Guide: The basics of UK payroll

Contents
 Introduction 04 What legislation covers payroll? 06 How do I set up & manage payroll? 10 What to

record in payroll 12 About Employment Hero Payroll 16 Disclaimer:

The information in this article is current as at 17 August 2022, and has been prepared by Employment Hero Pty Ltd
(ABN 11 160 047 709) and its related bodies corporate (Employment Hero). The views expressed in this article are
general information only, are provided in good faith to assist employers and their employees, and should not be
relied on as professional advice. The Information is based on data supplied by third parties. While such data is
believed to be accurate, it has not been independently verified and no warranties are given that it is complete,
accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for
any inaccuracy in such data and is not liable for any loss or damages arising either directly or indirectly as a result of
reliance on, use of or inability to use any information provided in this article. You should undertake your own
research and seek professional advice before making any decisions or relying on the information in this article.

you run a small to medium-sized business,

Introduction this guide aims to explain payroll in a
simple, easy to understand way.
Whether you are an emerging employer or
4 | Guide: The basics of UK payroll considerable protection of worker’s rights. You do need to know the law While payroll is often a function of HR or Finance teams, many
Payroll is the process of managing how employees are paid and how
because it’s your company’s legal responsibility to be compliant, and companies choose to outsource it. Outsourcing payroll has been rising
their work is tracked, including number of hours worked or leave taken.
there are strict penalties for non-compliance. sharply since 2013 when the UK introduced RTI (Real Time Information)
All businesses must keep payroll records, however the size of the
As an example, if you don’t keep adequate records, HMRC may step in to PAYE (Pay as you Earn). But it’s not just the UK. According to
company and how much employees are paid will determine how payroll
and make estimates for you, and they may also charge you a penalty of Deloitte’s research, 47% of businesses in Europe, Middle East and
is managed.
up to £3,000. Africa (EMEA) are outsourcing payroll completely.
The UK has a robust payroll and tax system which also provides
Another thing to think about is whether you want to do payroll yourself.

What legislation covers payroll?

The UK has an extensive legislative Part-Time Workers (Prevention of Less Contractors:
framework covering payroll, employment and tax. Here are Favourable Treatment) Regulations 2000 and The off-payroll working rules (IR35)
the main ones you need to know: Agency Workers Regulations 2010 The IR35 rules govern contractors, ensuring that workers who
These laws provided rights to part time workers to help ensure would have been an employee if they were providing their
Employment Rights Act 1996 (ERA)
equal and fair treatment and equal pay, and enshrines their services directly to the client (but have their own company or
This is the primary legislation for workers and employees in right not to be treated less favourably than full-time workers. work for an agency or umbrella organisation for example) pay
the UK. The ERA governs contract types, working hours, and roughly the same amount of tax and NI contributions as
entitlement to paid time off work. Income Tax (Earnings and Pension) Act 2003 and employees.
Income Tax Act 2007
It also governs authorised and unauthorised deductions and IR35 does not apply to self employed people that you
The Income Tax regulations govern the treatment of payroll tax
protects employees and workers from having unauthorised contract.
in the UK and personal income tax. These regs also define
deductions made from their wages. Late payment of wages is
employment to distinguish between employment and self
considered a deduction of wages.
employment. In the UK, tax for those who are self employment
National Minimum Wage Act 1998 is governed by the Self Assessment tax system.

This Act created a minimum hourly wage across the United National Insurance
Kingdom for those above the school leaving age and it’s now a Contributions Act of 2015
criminal offence for employers to not pay someone at or above
the National Minimum Wage or National Living Wage. This legislation provides a system of social security in the UK.
National Insurance (NI) contributions over a number of years
The National Minimum Wage and National Living Wage vary gives employees entitlement to state benefits for workers and
and can change each year. For up to date rates see the UK their families. When the employee is paid above a certain level,
Government website here. contributions are made by both the employee and employer.

National Insurance is paid alongside PAYE tax. As an

employer, you’ll take it from employee wages before they get
paid and the amount paid will be shown in payslips.
Pensions Act 2008
This Law was introduced in order to encourage employees
make suitable provision for retirement. The Act places an
obligation on employers to set up and contribute to a pension
plan for their employees at or above a defined level. When an
employee starts employment they must by law, if deemed an
eligible employee, be enrolled into a pension scheme within 3
months of starting employment. Employees also have the right
to opt-out of the pension scheme but only after they have been
6 | Guide: The basics of UK payroll enrolled. Further guidance on employers obligations can be
found on the Pension Regulators website
 8 | Guide: The basics of UK payroll
Calculating tax codes
What is PAYE?
The amount of Income Tax (PAYE) you deduct from your employees depends on their tax code and
Pay as You Earn (PAYE) is the UK HM Revenue and Customs’ (HMRC) system to collect Income
how much of their taxable income is above their Personal Allowance. Check the UK government
Tax and National Insurance. As an employer, you usually need to run PAYE as part of your payroll.
website for up to date information on personal allowances.
You don’t need to register for PAYE if none of your employees are paid £123 or more a week, get
Please note, Scotland has different tax bands than the rest of the UK. Wales can also have
expenses and benefits, have another job or get a pension.
different tax bands but are currently the same as England.
Whether or not you register for PAYE, all companies are legally required to keep payroll
National Insurance records.
The amount of National Insurance you pay depends on your employment status and how much you
earn, and it is the employer’s responsibility to calculate. Generally workers pay Class 1 National Is payroll the same as PAYE?
Insurance Contributions, but there are categories who will pay less. You’ll find up to date rates on the A PAYE reference number is different from a payroll number. An employer PAYE reference number is
Government website. given to every business that registers with HMRC as an employer. It is a unique set of letters and
numbers used by HMRC to identify your company.
Employers pay a different rate of National Insurance depending on their employees’ category letters.
A payroll number is a unique identifier that is given to an employee working at a specific company to
help identify them and store their records by the company.

Not all companies will be registered for PAYE, but all companies
must keep payroll records.

How do I set up & manage payroll?

If you’re just getting started and you’re Every time you pay your employees, → Information about the employees owe, including an employer’s
running payroll yourself, there are a number you must submit a Full Payment pay, including each employee’s National Insurance contribution on each
of tasks you must do: Submission (FPS) document to HMRC salary and net salary, how much employee’s earnings above £175 a week.
on or before the payment date. income tax and National
1. Tell HMRC and register as an employer 2. Your payroll software can submit the FPS
Insurance is due, and what the
Choose a payroll software to report to to HMRC to notify them of payments you’ve
employer owes to HMRC
HMRC. Your software must report PAYE made to your employees and any
→ Any updates on new
information online unless you’re exempt. 3. deductions you’ve made.
employees or employees who
Collect and keep records. have left If you use payroll software, you must use an
4. Tell HMRC about your employees. You’ll HMRC recognised payroll provider.
need to get information from your There are certain exemptions from Employment Hero Payroll is an HMRC
employee to work out their tax code. If reporting payroll online. Check out recognised payroll provider, and has all the
you don’t have their P45 you can use HMRC’s guidance on exemption. tools you need to make payroll a breeze.
HMRC’s ‘starter checklist’
Managing payroll yourself
5. Record pay, make deductions and report to Do I have to give a payslip?
If you manage payroll yourself, you’ll need to
HMRC on or before the first payday. 6. Pay Under the HRA, all employers are legally
report your employees’ payments and
HMRC the tax and National 10 | Guide: The basics of UK payroll deductions to HMRC on or before each required to provide their employees with a
Insurance you owe. The FPS will include: payday. Small businesses who pay less than payslip before their payday.

You need to record your employees’ → Information about each £1,500 a month can contact HMRC to Payslips must show:
salary or wages in your payroll system. employee including their payroll arrange to pay quarterly.
→ Gross pay (pay before any
number, Using payroll software
You must include everyone you pay, deductions) → All deductions
full name, address, National You can use payroll software to calculate
even if they get less than £123 a week. including tax, NI and pension
Insurance number and tax code how much tax and National Insurance you contributions
 → Net pay (pay after deduction) or sent to employees electronically. → How much you pay your taxable expenses or benefits
→ Where the pay varies What records do I need to keep? employees → Any deductions you → Documentation of charitable
depending on time worked, the make donations via the Payroll Giving
As an employer, you’re legally responsible
number of from employee pay Scheme,
for completing all payroll and PAYE tasks,
hours worked must be shown → Reports you make to HMRC including the agency contract and
even if you pay someone else to do them.
→ Payments you make to HMRC employee authorisation forms
You can use your payroll software to
provide payslips. Payslips can be printed You must keep records of: → Employee leave and sickness You must keep records for 3 years from
absences tax code notices the end of the tax year they relate to.

What to record in payroll

12 | Guide: The basics of UK payroll
Types of pay
Expenses and benefits
There are other payments you pay your employees that should be recorded as normal pay, including
As an employer, you will need to report any expenses or benefits you provide to employees. You
bonuses, commission, holiday pay and travel time payments. You should refer to the UK government
may also need to pay tax and National Insurance on them. These can be reported as part of the
website for a full guide to PAYE.
payroll and is called payrolling of benefits or Annually through P11d reports submitted electronically
You may also need to pay and record: to HMRC and a statement given to the employee.
→ Statutory Sick Pay (SSP). Your employees may be eligible for Statutory Sick Pay (SSP), Expenses or benefits like uniforms or company cars are reported
which is £99.35 a week for up to 28 weeks. separately and this is done annually at the end of the tax year.
→ Statutory pay for parents (maternity, paternity, adoption, bereavement
or shared parental pay). The UK government has guidance on expenses and benefits, and what you should record in your
software as normal pay.
→ You must record these in your payroll system or software and tax is calculated the
same as for normal pay.
Deductions
You can reclaim statutory pay for parents. You’ll need to send another report to claim any
Your payroll software will calculate how much tax and National Insurance to deduct from your
reduction on what you owe HMRC.
employees’ pay according to each employee’s tax code and National Insurance category.

Tips Other deductions may include:

Tips are treated as normal pay if they’re paid into your till, including tips added to card or cheque → Student loan repayments
payments. If tips are given directly to an employee, the employee is responsible for reporting to HMRC → Pension contributions
either through Self Assessment or their personal tax account. → Payroll Giving donations
→ Child maintenance payments.

Employers are legally required to automatically enrol employees

into workplace pension schemes. Pension reductions are taken after National Insurance, but
your pension provider can provide more details.
How do I make year-to-date figures in your next regular Full When do I pay HMRC? You can check your HMRC online account
changes to payroll? Payment Submission (FPS). Alternatively you to view reports you’ve submitted, see how
can correct it by sending an additional FPS You need to pay HMRC by the 22nd much you owe, and make payments.
You must tell HMRC of any changes such as before your next regular FPS is due. of every month. If you pay by post,
when a new employee starts or an employee
you must pay by the 19th. What happens if I am
leaves, or an employee becomes a director. You can also change your payday and
late reporting?
You must also let HMRC know when you change how often you pay employees. What you pay will be tax and national
start paying a workplace pension. You will need to contact HMRC’s insurance as you reported it to HMRC If you’ve paid your employees but you don’t
Employer Helpline for further guidance. or in your Full Payment Submission send the FPS or you send it late, HMRC will
You can also correct a mistake with an send you a late filing notice. This is an
submitted by your payroll software.
employee’s pay or deductions by updating the
 electronic notice to remind you to pay any can be inclusive of public holidays If your business stores or uses personal However, completing PAYE yourself is
outstanding amounts and submit your FPS. → Workers should get a information, including information held on not nearly as difficult or as time
minimum of 20 minutes of employees such as names, addresses and consuming as you may think.
HMRC can also charge you a penalty, unless working hours, then you are required to
break for
you have a valid reason for reporting late. follow rules on data protection. This small investment in payroll software
every 6 hours worked can save you money on outsourcing
14 | Guide: The basics of UK payroll → Any employee working three or more The rules require you to ensure the without putting a strain on your
Will Brexit impact payroll? hours between 11pm and 6am are information is kept secure, accurate headcount, as processes are
deemed night workers and their and up to date. automated and streamlined.
On 1 January 2021 the UK officially left the
EU. This means that the UK now has working hours should not exceed
eight hours For more information, check out Learn more about bringing payroll in
powers to make changes to employment the UK Government website. house with our helpful factsheet.
law coming from Europe, including the
A Draft Employment Bill has been tabled, but What is payroll software?
Working Time Directive (WTD). Should my business use
for the time being, the UK is still governed by
In summary, workers rights enshrined current European Regulations, including the a payroll provider or Payroll software is an on-premises or cloud-

by the WTD remain in force: WTD. It’s worth noting that the new process payroll in- based solution that manages, maintains, and
legislation could amend the 48 hour working house? automates payments to employees. This can
→ Unless exempt, workers are week limit and change rules on holiday pay help you stay compliant and streamline your
It’s up to you whether you choose payroll operations.
restricted from working more than 48 and rest breaks which would have a direct
to use an external payroll provider,
hours per week, which is calculated as impact on payroll. It would also affect
or bring payroll in-house. Automated payroll can instantly calculate
an average of total hours worked over employers in the UK who operate payroll
contributions and deductions, track time
17 weeks across Europe. It’s a numbers and admin-heavy task, so, and attendance, generate accurate data
→ Workers are entitled to take 28 Do I need to consider understandably, some business owners and take care of workforce
days of paid holiday per year which data protection? might believe it’s easier to outsource it. planning from one centralised place.

About Employment
Hero Payroll
Employment Hero’s HMRC-recognised payroll software makes processing
payroll easy. It’s purpose built for small to medium-sized businesses.
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 Smart payroll integrations Sync with your chart of accounts and HRIS. Enjoy the convenience of a full-integrated HR and
payroll system when using Employment Hero HR.

Learn more about how Employment

Hero Payroll can transform your
business. Speak to one of our business
specialists today and book a free demo.
16 | Guide: The basics of UK payroll

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