The payroll process starts with setting up the PAYE scheme and employee records, then continues through each pay run and the reporting that follows. Changes such as new starters, salary increases, bonuses, statutory payments and leavers can all affect what needs to be calculated and reported.
This guide covers the setup, payroll process, UK tax and National Insurance calculations, reporting requirements, key deadlines and the checks businesses should have in place.
Key takeaways
- UK payroll starts with accurate employee records, PAYE setup and the right payroll information.
- Each pay run follows seven key steps, from checking employee changes to paying HMRC.
- PAYE, National Insurance, pension contributions and other deductions determine the employee’s final take-home pay.
- Payroll must meet HMRC deadlines, including FPS reporting, PAYE payments and year-end documents such as P45s, P60s and P11Ds.
- Regular payroll checks and reconciliation help prevent errors and keep employee payments, HMRC liabilities and accounts aligned.
What does Payroll actually involve for a UK Small Business?
Payroll is the process of calculating what employees are owed, determining the deductions and employer liabilities that apply, reporting the relevant figures to HMRC and recording the resulting payments and liabilities.
For a small business, the important point is that payroll is a connected process. An incorrect employee record can affect the calculation, which can then affect the payslip, HMRC submission, employee payment and accounting records.
The four core parts of a payroll run
Every payroll run needs to cover four core areas:
- Calculate employee earnings for the pay period
- Apply Income Tax, National Insurance, pension and other relevant deductions
- Report the required information to HMRC
- Pay employees and settle the resulting liabilities
Other requirements, such as payslips, statutory payments, pension contributions and year-end documents, fit into these stages.
Setting up Payroll with HMRC before the First Pay Run
Before the first employee is paid, the business needs the PAYE scheme and employee records to be correctly established. This setup matters because the information entered here forms the basis for every subsequent payroll calculation.
Registering as an employer and getting a PAYE Reference
A business must generally register with HMRC as an employer before its first payday. HMRC then provides a PAYE reference and an Accounts Office reference, which are used when reporting payroll information and paying amounts due.
Registration can be completed up to two months before becoming an employer, giving the business time to set up its payroll process before the first payment.
Information needed for each employee
The employee record should be complete before the first payroll calculation. This normally includes:
- Full name, address and date of birth
- National Insurance number, where available
- Employment start date
- P45 or starter information
- Tax code
- National Insurance category
- Salary or hourly rate
- Pay frequency
- Workplace pension information
- Student or postgraduate loan information, where applicable
- Bank details for salary payments
The business should also confirm whether the employee is salaried or paid by the hour and whether overtime, commission, bonuses or other variable payments may apply.
Choosing how payroll will be processed
The business should decide how payroll will be processed before the first payday. This could involve suitable payroll software, HMRC’s Basic PAYE Tools for eligible small employers or professional payroll support.
The choice matters because the employer remains responsible for accurate payroll records and timely reporting regardless of who performs the calculations.
How does Payroll work in the UK: The complete step by step process
Once the PAYE scheme and employee records are ready, each payroll period follows a defined sequence. The main work is checking what has changed, calculating the resulting pay and deductions, reviewing the figures, paying employees and completing the required HMRC reporting.
These activities form a seven-step payroll run, with each stage taking the payroll from initial checks through to the final payment to HMRC.
Knowing the sequence is useful, but each stage involves different checks and decisions that can affect the accuracy of the final payroll. The following steps explain what needs to happen at each point and where errors can affect pay, deductions or HMRC reporting.
Step 1: Confirm Employees and Changes
Start by checking which employees are active for the pay period and what has changed since the previous payroll run.
This includes:
- New starters
- Leavers
- Salary or hourly-rate changes
- Overtime
- Bonuses and commission
- Unpaid leave
- Statutory leave and statutory pay
- Pension changes
- Updated tax codes
- Student or postgraduate loan deductions
This check should happen before calculations begin. If a salary increase takes effect from 1 September but is missed from the September payroll, the employee may be underpaid and the business may need to correct the payroll afterwards.
Step 2: Calculate Gross Pay
Once the changes have been confirmed, calculate the employee’s gross pay for the period.
For a salaried employee, this is generally based on their annual salary and pay frequency. For an hourly employee, approved hours are multiplied by the relevant rate. Overtime, commission, bonuses and statutory payments may then increase the gross amount.
Step 3: Apply Employee Deductions and Employer Contributions
The payroll calculation then applies the deductions relevant to each employee.
These can include:
- Income Tax
- Employee National Insurance
- Workplace pension contributions
- Student or postgraduate loan repayments
- Other authorised deductions
The business also needs to calculate employer liabilities separately, including employer National Insurance and employer pension contributions.
For 2026/27, the standard employer Class 1 National Insurance rate is 15% above the Secondary Threshold of £5,000 a year. For most Category A employees, the employee rate is 8% between the Primary Threshold and Upper Earnings Limit and 2% above the Upper Earnings Limit.
Step 4: Review the Payroll before Approval
The payroll should be checked before it is submitted to HMRC and before payslips are issued or payments are released.
A useful review compares the current payroll with the previous period and investigates significant changes in:
- Gross pay
- Income Tax
- National Insurance
- Pension deductions
- Net pay
- Employer payroll costs
For example, if an employee normally receives around £2,000 net but this month’s payroll shows £2,700, the difference should be explained before the payroll is approved. It may be a legitimate bonus, but it could also indicate an incorrect salary entry or missing deduction.
Step 5: Submit the Full Payment Submission to HMRC
Once the payroll has been checked and approved, the business submits the final pay and deduction figures to HMRC through a Full Payment Submission (FPS). The FPS forms part of HMRC’s Real Time Information (RTI) system and is normally submitted on or before payday.
For example, if payroll is completed before the usual payday, the business can submit the FPS early where the figures are final and will be paid as reported.
Step 6: Produce Payslips and Pay Employees
After the FPS has been submitted, the business issues payslips showing each employee’s pay, deductions and net wages. Employees are then paid the net amount due according to the business’s normal payroll schedule.
Step 7: Pay HMRC
After employees have been paid, the business accounts for the Income Tax and National Insurance due to HMRC. The amount payable can also be affected by information reported through an Employer Payment Summary (EPS), such as an Employment Allowance claim or recoverable statutory payments.
For electronic payments, the usual deadline for paying HMRC is the 22nd of the following tax month. If paying by post, the deadline is the 19th.
What is PAYE and how does it fit into the Payroll Calculation?
The payroll steps show when deductions are calculated. PAYE determines how Income Tax and employee National Insurance are collected from employment income, so the employee’s tax code and National Insurance category need to be correct before the final net pay is calculated.
Tax Codes
A tax code tells the payroll system how much tax-free income should be taken into account when calculating Income Tax.
For 2026/27, the standard Personal Allowance is £12,570. For England, Wales and Northern Ireland, the basic Income Tax rate is 20%, the higher rate is 40% and the additional rate is 45% at the relevant thresholds. Scotland has separate Income Tax rates and bands.
HMRC can change an employee’s tax code during the year. When a new code is issued, the payroll record needs to be updated so the change is reflected in the next appropriate calculation.
National Insurance Categories
National Insurance is calculated according to the employee’s category and earnings. Most employees fall under Category A, but other categories apply in specific circumstances.
The category should be checked when an employee is set up because using the wrong category can produce an incorrect deduction even when the salary has been entered correctly.
A Worked Example: How £30,000 salary becomes Take-Home Pay?
A monthly salary of £2,500 (£30,000 a year) provides a practical, illustrative example, using 2026/27 rates and thresholds, of how gross pay, employee deductions and employer costs connect within a payroll calculation.
A monthly salary of £2,500 provides a practical example of how gross pay, employee deductions and employer costs connect within a payroll calculation.
Assume the employee is paid monthly, has a standard tax code, is in National Insurance Category A and is enrolled in a workplace pension using the qualifying-earnings basis.
| Payroll item | Monthly amount |
|---|---|
| Gross salary | £2,500.00 |
| Income Tax | £290.50 |
| Employee National Insurance | £116.16 |
| Employee pension contribution | £99.00 |
| Estimated net pay | £1,994.34 |
The employer also has costs in addition to the employee’s gross salary:
| Employer cost | Monthly amount |
|---|---|
| Gross salary | £2,500.00 |
| Employer National Insurance | £312.45 |
| Employer pension contribution | £59.40 |
| Estimated employment cost | £2,871.85 |
These figures are illustrative 2026/27 calculations based on the assumptions above, not a result that applies to every employee. Actual payroll results can vary according to the employee’s tax code, National Insurance category, pension scheme and other deductions.
The example shows why salary, employee take-home pay and the business’s total employment cost should be treated as separate figures when reviewing payroll and budgeting for staff.
What are the key UK Payroll Deadlines?
The deadlines follow the payroll cycle. Payday determines when the FPS is due, while the resulting PAYE liability is generally paid during the following tax month. Year-end documents have separate deadlines because they summarise information accumulated during the tax year.
| Task | Deadline |
|---|---|
| Full Payment Submission (FPS) | On or before payday |
| Employer Payment Summary (EPS) | By the 19th where required |
| Electronic PAYE payment | By the 22nd of the following tax month |
| PAYE payment by post | By the 19th of the following tax month |
| P60 | By 31 May (2026/27 P60s: due 31 May 2027) |
| P11D | By 6 July (2026/27 P11Ds: due 6 July 2027) |
| Class 1A National Insurance | By 22 July when paid electronically (2026/27: due 22 July 2027) |
The exact requirements can vary according to the employer’s circumstances and payment method.
Where Do P45, P60 and P11D Fit into the Payroll Process?
These documents arise from specific payroll events. Understanding when each one is produced prevents them from being treated as separate pieces of administration disconnected from the main payroll process.
P45 When an Employee leaves
A P45 is issued when an employee leaves the business. It records their pay and Income Tax information for the tax year up to their leaving date.
The final payroll needs to be processed before the P45 is produced. If the employee receives a final salary payment, bonus or other taxable amount, the relevant figures need to be included in the final calculation.
P60 at the End of the Tax Year
A P60 is given to employees who remain employed at the end of the tax year. It summarises their total pay and deductions for that tax year and must be provided by 31 May.
The figures should agree with the payroll records because employees may use the P60 as evidence of their annual income.
P11D for Benefits and Expenses, and the Move to Payrolled Benefits
For the 2026/27 tax year, benefits and expenses that are not already being payrolled voluntarily still need to be reported to HMRC on a P11D, due by 6 July 2027.
Examples include company cars, private medical insurance and certain loans. Class 1A National Insurance on relevant benefits is generally due by 22 July 2027 when paid electronically.
This is set to change from 6 April 2027 (the start of the 2027/28 tax year), when HMRC begins phasing in mandatory payrolling of benefits in kind.
From that date, phase one covers company cars, car fuel, vans, van fuel and employer-provided medical benefits, which must be reported and taxed through payroll in real time rather than on a P11D. Most other benefits are expected to follow from April 2028, while loans and accommodation stay outside the mandatory regime for now.
How should Payroll be Reconciled with the Accounts?
Payroll should not stop at the point employees have been paid. The final figures need to agree with the business’s accounting records so that employee costs and outstanding liabilities are correctly recorded.
A payroll reconciliation should check:
- Net pay against the amount paid to employees
- PAYE and National Insurance against the HMRC liability
- Pension deductions and employer contributions against the pension payment
- Payroll costs against the accounting entries
For example, if payroll reports £8,000 payable to HMRC but the accounts show £7,500, the £500 difference needs to be investigated rather than carried forward into the next period.
This reconciliation gives the business a second control over payroll accuracy and can identify errors that were not caught before employees were paid.
What are the common Payroll Mistakes Small Businesses make?
Payroll errors often happen because information is incomplete, changes are missed or the figures are not checked against the records that support them.
1. Late Payroll Information
A bonus, overtime payment or salary change submitted after the payroll cut-off can result in an incorrect payment or a last-minute correction.
2. Incorrect New Starter Information
A missing P45, incorrect tax code or wrong National Insurance category can affect the employee’s deductions from their first pay run.
3. Missing the FPS Deadline
The FPS normally needs to be submitted on or before payday. Treating it as an end-of-month task can therefore result in a late submission.
4. Payroll and Accounts not agreeing
If payroll figures do not match bank payments, HMRC liabilities or pension payments, the difference can remain in the accounts until it is investigated.
5. Failing to Update Changes
A tax code, salary, pension contribution or other employee detail can change during the year. Leaving the old information in the payroll system can cause incorrect deductions across multiple pay periods.
How should a Business decide between Payroll Software and Professional Support?
The right approach depends on how complex the payroll is and how much internal time is available to manage it.
Payroll Software
Payroll software can calculate deductions, produce payslips and submit payroll information to HMRC. It can reduce manual calculations, but the business still needs to enter accurate employee information and review the resulting figures.
Professional Payroll Support
Professional support can be useful when payroll involves multiple employees, variable pay, statutory payments, pension requirements or frequent changes.
The business still needs to provide accurate information about starters, leavers, hours, salary changes and bonuses. The value of professional support comes from having the payroll calculations, reporting and compliance process handled consistently once that information has been provided.
How Can Daniel Wolfson & Co help with Payroll?
Daniel Wolfson & Co provides fully managed payroll support covering wage calculations, tax and National Insurance deductions, benefits, pension auto-enrolment and HMRC reporting. The team also handles payroll changes such as onboarding new starters and helps keep payroll calculations, payments and statutory requirements accurate and on time.
For businesses that want professional support with their payroll requirements, book a consultation with Daniel Wolfson & Co or email office@danielwolfson.co.uk to discuss your needs.
Conclusion
UK payroll is a connected process that starts with PAYE and employee setup and continues through each pay run, HMRC reporting, payment of liabilities and reconciliation with the accounts.
For a business, the key is maintaining accurate information and controls at each stage. Salary changes, new starters, leavers, tax-code updates and variable pay all need to reach payroll in time for the relevant pay run.
As payroll becomes more involved, consistent processes and appropriate support can reduce corrections and help keep employee payments, HMRC liabilities and accounting records aligned.
Frequently Asked Questions
Do I need to register for PAYE if I have only one employee?
Generally, yes. If the employee is paid at or above the relevant PAYE thresholds or receives benefits, the business may need to register as an employer and operate PAYE. Directors can also have PAYE obligations where they are paid through the company.
When does an employer submit an FPS?
The FPS is normally submitted to HMRC on or before payday. Report payroll information to HMRC
When does PAYE need to be paid to HMRC?
For most employers paying electronically, the PAYE liability is due by the 22nd of the following tax month. The deadline is generally the 19th for payments made by post. Pay employers’ PAYE tax and National Insurance
What happens if payroll information is wrong?
The appropriate correction depends on what was wrong and when the error was identified. The payroll records and, where necessary, HMRC reporting may need to be corrected rather than simply changing the next month’s figures.
What is the difference between a P45 and a P60?
A P45 is issued when an employee leaves and records their pay and Income Tax information up to the leaving date. A P60 is issued after the end of the tax year to employees who remain employed and summarises their pay and deductions for that year.
Does payroll need to be reconciled with the accounts?
Yes. Payroll should be checked against employee payments, HMRC liabilities, pension payments and the relevant accounting entries so that differences can be identified and corrected promptly.
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