How To Run Payroll UK

Your accountant just told you they’re handing payroll back to you. Or you’ve taken on your first employee and realised nobody has explained what happens next.

Either way, you’re now responsible for a process that has legal deadlines, government submissions, and real penalties if you miss them.

This guide covers every step, in order, so you can run payroll correctly from month one.

What does running payroll in the UK actually involve?

Running payroll is calculating wages. It means calculating deductions, reporting them to HMRC in real time, paying your employees, paying HMRC, and keeping records that hold up to inspection.

The legal framework is PAYE (Pay As You Earn). Under PAYE, you act as a collector of Income Tax and National Insurance on HMRC’s behalf.

You deduct these from employee pay before it reaches their bank account and send the money to HMRC monthly.

The process has a regular rhythm: calculate, deduct, report, pay. Each month. Every month. On schedule.

How do you register as an employer with HMRC?

You must register with HMRC before your first payday. Do it as soon as you know you’re taking on an employee.

Go to GOV.UK and complete the online employer registration. HMRC will send your employer PAYE reference number by post. That letter takes up to five working days to arrive.

No reference number, no FPS submission.

You can register up to two months before your first planned payday, but not earlier. If you need to pay someone before the letter arrives, the correct approach is to run payroll, store your FPS, and send it as a late submission once you have the reference.

HMRC has a defined process for this scenario.

If you’re a limited company director taking a salary, you need to register even if you are the sole employee.

What software do you need to run payroll?

HMRC requires RTI (Real Time Information) submissions. That means your payroll process must be software-based; you cannot submit by phone or post for most employers.

HMRC offers Basic PAYE Tools (BPT) free of charge. It handles FPS submissions, tax code lookup, and basic record-keeping. It is designed for employers with fewer than 10 employees.

Beyond that threshold, you are looking at commercial payroll software, which ranges from standalone payroll tools to integrated HR and accounting platforms.

The choice matters. A misconfigured setup can apply the wrong tax table or miss a statutory payment trigger. Test any new setup with one full payroll run before processing live pay.

How do you collect the right information from a new employee?

Before you can calculate anything, you need the right inputs. For every new starter, collect:

– A P45 from their previous employer, if they have one. This tells you their tax code and earnings to date in the current tax year. – If they have no P45, a Starter Checklist (formerly called a P46).

The checklist tells you which tax code to use initially. – Their full name, date of birth, address, and National Insurance number.

– Their bank details.

The P45 or checklist determines the starting tax code. Getting this wrong is the most common first-timer mistake.

If you apply an emergency tax code when the employee provided a P45, they will be overtaxed and you will need to correct it mid-year.

How do you calculate gross pay, PAYE, and National Insurance?

Gross pay is the agreed salary or hourly wage before any deductions. If an employee works variable hours, you calculate based on hours worked multiplied by the agreed hourly rate.

From gross pay, you deduct:

Income Tax (PAYE): Calculated using the employee’s tax code. The code tells your software how much personal allowance to apply. Standard code for 2025/26 is 1257L, giving a £12,570 personal allowance.

Anything over that threshold is taxed at the basic rate (20%), then higher rate (40%) above £50,270.

National Insurance Contributions (NICs): Both employee and employer NICs apply. The employee’s NIC is deducted from their pay. The employer’s NIC is an additional cost on top of gross pay.

The category letter determines which rate applies. Category A covers most employees. Category C applies to employees over state pension age, who pay no employee NICs.

Applying the wrong category overpays or underpays contributions.

Pension contributions: If your employee is auto-enrolled, you also deduct their pension contribution and add the employer contribution.

Your payroll software should handle all calculations once the inputs are correct. The risk sits in the inputs.

What statutory payments do you need to include?

Statutory payments sit alongside regular pay and have their own calculation rules.

Statutory Sick Pay (SSP): Applies from the fourth consecutive day of sickness. The rate for 2025/26 is £116.75 per week. You pay SSP through payroll; HMRC no longer reimburses most employers.

Statutory Maternity Pay (SMP): 90% of average weekly earnings for the first six weeks, then the statutory flat rate for up to 33 further weeks.

You can recover 92% of SMP from HMRC (or 103% if you qualify as a small employer).

Statutory Paternity Pay and Shared Parental Pay follow similar structures with different durations.

Miss a statutory payment and the employee has grounds for a formal dispute. Include it incorrectly and your HMRC reconciliation will not balance.

When and how do you submit your Full Payment Submission?

The FPS is the RTI submission that tells HMRC exactly what you paid each employee and what deductions you made. The rule is absolute: submit the FPS on or before payday.

If payday falls on a weekend or bank holiday, submit the FPS on the next banking day, but enter the actual payment date in the submission and use late reporting reason code G. This is the one permitted exception.

An FPS submitted even one day late without a valid reason triggers an automated online penalty warning. If it happens repeatedly, HMRC issues financial penalties.

For employers with one to nine employees, the monthly penalty for persistent late filing is £100.

Your payroll software generates the FPS automatically once you have finalised that period’s payroll. Do not approve pay runs until you are ready to submit.

How do you pay your employees and HMRC?

Pay your employees on payday. Most employers use BACS (bank transfer), which takes three working days to process. That means initiating a BACS payment three working days before the intended payday, not on the day itself.

Get this wrong and employees receive pay late, which is a contractual breach.

Paying HMRC is a separate step with its own deadline. You must pay HMRC the total PAYE and NICs for each tax month by the 22nd of the following month if paying electronically (19th if paying by cheque).

The tax month runs from the 6th to the 5th of the following month.

So for the period 6 April to 5 May, your HMRC payment is due by 22 May.

Missing the 22nd attracts a surcharge on the amount owed. After three missed payments in a tax year, HMRC adds a 5% surcharge.

What do your employees need to receive?

By law, every employee must receive a payslip on or before payday. The payslip must show gross pay, all deductions itemised by type, and net pay. If hours vary, it must also show the hours worked.

You issue payslips; they are not optional documentation you provide on request.

What happens at year end?

The tax year ends on 5 April. By 19 April, you must submit your final FPS (marked as the last one for the year) and an Employer Payment Summary (EPS) if you have claimed any statutory payment recovery.

By 31 May, you must give every employee who worked for you during the year a P60. This summarises their pay and deductions for the whole tax year.

By 6 July, file P11D forms for any taxable benefits in kind (private health insurance, company cars, etc.) you have provided that are not payrolled.

Year end is the point when accumulated errors in tax codes, NIC categories, or statutory payments become visible. Cleaning up mid-year is far less painful than discovering a reconciliation gap after 5 April.

What mistakes do first-time employers make most often?

Wrong tax code from day one. If an employee hands you a P45, use the tax code on it. If they don’t, use the Starter Checklist to determine the correct code.

Defaulting to an emergency code (BR or W1/M1) when you have the right information will overtax the employee and require a correction.

Missing the FPS. Some employers run payroll but forget the submission. Running the calculation in software and getting money into employee bank accounts does not automatically trigger the FPS. It is a separate step.

Check your software’s submission log after every pay run.

Wrong NIC category. Applying Category A to a director who should be on a different category, or keeping an employee on Category A after they reach state pension age, produces incorrect contributions in both directions.

Paying HMRC late. The 22nd deadline is not when you initiate the payment. It is when HMRC must receive cleared funds. For BACS, that means paying earlier than the 22nd.

Not issuing payslips. Failing to issue payslips before or on payday is an employment law breach, administrative lapse.

What should you do next?

If you are not yet registered as an employer, go to GOV.UK and start the registration today. Allow five working days for your PAYE reference number to arrive by post.

If you are already registered but taking payroll in-house for the first time, audit your software setup before processing live payroll: confirm tax codes match P45 or Starter Checklist data, confirm NIC categories for each employee, and confirm your FPS submission settings are pointed at the live HMRC environment, not a test gateway.

Then set two recurring calendar reminders: one for the day before each payday (FPS check), and one for the 19th of each month (HMRC payment initiation).

Those two reminders will catch the deadlines that generate the majority of first-year penalties.