Payroll in the UK is more than just paying employees on time—it’s a legal responsibility that involves a number of obligations, statutory deductions, and compliance with employment law. Failing to get payroll right can result in penalties from HMRC, loss of employee trust, and reputational damage. Whether you run a small business or manage a large workforce, understanding UK payroll legislation is crucial.
What Does Payroll Involve?
Payroll is the process of calculating and distributing wages to employees. In the UK, this includes:
- Determining gross pay based on hours worked, salary, or commission.
- Deducting the correct amount of Income Tax and National Insurance.
- Processing statutory payments such as sick pay, maternity or paternity leave.
- Reporting pay and deductions to HMRC via Real Time Information (RTI).
- Paying employers’ contributions and submitting relevant returns.
Key UK Payroll Legislation
- PAYE (Pay As You Earn)
The PAYE system is how employers collect Income Tax and National Insurance contributions from employees’ wages. Employers must register with HMRC before their first payday and operate PAYE as part of their payroll. - Real Time Information (RTI)
Under RTI, employers must report employee pay, tax, and NI deductions to HMRC every time they run payroll. This ensures HMRC has up-to-date records and prevents over- or underpayments of tax. - National Minimum Wage (NMW) and National Living Wage (NLW)
Employers must ensure that employees receive at least the statutory minimum wage based on their age and employment status. As of April 2025, the NLW applies to workers aged 21 and over, with tiered rates for younger workers and apprentices. - Auto-Enrolment and Pensions
UK employers are legally required to enrol eligible workers into a workplace pension scheme and make minimum contributions. The current employer minimum contribution is 3%, with employees contributing 5%, unless they opt out. - Statutory Payments
Employers must process and pay statutory benefits correctly, including Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), and others. Each has eligibility rules and must be reported through payroll systems.
Common Pitfalls to Avoid
- Missing Deadlines: Late RTI submissions can result in penalties from HMRC.
- Incorrect Tax Codes: Using outdated or incorrect tax codes can lead to employees being under or overtaxed.
- Poor Record-Keeping: Employers must keep detailed payroll records for at least 3 years, including payslips, tax code notices, and pension contributions.
- Neglecting Leavers: Final payments must be handled correctly, including issuing a P45.
In-House vs Outsourcing Payroll
While payroll software (e.g., BrightPay, QuickBooks, Xero) makes it easier to manage in-house, many businesses outsource payroll to ensure compliance and reduce administrative burden. This can be especially helpful for employers dealing with variable hours, multiple pay rates, or complex statutory payments.
Final Thoughts
Managing payroll in the UK is a serious responsibility governed by detailed legislation. Getting it right ensures your business stays compliant, your employees are paid correctly, and your operations run smoothly. Whether you do payroll yourself or outsource it, keeping up to date with changes in UK employment and tax law is essential.
If you need help with your payroll, please get in touch
