Paying employees properly is one of the most important legal responsibilities you’ll face when starting a business in the UK. It’s not just about transferring money, there are strict requirements involving tax, reporting, payslips and more.
This guide covers everything you need to know to pay your staff legally and efficiently, from registering for PAYE to selecting payroll software and understanding deductions.
Whether you’re a sole trader hiring your first staff member or launching a limited company, this blog will walk you through each step clearly and professionally.
What Is Payroll?
Payroll is the system used by employers to calculate and distribute wages to their employees while ensuring that all statutory deductions are accurately made.
This includes Income Tax, National Insurance contributions, and any other relevant deductions such as pensions or student loan repayments.
Payroll also involves producing payslips and reporting payment information to HM Revenue and Customs (HMRC) through Real Time Information (RTI) submissions.
Whether run manually or through payroll software, payroll ensures employees are compensated correctly and on time. It’s a vital part of running a compliant and responsible business, especially for maintaining trust and adhering to employment laws.
Why Is It Crucial for UK Businesses?
Payroll is crucial for UK businesses because it ensures legal compliance, supports financial planning, and maintains employee satisfaction. When payroll is handled correctly, it demonstrates professionalism and builds trust between employers and staff.
Failing to operate payroll properly can lead to penalties, disrupted operations, and reputational damage.
Key reasons payroll is essential include:
- Legal compliance: Ensures accurate tax and NI deductions as required by HMRC.
- Employee trust: Timely and correct payment of wages fosters staff loyalty.
- Financial accountability: Helps you manage business cash flow and budgeting effectively.
- Statutory obligations: Covers responsibilities such as pensions, maternity pay and student loans.
- Data recording: Supports accurate record-keeping for audits and financial reviews.
Overall, a well-managed payroll system is a cornerstone of business success and sustainability in the UK.
How Do You Pay Employees?
Paying employees in the UK involves a structured process. First, you must register with HMRC as an employer and get a PAYE reference.
You’ll also need a UK business bank account and a payroll software that supports Real Time Information (RTI) reporting.
For each pay period, you calculate gross wages, deduct Income Tax, National Insurance and other applicable deductions. You then report this to HMRC via a Full Payment Submission (FPS).
Once deductions are calculated and reported, you pay the employee their net wages using methods such as BACS or bank transfer. Payslips must be issued on or before the payday.
How Much Tax Does an Employer Pay for an Employee UK?
As an employer, your tax responsibilities include contributing to National Insurance and potentially workplace pensions.
Employer National Insurance is calculated on earnings above £242 per week. In addition, if your business has an annual pay bill over £3 million, you must pay the Apprenticeship Levy.
You’re also responsible for administering statutory payments like maternity or sick pay and reclaiming them when eligible. Pension contributions under automatic enrolment are typically 3% from the employer.
Understanding these responsibilities is essential, as failure to comply with your tax obligations could result in penalties from HMRC and disruptions to your business operations.
How Do You Register for PAYE with HMRC?
Registering for PAYE (Pay As You Earn) with HMRC is your first step to legally paying employees. You must do this before your employees receive their first paycheque.
The registration process allows HMRC to assign your business a PAYE reference number and an Accounts Office reference, both of which are essential for reporting taxes and National Insurance.
To register, follow these steps:
- Visit the official HMRC website and go to the “Register as an employer” section.
- Create or log in to your Government Gateway account.
- Enter your business details, including name, address, and business type.
- Provide your company’s incorporation date and expected first payday.
- Submit the form and wait for your PAYE and Accounts Office reference numbers (typically sent by post within 5 working days).
- Set up PAYE Online access using the credentials provided.
Once registered, you must choose payroll software that can send RTI (Real Time Information) to HMRC. Your registration should be completed at least two weeks before you begin paying employees to ensure everything is in place for timely reporting and payment submissions.
What Information Do You Need to Run Payroll?
Running payroll correctly requires gathering key details about both your employees and your business. Here’s a breakdown of the essential information you need to ensure legal and accurate payroll processing.
What Employee Data is Required?
You’ll need each employee’s full name, address, date of birth, and National Insurance number. You also need their tax code, start date and details about their pay structure (hourly, salary, commission etc).
What Employer Details are Needed?
Your PAYE reference, Accounts Office reference, and HMRC login credentials are essential to submit reports and calculate tax.
What Legal and Compliance Documents are Necessary?
Employment contracts, pension opt-in or opt-out forms and right-to-work documentation should be collected. Additionally, you must maintain records of all pay, tax deductions and statutory payments for at least three years.
This information forms the backbone of your payroll setup and ensures your responsibilities as an employer are met correctly.
How Do You Calculate PAYE, NI and Other Deductions?
Calculating deductions from your employees’ wages involves understanding the tax code system, NI thresholds, and other potential deductions like student loans and pensions.
Your payroll software will handle the calculations automatically, but it’s essential you understand the basics. Income Tax is deducted based on the employee’s tax code, which reflects their personal allowance and any adjustments for second jobs or benefits.
National Insurance is calculated weekly or monthly, depending on pay frequency. You, as the employer, also pay NI contributions on earnings above £242 per week.
Additional deductions might include:
- Student loan repayments (9% of earnings over the threshold, depending on plan)
- Postgraduate loan repayments (6% over £21,000)
- Pension contributions (both employer and employee)
- Payroll Giving donations
- Child maintenance payments
You must ensure that deductions are made correctly and are reflected on the employee’s payslip. Errors in calculations can affect an employee’s income-related benefits, such as Universal Credit.
Using reliable payroll software helps prevent such mistakes and ensures your calculations are aligned with the latest HMRC guidelines.
How Often Should You Pay Employees in the UK?
UK employers typically pay staff weekly, fortnightly or monthly, and the chosen frequency must be clearly outlined in the employment contract.
Monthly payments are most common, offering consistency and simplicity in reporting to HMRC. Weekly payments may suit retail or hospitality sectors.
You must align pay frequency with your payroll cycle and ensure that all RTI submissions are made on or before each payday.
If you pay less than £1,500 monthly, you may request to pay quarterly instead. Choose a frequency that suits your cash flow and operational needs while keeping staff informed and satisfied.
What Are the Legal Requirements for Employee Payslips?
Providing payslips is a legal obligation for all employers in the UK. Payslips must be given to every employee and worker on or before their payday.
They must include a breakdown of gross pay, deductions, and net pay. You can issue them digitally or in paper form, as long as they’re accessible and accurate.
A legally compliant payslip must show:
- Gross pay (total earnings before deductions)
- Deductions (Income Tax, National Insurance, pensions, student loans, etc.)
- Net pay (take-home pay)
- Number of hours worked (if pay varies based on hours)
Payslips can be provided digitally or in printed form. You may include additional info such as tax codes, NI numbers or total pay to date.
Most modern payroll software will generate payslips automatically, but you can use separate software if required. Not issuing payslips or failing to include mandatory details may result in legal claims from employees.
How Do You Submit Payroll Information to HMRC?
Each time you pay employees, you’re required to submit a Full Payment Submission (FPS) to HMRC using your payroll software. This report details what each employee was paid and what deductions were made.
Your FPS Should Include:
- PAYE reference and Accounts Office reference
- Employee earnings and tax/National Insurance deductions
- Start and end dates (if applicable)
- Statutory payments and pension contributions
You must send the FPS on or before payday, regardless of payment method or frequency. If no employees are paid in a tax month, submit an Employer Payment Summary (EPS) instead to inform HMRC of the zero-payment month.
After FPS and EPS submission:
- You can view your tax liability on your HMRC online account by the 10th of the next tax month
- Send EPS by the 19th if you’re claiming statutory pay or reductions
- Pay HMRC by the 22nd (or 19th if paying by post)
Late submissions without a valid reason may result in penalties and can impact employees’ benefit entitlements. Always ensure that all submissions are completed on time, using the correct software and entering accurate figures to avoid errors.
What Are the Payment Methods for Paying Salaries?
BACS (Bankers’ Automated Clearing Service)
BACS is the most widely used method for paying salaries in the UK. It allows you to transfer payments directly from your business account to employees’ bank accounts. It is secure, cost-effective and suitable for regular payroll processing.
Faster Payments or Online Banking
Faster Payments are ideal for smaller businesses that need to make immediate payments. This method is quick but typically involves manually entering employee details each time, which can increase the chance of errors.
Cash or Cheques
While legal, paying salaries in cash is discouraged due to the risks of theft, mismanagement, and difficulty tracking payments. Cheques are rarely used today because they take longer to clear and can delay employees receiving their wages.
Can You Run Payroll Yourself or Should You Outsource?
You can run payroll yourself using HMRC-recognised software, which may save costs and give you direct control over your business finances. This option suits small businesses with simple payroll structures.
Alternatively, outsourcing to an accountant or payroll bureau ensures accuracy, compliance, and time savings, ideal for businesses with complex payroll needs. Outsourced providers may also handle pension auto-enrolment and HMRC correspondence.
Regardless of your choice, you remain legally responsible for payroll accuracy and reporting. If you’re unsure, begin by running payroll yourself with support, then transition to outsourcing as your business scales.
Conclusion
Paying employees correctly when starting a business in the UK is a critical responsibility that combines financial accuracy with legal compliance.
From registering for PAYE to issuing payslips and submitting RTI to HMRC, each step plays a role in ensuring transparency and trust. The process can be streamlined using payroll software or supported by professionals if you choose to outsource.
By meeting these obligations, you protect your business from penalties and create a positive relationship with your staff. With the right setup and tools, payroll becomes a straightforward part of running a successful and compliant UK business.
FAQs About How Do You Pay Employees
What happens if I pay employees without registering for PAYE?
You may face fines, investigations and potentially HMRC closing your PAYE scheme for non-compliance. It can also affect your employees’ tax records and benefits.
Do I need to pay myself through payroll if I’m the business owner?
If you’re a company director drawing a salary, you must run payroll and report your earnings like any other employee. Sole traders do not typically use payroll for their own income.
Can I pay employees in cash in the UK?
Yes, but you must still deduct and report tax and NI to HMRC, and issue a compliant payslip. Cash payments must be recorded accurately in payroll records.
What are the fines for incorrect payroll submissions?
Late or incorrect FPS filings can result in penalties from HMRC and impact your employees’ entitlement to benefits like Universal Credit. Repeated errors may lead to further scrutiny.
Do part-time or temporary employees need to be on payroll?
Yes, all staff, regardless of hours or contract type, must be included in your PAYE reporting and receive payslips. There are no exceptions for part-time or casual workers.
How do I handle payroll for remote or hybrid employees?
Remote employees are processed like on-site staff, but digital payslips and online transfers are best. Ensure payroll software is accessible remotely if you manage it in-house.
Is auto-enrolment for pensions part of the payroll process?
Yes, you are required to assess and enrol eligible employees into a workplace pension and make employer contributions. Your payroll software should support this automatically.
