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

4 | Guide: The basics of UK payroll

What legislation covers payroll?
The UK has an extensive legislative
framework covering payroll, employment
and tax. Here are the main ones you
need to know:
Employment Rights Act 1996 (ERA)
This is the primary legislation for workers
and employees in the UK. The ERA governs
contract types, working hours, and
entitlement to paid time off work.
It also governs authorised and unauthorised
deductions and protects employees and
workers from having unauthorised deductions
made from their wages. Late payment of
wages is considered a deduction of wages.
National Minimum Wage Act 1998
This Act created a minimum hourly wage
across the United Kingdom for those
above the school leaving age and it’s now a
criminal offence for employers to not pay
someone at or above the National Minimum
Wage or National Living Wage.
The National Minimum Wage and National
Living Wage vary and can change each year.
For up to date rates see the UK Government
website here.
6 | Guide: The basics of UK payroll
Part-Time Workers (Prevention
of Less Favourable Treatment)
Regulations 2000 and Agency
Workers Regulations 2010
These laws provided rights to part time
workers to help ensure equal and fair
treatment and equal pay, and enshrines
their right not to be treated less favourably
than full-time workers.
Income Tax (Earnings and Pension)
Act 2003 and Income Tax Act 2007
The Income Tax regulations govern the
treatment of payroll tax in the UK and
personal income tax. These regs also
define employment to distinguish between
employment and self employment. In the UK,
tax for those who are self employment is
governed by the Self Assessment tax system.
National Insurance
Contributions Act of 2015
This legislation provides a system of social
security in the UK. National Insurance (NI)
contributions over a number of years gives
employees entitlement to state benefits for
workers and their families. When the
employee is paid above a certain level,
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 enrolled. Further guidance on
employers obligations can be found
on the Pension Regulators website
Contractors:
The off-payroll working rules (IR35)
The IR35 rules govern contractors, ensuring
that workers who would have been an
employee if they were providing their
services directly to the client (but have
their own company or work for an agency
or umbrella organisation for example) pay
roughly the same amount of tax and NI
contributions as employees.
IR35 does not apply to self employed
people that you contract.
 Calculating tax codes
The amount of Income Tax (PAYE) you
deduct from your employees depends on
their tax code and how much of their taxable
income is above their Personal Allowance.
Check the UK government website for up
to date information on personal allowances.
Please note, Scotland has different tax
bands than the rest of the UK. Wales
can also have different tax bands but
are currently the same as England.
National Insurance
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
Insurance Contributions, but there are
categories who will pay less. You’ll find up
to date rates on the Government website.
Employers pay a different rate of National
Insurance depending on their employees’
category letters.
8 | Guide: The basics of UK payroll
What is PAYE?
Pay as You Earn (PAYE) is the UK HM
Revenue and Customs’ (HMRC) system
to collect Income Tax and National
Insurance. As an employer, you usually
need to run PAYE as part of your payroll.
You don’t need to register for PAYE if
none of your employees are paid £123 or
more a week, get expenses and benefits,
have another job or get a pension.
Whether or not you register for PAYE,
all companies are legally required to
keep payroll records.
Is payroll the same as PAYE?
A PAYE reference number is different
from a payroll number. An employer PAYE
reference number is 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.
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
running payroll yourself, there are a number
of tasks you must do:
1. Tell HMRC and register as an employer
2. Choose a payroll software to report to
HMRC. Your software must report PAYE
information online unless you’re exempt.
3. Collect and keep records.
4. Tell HMRC about your employees.
You’ll need to get information from your
employee to work out their tax code.
If you don’t have their P45 you can use
HMRC’s ‘starter checklist’
5. Record pay, make deductions and report
to HMRC on or before the first payday.
6. Pay HMRC the tax and National
Insurance you owe.
You need to record your employees’
salary or wages in your payroll system.
You must include everyone you pay,
even if they get less than £123 a week.
Every time you pay your employees,
you must submit a Full Payment
Submission (FPS) document to HMRC
on or before the payment date.
10 | Guide: The basics of UK payroll
The FPS will include:
→ Information about each employee
including their payroll number,
full name, address, National
Insurance number and tax code
→ Information about the employees
pay, including each employee’s salary
and net salary, how much income tax
and National Insurance is due, and
what the employer owes to HMRC
→ Any updates on new employees
or employees who have left
There are certain exemptions from
reporting payroll online. Check out
HMRC’s guidance on exemption.
Managing payroll yourself
If you manage payroll yourself, you’ll
need to report your employees’ payments
and deductions to HMRC on or before each
payday. Small businesses who pay less than
£1,500 a month can contact HMRC to
arrange to pay quarterly.
Using payroll software What records do I need to keep?
You can use payroll software to calculate As an employer, you’re legally responsible
how much tax and National Insurance for completing all payroll and PAYE tasks,
you owe, including an employer’s even if you pay someone else to do them.
National Insurance contribution on each
employee’s earnings above £175 a week. You must keep records of:
→ How much you pay your employees
Your payroll software can submit the
→ Any deductions you make
FPS to HMRC to notify them of payments
from employee pay
you’ve made to your employees and
→ Reports you make to HMRC
any deductions you’ve made.
→ Payments you make to HMRC
If you use payroll software, you must use
→ Employee leave and sickness
an HMRC recognised payroll provider. absences tax code notices
Employment Hero Payroll is an HMRC taxable expenses or benefits
recognised payroll provider, and has all → Documentation of charitable donations
the tools you need to make payroll a breeze. via the Payroll Giving Scheme,
including the agency contract and
Do I have to give a payslip? employee authorisation forms
Under the HRA, all employers are legally You must keep records for 3 years from
required to provide their employees the end of the tax year they relate to.
with a payslip before their payday.
Payslips must show:
→ Gross pay (pay before any deductions)
→ All deductions including tax, NI
and pension contributions
→ Net pay (pay after deduction)
→ Where the pay varies depending
on time worked, the number of
hours worked must be shown
You can use your payroll software to
provide payslips. Payslips can be printed
or sent to employees electronically.
What to record in payroll
Types of pay
There are other payments you pay your
employees that should be recorded as
normal pay, including bonuses, commission,
holiday pay and travel time payments.
You should refer to the UK government
website for a full guide to PAYE.
You may also need to pay and record:
→ Statutory Sick Pay (SSP). Your employees
may be eligible for Statutory Sick Pay
(SSP), which is £99.35 a week for up
to 28 weeks.
→ Statutory pay for parents (maternity,
paternity, adoption, bereavement
or shared parental pay).
→ You must record these in your payroll
system or software and tax is calculated
the same as for normal pay.
You can reclaim statutory pay for parents.
You’ll need to send another report to
claim any reduction on what you owe HMRC.
Tips
Tips are treated as normal pay if they’re paid
into your till, including tips added to card or
cheque payments. If tips are given directly
to an employee, the employee is responsible
for reporting to HMRC either through Self
Assessment or their personal tax account.
12 | Guide: The basics of UK payroll
Expenses and benefits
As an employer, you will need to report
any expenses or benefits you provide
to employees. You may also need to
pay tax and National Insurance on
them. These can be reported as part of
the payroll and is called payrolling of
benefits or Annually through P11d reports
submitted electronically to HMRC and
a statement given to the employee.
Expenses or benefits like uniforms
or company cars are reported
separately and this is done annually
at the end of the tax year.
The UK government has guidance on
expenses and benefits, and what you should
record in your software as normal pay.
Deductions
Your payroll software will calculate
how much tax and National Insurance
to deduct from your employees’ pay
according to each employee’s tax code
and National Insurance category.
Other deductions may include:
→ Student loan repayments
→ Pension contributions
→ 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
changes to payroll?
You must tell HMRC of any changes such
as when a new employee starts or an
employee leaves, or an employee becomes
a director. You must also let HMRC know
when you start paying a workplace pension.
You can also correct a mistake with an
employee’s pay or deductions by updating
the year-to-date figures in your next regular
Full Payment Submission (FPS). Alternatively
you can correct it by sending an additional
FPS before your next regular FPS is due.
You can also change your payday and
change how often you pay employees.
You will need to contact HMRC’s
Employer Helpline for further guidance.
When do I pay HMRC?
You need to pay HMRC by the 22nd
of every month. If you pay by post,
you must pay by the 19th.
What you pay will be tax and national
insurance as you reported it to HMRC
or in your Full Payment Submission
submitted by your payroll software.
You can check your HMRC online account
to view reports you’ve submitted, see how
much you owe, and make payments.
What happens if I am
late reporting?
If you’ve paid your employees but you don’t
send the FPS or you send it late, HMRC
will send you a late filing notice. This is an
electronic notice to remind you to pay any
outstanding amounts and submit your FPS.
HMRC can also charge you a penalty, unless
you have a valid reason for reporting late.
14 | Guide: The basics of UK payroll
Will Brexit impact payroll?
On 1 January 2021 the UK officially left
the EU. This means that the UK now has
powers to make changes to employment
law coming from Europe, including
the Working Time Directive (WTD).
In summary, workers rights enshrined
by the WTD remain in force:
→ Unless exempt, workers are restricted
from working more than 48 hours per
week, which is calculated as an average
of total hours worked over 17 weeks
→ Workers are entitled to take 28 days
of paid holiday per year which can
be inclusive of public holidays
→ Workers should get a minimum
of 20 minutes of break for
every 6 hours worked
→ Any employee working three or more
hours between 11pm and 6am are
deemed night workers and their working
hours should not exceed eight hours
A Draft Employment Bill has been tabled,
but for the time being, the UK is still
governed by current European Regulations,
including the WTD. It’s worth noting that
the new legislation could amend the 48
hour working week limit and change rules
on holiday pay and rest breaks which
would have a direct impact on payroll.
It would also affect employers in the UK
who operate payroll across Europe.
Do I need to consider What is payroll software?
data protection? Payroll software is an on-premises or
If your business stores or uses personal cloud-based solution that manages,
information, including information held maintains, and automates payments to
on employees such as names, addresses employees. This can help you stay compliant
and working hours, then you are required and streamline your payroll operations.
to follow rules on data protection.
Automated payroll can instantly calculate
The rules require you to ensure the contributions and deductions, track
information is kept secure, accurate time and attendance, generate accurate
and up to date. data and take care of workforce
planning from one centralised place.
For more information, check out
the UK Government website.
Should my business use a
payroll provider or process
payroll in-house?
It’s up to you whether you choose
to use an external payroll provider,
or bring payroll in-house.
It’s a numbers and admin-heavy task,
so, understandably, some business
owners might believe it’s easier to
outsource it. However, completing PAYE
yourself is not nearly as difficult or as
time consuming as you may think.
This small investment in payroll software
can save you money on outsourcing
without putting a strain on your
headcount, as processes are
automated and streamlined.
Learn more about bringing payroll
in house with our helpful factsheet.
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.
Our platform uses automation to make every pay run simple, and our
helpful tools can help you manage every part of the payroll process.

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Budget and allocate shifts based on skills
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pay runs by logging start, break and end times.
HMRC-compliant payroll reporting
Remove frustrations and improve
compliance with automated HMRC real
time information (RTI) reporting, submit all
required information with a few clicks.
Your team can request leave on-the-go
through their mobile or desktop app.
Managers can easily see their whole
team’s leave schedule to identify any
conflicting requests.
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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