How to do payroll: a step-by-step guide for employers
Every UK employer must report each employee's pay and deductions to HMRC in a Full Payment Submission on or before the day they are paid [1], and since 6 April 2026 employer National Insurance is charged at 15% on earnings above a Secondary Threshold of just £5,000 a year [2]. Those two facts frame the whole task: payroll in the United Kingdom is a real-time, legally deadlined process, and the cost of getting an employee onto the books has risen.
Running payroll means far more than paying a wage. It means registering with HMRC, working out income tax and National Insurance to the penny, applying the right tax code, handling pensions and student loans, producing a compliant payslip, filing the payroll data electronically, and then paying HMRC what is owed by a fixed date each month. Miss a step and the employer, not the employee, carries the penalty.
This guide sets out the full sequence in the order an employer actually needs it: registering as an employer, collecting the right details from each new starter, choosing how to run payroll, calculating gross-to-net pay, producing payslips, filing Real Time Information, paying HMRC, and keeping the records that protect the business if HMRC ever asks questions.
Key takeaways
- Employers must register with HMRC for PAYE before the first payday, and can register up to two months in advance.
- Every payrun requires a Full Payment Submission to HMRC on or before payday, filed through HMRC-recognised software.
- Income tax and National Insurance are the two core deductions, with student loans, pension contributions and attachment orders layered on where they apply.
- Employer National Insurance is charged at 15% above a £5,000 Secondary Threshold for the 2026-27 tax year.
- PAYE owed to HMRC is due by the 22nd of the following month electronically, or the 19th by post.
- Payroll records must be kept for at least three years after the end of the tax year they relate to.
Registering as an employer with HMRC
Before a single payslip is produced, the business must register as an employer with HMRC and set up a login for PAYE Online [3]. Registration is the legal gateway to operating PAYE, the system through which income tax and National Insurance are collected from wages. An employer usually needs to register even when taking on only one member of staff, and even when that person is a director drawing a modest salary.
The timing matters. HMRC allows registration up to two months before the first payday, and the process should be started in good time because the reference numbers do not arrive instantly [3]. Registering late does not remove the obligation to have operated PAYE from the first payment, so an employer who pays staff before the paperwork lands may have to file catch-up submissions.
What HMRC issues and when
On completing registration, HMRC issues two identifiers that appear on almost every payroll document from then on. The first is the employer PAYE reference, a short code in the format 123/AB456 that identifies the scheme. The second is the Accounts Office reference, used when paying HMRC [4]. These references can take a number of working days to arrive, which is why the guidance encourages employers to register well ahead of the first payrun rather than the week before [3].
Once the scheme is live, the employer gains access to PAYE Online, HMRC's portal for viewing what is owed, sending certain submissions, and receiving tax code notices [4]. For businesses using commercial payroll software, most day-to-day filing happens inside that software rather than the portal, but the PAYE Online account remains the place HMRC posts coding notices and generic notifications. Small employers new to this can find a plain-language overview of the whole obligation on the Moonworkers guide to HMRC-recognised payroll software for SMEs.
The information to collect from each employee
Payroll cannot be calculated without accurate employee data. For each new starter, the employer needs the person's full name, address, date of birth, National Insurance number and start date, along with their tax code and year-to-date pay and tax figures [5]. Where the employee has a recent P45 from a previous job, parts 2 and 3 of that form supply the tax code and cumulative figures [6].
When a new starter has no P45, the employer uses HMRC's starter checklist to gather the same information and to establish which tax code and student-loan plan apply [6]. The completed checklist is not sent to HMRC; instead its answers feed the first Full Payment Submission for that employee, and the record must be kept for the current and the next three tax years [5]. Getting the tax code right at this stage prevents the emergency-code corrections that otherwise surface on the first payslip.
Choosing how to run payroll
Every UK employer that operates PAYE must use payroll software capable of reporting to HMRC in real time [7]. The practical choice is between running payroll in-house with software, using an HMRC-recognised payroll engine embedded in another platform, or outsourcing the job to a bureau. The right answer depends on headcount, appetite for compliance work, and whether payroll needs to sit inside an existing HR or accounting system.
HMRC recognition is not a premium feature; it is the baseline every serious payroll product in the United Kingdom holds. Software that submits Real Time Information at scale carries the badge, and it is best treated as the floor rather than the headline. What separates products is the developer experience, whether the payroll can be embedded into another system, and how transparently it is priced.
HMRC-recognised software versus manual methods
HMRC publishes a free tool, Basic PAYE Tools, aimed at employers with fewer than ten staff [7]. It records employee details, calculates deductions and files the FPS, but it does not produce payslips and does not assess auto-enrolment, so most employers pair it with other tools or move to commercial software as they grow. That gap is exactly why the free tool is best understood as the do-nothing baseline against which paid software has to justify its cost.
Commercial payroll software automates the parts of the job that carry the most risk: applying the correct rates each tax year, calculating National Insurance across the right category letters, assessing pension eligibility, and filing the FPS automatically at the end of a payrun. Businesses that would rather embed payroll inside their own product, rather than log into a separate application, increasingly turn to an HMRC-recognised payroll API that other platforms call directly. Accountants running many client schemes from one place use a dedicated payroll bureau platform built for multi-client workflows.
Calculating pay and deductions on each payrun
The heart of payroll is the calculation that turns gross pay into net pay. Every pay period, weekly, fortnightly or monthly, follows the same shape: establish gross pay, apply statutory deductions in the correct order, add the employer's own costs, and arrive at the amount paid to the employee and the amount owed to HMRC [8]. Gross pay includes basic salary or wages plus overtime, commission, bonuses and any taxable benefits paid through payroll.
Before the calculation runs, the employer should confirm the pay meets the National Minimum Wage or National Living Wage for the worker's age band, because underpayment is assessed on hours worked and can trigger enforcement [9]. Only once gross pay is settled do the deductions begin.
Income tax under PAYE
Income tax is deducted through the employee's tax code, which tells the software how much tax-free Personal Allowance to apply before tax is charged. For the 2026-27 tax year the standard Personal Allowance is £12,570 and the standard code is 1257L [10]. Earnings above the allowance are taxed in bands, and the software spreads the allowance evenly across the pay periods in the year so the deduction is consistent.
The band rates for England and Northern Ireland are set out below, applied to taxable income after the Personal Allowance [10]. Scotland and Wales set their own arrangements, with Scottish codes prefixed S and Welsh codes prefixed C.
| Band | Taxable income (2026-27) | Rate |
|---|---|---|
| Basic rate | Up to £50,270 | 20% |
| Higher rate | £50,270 to £125,140 | 40% |
| Additional rate | Above £125,140 | 45% |
A tax code beginning with K signals that deductions owed exceed the allowance, so the code adds to taxable pay rather than reducing it. HMRC caps any single PAYE deduction at 50% of gross pay, a safety net that stops a back-tax adjustment swallowing an entire wage [10].
National Insurance contributions
National Insurance is charged separately from income tax and on different thresholds. Employees pay 8% on earnings between the Primary Threshold of £12,570 a year and the Upper Earnings Limit of £50,270, and 2% above that [11]. The employer pays 15% on the employee's earnings above the Secondary Threshold of £5,000 a year for the 2026-27 tax year [2].
The category letter assigned to each employee decides which rates and reliefs apply, and the main thresholds are summarised here [11]. Under-21s and apprentices under 25 attract a 0% employer rate up to £50,270, which materially reduces the cost of employing younger staff.
| Threshold | Weekly | Monthly | Annual |
|---|---|---|---|
| Secondary Threshold (employer) | £96 | £417 | £5,000 |
| Primary Threshold (employee) | £242 | £1,048 | £12,570 |
| Upper Earnings Limit | £967 | £4,189 | £50,270 |
Many employers can offset some employer National Insurance through the Employment Allowance, which reduces the annual employer NI bill for eligible businesses [12]. Directors are a special case: their National Insurance is worked out on an annual basis even when they are paid monthly, which trips up owner-managed companies paying a low salary. A fuller treatment sits in the Moonworkers guide to employer National Insurance.
Student loans, pensions and other deductions
Where an employee is repaying a student loan, the deduction runs through payroll at 9% of earnings above the relevant plan threshold, rounded down to the nearest pound [13]. The plan type, signalled by the P45, the starter checklist or an HMRC notice, sets the threshold, and a postgraduate loan is deducted before an ordinary student loan when both apply.
Auto-enrolment adds another layer. Employers must assess each worker for eligibility and enrol qualifying staff into a workplace pension, contributing at least 3% of qualifying earnings with the employee making up the rest to a minimum total of 8% [14]. Court-ordered attachment of earnings and payrolled benefits in kind can also affect the calculation, and each has its own priority rule, which is why HMRC-recognised software that sequences deductions correctly removes a common source of error. The mechanics of pension assessment are covered in the Moonworkers explainer on workplace pension auto-enrolment.
Producing a compliant payslip
Every employee and worker has a legal right to an itemised pay statement at or before the time they are paid [15]. The payslip is not optional and its content is set by law, so a wage paid without one, or with an incomplete one, breaches the Employment Rights Act 1996.
A compliant payslip must show gross pay, the amount and purpose of any variable deductions, any fixed deductions (or an aggregate figure supported by a separate standing statement), and the net amount paid [15]. Where an employee's pay varies by the hours they work, the payslip must also show the number of hours paid, a requirement that matters for staff on variable or zero-hours arrangements. Employers issuing occasional or one-off payments can generate a single compliant document through an instant payslip generator rather than standing up a full payroll scheme.
Reporting to HMRC in real time
Real Time Information, live across the United Kingdom since 2013, requires employers to report pay and deductions each time staff are paid rather than once a year [16]. Two submissions carry the load: the Full Payment Submission and the Employer Payment Summary. Software that holds the HMRC Recognised badge generates and sends both automatically as part of the payrun.
The Full Payment Submission
The Full Payment Submission, or FPS, is the core report. It tells HMRC what each employee was paid, what tax and National Insurance were deducted, and the year-to-date totals, and it must reach HMRC on or before payday [1]. The FPS also carries new-starter and leaver information, so it doubles as the mechanism for telling HMRC about joiners and people who have left [17].
Filing on time is not a courtesy. HMRC charges late-filing penalties based on the number of employees, though it allows a three-day grace period and waives the first default in a tax year [18]. New employers get a 30-day settling-in period before penalties bite, and where a submission is genuinely late the employer should record the reason on the FPS to avoid an automatic charge [18].
The Employer Payment Summary
The Employer Payment Summary, or EPS, is filed when the FPS alone does not give HMRC the full picture. An employer sends an EPS to reclaim statutory payments such as maternity or paternity pay, to claim the Employment Allowance, or to tell HMRC that no employees were paid in a period so that HMRC does not expect an FPS [17]. Businesses paying the Apprenticeship Levy report it on the EPS every month, even when the amount due is nil.
Paying HMRC what the payroll owes
Filing the FPS tells HMRC what is owed; paying it is a separate step with its own deadline. Each month the employer must pay HMRC the income tax and National Insurance deducted from employees plus the employer's own National Insurance, by the 22nd of the following tax month electronically, or by the 19th if paying by post [19]. A tax month runs from the 6th to the 5th, so PAYE for the month to 5 May, for example, is due by 22 May.
Smaller employers can ease the cash-flow rhythm. An employer whose average monthly PAYE bill is under £1,500 can arrange to pay quarterly rather than monthly, on the same 19th or 22nd pattern after each quarter end [20]. Late payment attracts interest and, for repeated defaults, penalties, so the payment date deserves the same discipline as the filing date [20]. Businesses scaling their headcount can find guidance pitched at growing teams on the Moonworkers small business payroll pages.
Keeping records and staying compliant
Payroll records are a statutory obligation, not housekeeping. Employers must keep records of what they paid employees, the deductions made, the reports and payments sent to HMRC, employee leave and sickness, tax code notices and taxable benefits, for at least three years from the end of the tax year they relate to [21]. HMRC can inspect these records and can charge penalties where they are inadequate.
Good records also protect the business during a compliance check, which can look back further where HMRC suspects a persistent error. The discipline that keeps payroll clean, accurate starter data, correct tax codes, on-time filing, on-time payment and complete records, is the same discipline that keeps an HMRC enquiry short. For sole traders and single-director companies, the lighter-touch obligations are set out on the Moonworkers sole-trader payroll pages.
Conclusion
Doing payroll in the United Kingdom is a repeating cycle rather than a one-off task: register once, then for every pay period collect the data, calculate income tax and National Insurance, apply pensions and student loans, produce the payslip, file the FPS on or before payday, and pay HMRC by the 22nd of the following month. Each step has a legal deadline and a penalty for missing it, which is why most employers reach for HMRC-recognised software rather than run the arithmetic by hand.
The direction of travel is towards more automation and less manual reconciliation. As employer National Insurance settles at 15% and the Employment Rights Act 2025 reshapes statutory pay, the value of a payroll system that applies each change automatically, and files in real time without prompting, only grows. The employer who has the registration, the data discipline and the right software in place spends payday checking a summary, not chasing a deadline.
Frequently asked questions
Do I need to register for PAYE if I only employ one person?
In most cases yes. An employer generally has to operate PAYE and register with HMRC as soon as it pays anyone, including a single employee or a director, at a level that triggers reporting. Registration should be done before the first payday, and it can be started up to two months in advance [3]. Even where an employee earns below the tax and National Insurance thresholds, an FPS may still be required, so registering is the safe course.
Can I run payroll for free using HMRC tools?
HMRC provides Basic PAYE Tools free of charge for employers with fewer than ten employees, and it will calculate deductions and file the Full Payment Submission [7]. It does not produce payslips or assess auto-enrolment, so most employers combine it with other tools or move to commercial software as they take on more staff. The free tool sets the price floor that any paid payroll software has to justify itself against.
When do I have to pay HMRC the tax and National Insurance I have deducted?
Payment is due monthly by the 22nd of the following tax month when paying electronically, or the 19th when paying by post [19]. Employers whose average monthly PAYE bill is under £1,500 can arrange to pay quarterly instead [20]. Filing the FPS and paying HMRC are separate steps with separate deadlines, and both carry consequences if missed.
How long do payroll records need to be kept?
Payroll records must be kept for at least three years from the end of the tax year they relate to [21]. The records should cover pay, deductions, reports and payments to HMRC, employee leave and sickness, tax code notices and any taxable benefits. HMRC can inspect these records and charge penalties where they are incomplete or inaccurate.
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Documentary photograph, a UK small business owner at a tidy home office desk reviewing a laptop showing a payroll summary, printed payslips and a calculator beside the keyboard, soft natural daylight from a side window, mid-morning, palette of cool grey, deep navy and warm oak, a bookshelf softly blurred behind, asymmetric composition with the subject in the left two-thirds, shot on a Sony A7 IV at 35mm f/2.8, photojournalism style, gentle film grain, no AI artefacts, no warped hands, no legible text on screen (screen softly blurred), landscape orientation 16:9.
