them every three years.
Real Time Information reporting
Since 2013, UK employers have submitted payroll data to HMRC through Real Time Information (RTI). On or before every payday, you send a Full Payment Submission (FPS) containing each employee's pay, deductions, and year-to-date figures. If you paid no one in a period, you may need to send an Employer Payment Summary (EPS) instead.
Late or missing FPS submissions can trigger automatic penalties, so the timing matters. Your payroll software handles the submission if it is RTI-compatible, but you remain legally responsible for accuracy.
At the end of the tax year there are two further obligations. You must give every employee a P60 — a summary of their pay and deductions for the year — by 31 May. If any employees received expenses or benefits in kind (such as a company car or private medical insurance) that were not processed through payroll, you report these to HMRC on a P11D by 6 July.
Statutory payments and employee rights
Payroll is not only about regular wages. You are also responsible for administering Statutory Sick Pay when an employee is ill for four or more consecutive days, and statutory family-leave pay for employees on maternity, paternity, adoption or shared parental leave. These amounts are set by the government and change periodically; your software should stay up to date, but it is worth checking the current rates each April.
The Employment Rights Act 2025 has strengthened day-one rights for employees, which has knock-on implications for payroll. Written statements of employment particulars, for example, must be provided from day one, and some statutory entitlements now apply from the start of employment rather than after a qualifying period. Employees are also entitled to 5.6 weeks of statutory annual leave — 28 days including bank holidays for someone working a standard five-day week — and their holiday pay must be calculated correctly, including regular overtime and commission where applicable.
Keeping records
HMRC requires you to keep payroll records for at least three years from the end of the tax year they relate to. That includes payslips, RTI submissions, records of statutory payments, and evidence that you have met your auto-enrolment duties. Good record-keeping is your first line of defence if HMRC ever queries a submission or an employee raises a dispute about their pay.
Payroll accuracy is ultimately a legal obligation. Understanding each component — registration, calculation, reporting, pensions, and statutory pay — means you can spot errors before they escalate and build a process that holds up as your team grows.
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