What is payroll? A complete guide for UK employers
Payroll is the process by which an employer pays its staff and collects Income Tax and National Insurance from their wages to send to HMRC, a system known as Pay As You Earn, or PAYE [1]. Since 6 April 2026 employers have paid their own National Insurance at 15% on earnings above a Secondary Threshold of £5,000 a year, on top of the tax and NI they deduct from employees [2].
The word payroll describes both the list of people a business pays and the whole machinery of paying them correctly: calculating gross pay, deducting the right taxes, applying pensions and student loans, producing a compliant payslip, reporting every payment to HMRC in real time, and paying over what is owed. Getting any part wrong exposes the employer, not the employee, to interest and penalties.
This guide explains what payroll is in the United Kingdom from first principles: the two payroll taxes, the difference between gross and net pay, the deductions an employer must and may make, how Real Time Information reporting works, what a payslip and the year-end forms contain, and what an employer has to do to run payroll compliantly.
Key takeaways
- Payroll is the process of paying staff and collecting Income Tax and National Insurance through PAYE to remit to HMRC.
- Income Tax and National Insurance are the two distinct UK payroll taxes, deducted on separate thresholds.
- Gross pay is pay before deductions, net pay is what the employee receives after tax, NI and other deductions.
- Every payment must be reported to HMRC in a Full Payment Submission on or before payday under Real Time Information.
- Payslips are a legal right, and P45, P60 and P11D are the standard payroll forms.
- Employers must register with HMRC, use recognised software and pay over what they deduct by a monthly deadline.
What payroll means in the UK
At its simplest, payroll is how a business turns a wage agreement into a correctly taxed payment. When an employer takes someone on, it must start collecting Income Tax and National Insurance from that person's pay and sending it to HMRC, and that activity is what running a payroll means [1]. The system that governs it, PAYE, ensures each employee pays the right tax and National Insurance across the year rather than facing a single bill at the end of it [1].
Payroll is a recurring obligation, not a one-off event. Every time staff are paid, whether weekly, fortnightly or monthly, the employer repeats the same cycle of calculation, deduction, reporting and payment [3]. The obligation begins the moment a business pays its first employee, which is why even a single-director company usually has to operate PAYE.
Payroll as a process, not just a payment
The payment itself is only the visible part. Behind it sits the calculation of gross pay, the deduction of tax and National Insurance using each employee's tax code and category letter, the application of any student loan or pension, and the reporting of the whole lot to HMRC [3]. Most employers use payroll software to work out exactly how much to deduct, because the arithmetic changes with each threshold HMRC sets [1].
That software also handles the filing. Each time wages are paid the employer sends a report to HMRC under Real Time Information, and the software generates and submits it automatically [1]. A plain-language starting point for businesses new to the obligation sits in the Moonworkers overview of HMRC-recognised payroll software for SMEs.
The two payroll taxes: Income Tax and National Insurance
The United Kingdom has two distinct payroll taxes, and confusing them is a common error. Income Tax is deducted through the employee's tax code, which sets how much tax-free Personal Allowance to apply before tax is charged at 20%, 40% or 45% depending on the band [4]. For the 2026-27 tax year the Personal Allowance is £12,570 and the standard code is 1257L.
National Insurance is charged separately, on its own thresholds, and comes in an employee share and an employer share. Employees on the main category pay 8% on earnings between the Primary Threshold and the Upper Earnings Limit, and 2% above it, while the employer pays 15% on earnings above the Secondary Threshold [5]. The headline figures for the 2026-27 tax year are set out below.
| Tax | Who pays | Rate | Starting point (annual) |
|---|---|---|---|
| Income Tax | Employee | 20% basic rate | Above £12,570 |
| National Insurance | Employee | 8% main rate | Above £12,570 |
| National Insurance | Employer | 15% | Above £5,000 |
The employer share is the cost many new businesses overlook. It is paid on top of the wage and does not reduce the employee's take-home pay, and the deeper mechanics are covered in the Moonworkers guide to employer National Insurance.
Gross pay, deductions and net pay
Two terms sit at the centre of every payslip. Gross pay is the amount before any tax or National Insurance is taken off, including basic wages plus overtime, commission and bonuses [19]. Net pay, sometimes called take-home pay, is what remains after Income Tax, National Insurance and any other deductions have been removed.
Before the deductions begin, the employer must confirm that gross pay meets the National Minimum Wage or National Living Wage for the worker's age and hours, because minimum-wage compliance is enforced on actual hours worked and separately from PAYE [20]. Only then does the sequence of deductions run.
Statutory deductions the employer must make
Some deductions are compulsory. The employer must deduct Income Tax and National Insurance for most employees, and where they apply, student loan repayments, pension contributions under auto-enrolment, and court-ordered deductions such as attachment of earnings [3]. Student loans are deducted at 9% of earnings above the plan threshold, and the order in which deductions apply is set by rules rather than by choice [14].
Where a court or government body orders a deduction, such as a Direct Earnings Attachment to recover a benefit overpayment, the employer is legally required to make it and to observe the protected-earnings floor that stops the deduction pushing pay below a set level [21]. Auto-enrolment pension contributions are the most common statutory deduction after tax and NI, with a minimum total of 8% of qualifying earnings [15]. The pension assessment rules are set out in the Moonworkers explainer on workplace pension auto-enrolment.
Voluntary and other deductions
Not every deduction is compulsory. An employee may ask for voluntary deductions such as Payroll Giving donations to charity, taken before tax, or other agreed amounts like season-ticket loan repayments [3]. These sit outside the statutory set and require the employee's agreement.
The order of deductions matters because it changes the final figure. Pension contributions are normally taken before tax but after National Insurance, and this sequencing is why HMRC-recognised software, which applies the correct order automatically, removes a frequent source of manual error [4]. An employee can check the detail of any deduction against their own pay record, since each must be itemised on the payslip [4].
The role of PAYE and Real Time Information
PAYE is the framework, and Real Time Information is how it operates in practice. Since 2013, employers have had to report pay and deductions to HMRC every time staff are paid, rather than once a year, a system called Real Time Information or RTI [8]. This shift means HMRC sees each payment as it happens, which is why filing on or before payday is central to what payroll now involves.
Payroll software that holds the HMRC Recognised badge submits this information automatically as part of each payrun, reflecting new rates and thresholds without manual reconfiguration [8]. Platforms that prefer to embed payroll inside their own product, rather than run it in a separate application, call an HMRC-recognised payroll API that produces the figures and files the return in one step.
The Full Payment Submission and Employer Payment Summary
Two reports carry RTI. The Full Payment Submission, or FPS, tells HMRC what each employee was paid and what was deducted, and it must reach HMRC on or before payday [9]. It also carries new-starter and leaver details, so it doubles as the way the employer tells HMRC about joiners and leavers [9].
The Employer Payment Summary, or EPS, fills the gaps the FPS cannot. An employer sends an EPS to reclaim statutory payments, to claim the Employment Allowance, or to tell HMRC that no employees were paid in a period so that no FPS is expected [9]. Together the two submissions give HMRC a complete monthly picture of the payroll.
The payslip and the year-end forms
Every employee and worker has a legal right to an itemised pay statement at or before the time they are paid, showing gross pay, the deductions and their purpose, and net pay [13]. A wage paid without a compliant payslip breaches the Employment Rights Act 1996. Employers needing to issue an occasional or one-off statement can produce a single compliant document through an instant payslip generator rather than running a full scheme.
Alongside the payslip sit the standard payroll forms, which mark the key moments in an employee's payroll life. Each has a defined purpose, summarised below [10].
| Form | When it is issued | What it shows |
|---|---|---|
| P45 | When an employee leaves | Pay and tax to the leaving date, plus the tax code |
| P60 | After the tax year end | Total pay, tax and NI for the whole tax year |
| P11D | After the tax year end | Taxable benefits in kind provided to the employee |
P45, P60 and P11D
The P45 is issued when an employee stops working for a business, and the new employer uses it to apply the right tax code and cumulative figures [10]. Without it, a new starter is placed on an emergency code until HMRC issues the correct one.
The P60 is the year-end certificate. Employers must give a P60 to every employee still on the payroll at the tax year end, by law, by 31 May following the end of the tax year, and it summarises pay, tax and National Insurance for the full year [11]. Employees rely on it for self-assessment, mortgage applications and benefit claims. The P11D reports taxable benefits in kind where these are not already taxed through the payroll. The year-end sequence is set out in the Moonworkers P60 end-of-year checklist.
What an employer must do to run payroll
Running payroll compliantly rests on a fixed set of duties. The employer must register with HMRC as an employer before the first payday, and can do so up to two months in advance [12]. It must use payroll software capable of reporting in real time, collect accurate details from each employee, and calculate pay and deductions correctly each period [3].
The employer must then file the FPS on or before payday, produce a compliant payslip, and pay HMRC the tax and National Insurance it has collected, plus its own employer National Insurance, by the 22nd of the following month electronically, or the 19th by post [17]. Statutory pay obligations, such as Statutory Sick Pay from the first qualifying day of absence, layer on where relevant [18]. Accountants carrying these duties across many clients use a payroll bureau platform built to run multiple schemes from one place.
In-house payroll, bureaux and embedded engines
An employer has three broad ways to meet these duties. It can run payroll in-house with software, hand the job to a payroll bureau as a managed service, or embed an HMRC-recognised payroll engine inside another system such as an HR or accounting platform. HMRC recognition is common to all three; it is the market-entry threshold every serious product holds, not a distinguishing feature.
What separates the options is control and integration. A bureau takes the work away entirely, in-house software keeps it close but adds an application to log into, and an embedded engine lets another platform deliver payroll inside its own product without its users leaving. That third category, a compliance engine other software calls, is where a growing share of the market is heading as HR platforms and ERPs add UK payroll without owning the compliance work. Sole traders and single-person companies with lighter needs can start from the Moonworkers sole-trader payroll pages.
Conclusion
Payroll is the recurring machinery that turns a wage into a correctly taxed payment: calculate gross pay, deduct Income Tax and National Insurance on their separate thresholds, apply pensions and student loans, produce a payslip, report to HMRC in real time, and pay over what is owed by a fixed date. It is a legal obligation from the first employee, and every step carries a deadline that falls on the employer rather than the worker.
The direction of travel is towards more automation and more embedding. As the 15% employer National Insurance rate settles in and the Employment Rights Act 2025 reshapes statutory pay, the definition of payroll is widening from a back-office task into a compliance layer that sits inside the other software a business already runs. Understanding what payroll is, at the level of its taxes, deductions and reports, is the foundation for choosing how to run it.
Frequently asked questions
What is the difference between payroll and PAYE?
Payroll is the whole process of paying staff and handling the tax, deductions, reporting and record-keeping that go with it. PAYE, or Pay As You Earn, is the specific HMRC system through which Income Tax and National Insurance are collected from wages [1]. In practice the two are closely linked: running payroll for employees means operating PAYE, so an employer cannot do one without the other.
What are the main deductions taken from an employee's pay?
The compulsory deductions are Income Tax and National Insurance, and, where they apply, student loan repayments, auto-enrolment pension contributions and court-ordered deductions such as attachment of earnings [3]. Voluntary deductions, such as Payroll Giving donations, can be added at the employee's request. Each deduction must be itemised on the payslip so the employee can see what has been taken and why [4].
Do small employers have to run payroll?
Yes, in almost all cases. The obligation to operate PAYE begins as soon as a business pays anyone, including a single employee or a director, and the employer must register with HMRC before the first payday [12]. Even where an employee earns below the tax and National Insurance thresholds, a Full Payment Submission may still be required, so registering is the safe course.
What is the difference between gross pay and net pay?
Gross pay is the amount before any deductions, including basic wages plus overtime, commission and bonuses [19]. Net pay, or take-home pay, is what the employee actually receives after Income Tax, National Insurance and any other deductions have been removed. The gap between the two is what the employer collects and pays over to HMRC, the pension provider or another body.
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Documentary photograph, a UK employer and a colleague reviewing a payroll summary on a laptop across a shared office desk, printed payslips and a notebook nearby, soft natural daylight from a tall window, mid-morning, palette of cool grey, deep navy and warm timber, an open-plan office softly blurred behind, asymmetric composition with the laptop in the centre-right, 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.
