UK Payroll guide: Everything You Need to Know About Payroll

Running payroll can initially feel like an overwhelming task. From calculating taxes and National Insurance contributions to staying compliant with ever-changing payroll legislation and understanding your employer obligations, there are lots of factors to consider when it comes to paying your employees. And that’s exactly why we’ve put together this comprehensive guide to running payroll. 

In this UK payroll guide, we’ll cover everything you need to know about how payroll works, including key terms, legal requirements, and best practices for paying employees.

Your basic guide to payroll: Key UK payroll terms

Before diving into the specifics of UK payroll, it’s important to understand some of the key terms used in payroll management: 

• PAYE (Pay As You Earn): PAYE is the system used by employers to deduct income tax and National Insurance contributions from their employees’ paychecks. This system ensures that employees pay their taxes and National Insurance contributions throughout the year rather than in one lump sum at the end of the year.

• National Insurance Contributions (NICs): NICs are contributions made by employees and employers to the National Insurance fund, which provides benefits such as the State Pension and Jobseeker’s Allowance. Employees and employers both contribute a percentage of the employee’s earnings, and the amount of NICs paid depends on the employee’s earnings.

• Real Time Information (RTI): RTI is a system used by employers to report payroll information to HM Revenue & Customs (HMRC) in real time. 

A step-by-step guide to running payroll

#1 Register with HMRC 

Before you can start running payroll, you’ll need to register with HMRC as an employer. You can do this online, and you’ll receive a PAYE reference number once your registration is complete. 

#2 Tell HMRC about your new employee/s: 

You’ll need to tell HMRC every time you hire a new employee, and whenever their salary or circumstances change. 

Usually, new employees will have a P45 form from their previous employer, which will outline their tax code and all other information that HMRC needs. If they don’t have a P45, you can ask them to fill out a Starter Checklist.

#3 Prepare payroll:

We recommend reading our beginner’s guide to preparing payroll to find out everything you need to know about setting up payroll - from determining your payroll schedule and gathering information about your employees to getting started with time-saving payroll software.

#4 Calculate income tax: 

It's your obligation as an employer to figure out how much tax your employees owe, deduct it from their salary, and send it to HMRC.

The more your employee earns, the higher percentage of their income they'll pay in taxes. Tax codes are assigned by HMRC based on the employee’s personal allowance, which is the amount of income they can earn before they have to pay tax. 

Different tax codes are used for different situations, such as when an employee has multiple jobs or receives taxable benefits, and will be issued by HMRC when you tell them about your new hire. You can automate income tax calculations using a payroll software like Freshpay.

#5 Calculate National Insurance Contributions (NICs):

You'll also need to make sure you're operating the correct National Insurance contributions for your employees. The amount of contributions you need to deduct from your employee's pay depends on their earnings and employment status.

NICs are calculated based on the employee’s gross pay and their NIC category, which depends on their age and earnings. 

Employers must also pay employer NICs, which are calculated based on the employee’s gross pay and the employer’s NIC rate.

It's also worth noting that there are a variety of allowances and deductions available that can lower your employee's tax bill, such as the personal allowance and tax relief for charitable donations. Make sure you're aware of these so you can help your employees save on taxes where possible.

#6 Pay your employees

You can use an online payments solution like Crezco to make bulk payments quickly, securely and cost-effectively with one single bank authentication.

#7 Issue employee payslips

As an employer, you’ll need to provide employees with a payslip each time they are paid. 

Payslips should detail employees’ gross pay, taxes and deductions, as well as their net pay. 

You can use a payroll software to automate payslip creation and ensure all the right information is included every time. 

#8 Keep records of all your payslips and payments

Keeping records of your employees’ payslips is crucial, as this makes it easier to keep track of payroll costs, pay HMRC the tax and National Insurance you owe each month and prepare your annual report for HMRC at the end of the tax year.

#9 Report to HMRC

HMRC requires employers to submit Real Time Information (RTI) reports to them every time they run payroll. This ensures that HMRC has up-to-date information about employees’ earnings, taxes, and NICs, and helps to prevent fraud and error in the payroll system.  

You’ll need to report your latest pay deductions to HMRC by the 19th of every month (if you pay by post) or the 22nd (if you pay online).

At the end of the tax year, you’ll also need to submit your final report for the year to HMRC and provide a P60 form (summarising annual pay and deductions) to every employee. 

Managing an international payroll

When you’re paying employees outside of the UK and managing a remote payroll, it’s important to read up on and understand the laws and regulations around tax in both the UK and the country where your employee is located. 

You’ll also need to keep an eye on current exchange rates, and decide how you’re going to pay your international employees cost-effectively. One of the speediest and safest ways to do this is by using an online payments solution like Crezco to pay all of your employees in bulk - whether they’re in the UK or abroad. 

Read our international payroll guide to find out everything you need to know about paying employees overseas.

Simplify payroll with payroll software

By automating key tasks using payroll software, you can save valuable time and reduce errors, giving you more resources to focus on growing your business.

For example, cloud-based payroll platform Freshpay offers a comprehensive solution that simplifies and speeds up the payroll process from end to end. 

Using a payroll software, you can automate wage calculations and tax deductions, leaving you with more time to concentrate on your core business operations. Using reliable payroll software also lets you feel confident that you’re sticking to your employer obligations, while staying on top of any changes in employer reporting requirements or tax legislation.

You’re ready to start running payroll

By following the steps outlined in this payroll guide, you can be sure that you’re paying your people, efficiently, accurately, and in line with tax regulations and government guidelines. 

Before you get started, you can find out more information about running payroll on the government’s official website, and learn more about how to streamline your payroll process with Crezco.