Hiring in the UK without understanding PAYE is like filing taxes in a language you don’t speak: technically possible, but expensive when you get it wrong. UK payroll operates on a “collect as you go” model where employers deduct income tax and National Insurance before employees ever see their pay.
This guide walks you through how PAYE works, what you’ll deduct and contribute, how to stay compliant with HMRC, and your options for running UK payroll when you don’t have a local entity.
What is UK payroll and how does the paye system work
UK payroll requires employers to operate Pay As You Earn (PAYE) to deduct income tax and National Insurance contributions, then submit Real Time Information (RTI) to HMRC on or before every payday. You’ll also handle pension auto-enrolment and comply with minimum wage rates as part of the same compliance cycle.
UK payroll goes beyond transferring money. You act as a tax collector on behalf of the government, calculating and withholding the right amounts from each employee’s earnings every pay period.
How the pay as you earn system works
PAYE is how HMRC collects income tax and National Insurance at source. Instead of employees filing their own tax returns, you deduct what’s owed directly from their wages each time you run payroll.
Every employee gets a tax code from HMRC, a combination of letters and numbers, that tells you how much income they can earn before tax applies. HMRC sends the code directly to you. You apply it when calculating pay, and the result determines how much income tax to withhold.
- Tax codes: Reflect the employee’s personal allowance and any adjustments HMRC has made
- Real Time Information (RTI): The system for reporting payroll data to HMRC on or before each payday
- Payment to HMRC: You remit collected taxes and National Insurance by the 22nd of the following month (or 19th if paying by post)
Key differences between UK and us payroll
If you’re familiar with US payroll, the UK system works quite differently. The table below highlights the main distinctions.
| Aspect | UK Payroll | US Payroll |
|---|---|---|
| Tax collection | PAYE: employer deducts at source | Employer withholds; employee files annual return |
| Healthcare | Not employer-funded (NHS) | Often employer-sponsored |
| Social security | National Insurance | FICA taxes |
| Tax year | 6 April to 5 April | 1 January to 31 December |
The UK tax year running April to April catches many international employers off guard. All annual reporting deadlines align to this cycle, not the calendar year.
How to set up payroll in the UK
Before running your first payroll, you’ll complete several registration and setup steps. Missing any of them creates compliance issues from day one.
1. Register as an employer with hmrc
Register with HMRC as an employer before your first employee’s payday. Registration gives you a PAYE reference number, which HMRC sends by letter. If you need to pay an employee before the reference arrives, you can run payroll and send a late Full Payment Submission to HMRC once you receive it.
2. Collect employee information and tax codes
For each new hire, gather their documentation. If they’re joining from another UK employer, they’ll provide a P45 showing their earnings and tax paid so far in the tax year.
New employees without a P45 complete a starter checklist instead. This helps you determine which tax code to apply until HMRC sends the official one.
3. Choose payroll software or a provider
HMRC requires RTI-compatible software for submitting payroll data. Check HMRC’s list of approved payroll software before purchasing.
- HMRC-recognised software: Automatic tax calculations, RTI submission, payslip generation, and pension integration
- Payroll bureau: Outsource submissions and calculations while retaining a UK entity
- Employer of Record: Full payroll handling for companies without a UK entity
4. Establish your payroll schedule
Most UK employers pay monthly on a fixed date, though weekly and fortnightly schedules exist in some industries. Your pay frequency determines your RTI submission timing: you report to HMRC on or before each payday.
Payroll taxes and deductions in the UK
UK payroll involves several mandatory deductions from employee pay. You’ll calculate and withhold amounts before issuing a payslip.
Income tax bands and the personal allowance
The personal allowance is the amount employees can earn tax-free each year. Earnings above this threshold fall into progressive tax bands: basic rate (20%), higher rate (40%), and additional rate (45%).
Tax rates and thresholds are reviewed annually. Always check GOV.UK for the current figures before the start of each tax year.
Employee national insurance contributions
National Insurance funds state benefits including the State Pension. Employees pay NI on earnings above certain thresholds, with different rates applying to different earning bands.
Several NI categories exist depending on the employee’s circumstances. Standard employees, directors, and those above State Pension age all have different treatment. Category letters on your payroll software determine which rates apply.
Student loan and postgraduate loan deductions
When an employee has an outstanding student loan, HMRC notifies you to begin deductions. The loan type determines the repayment threshold and percentage.
- Plan 1: 9% on earnings above the threshold
- Plan 2: 9% on earnings above the threshold
- Plan 4: 9% on earnings above the threshold
- Plan 5: 9% on earnings above the threshold
- Postgraduate Loan: 6% on earnings above the threshold
You’ll see deduction instructions on the employee’s tax code notice or receive a separate Start Notice from the Student Loans Company.
Attachment of earnings and court orders
Sometimes you’ll receive court orders requiring you to deduct money from an employee’s pay for debts like child maintenance or unpaid fines. The order specifies how much to deduct and where to send the payment.
Employer contributions for UK payroll
Beyond what you deduct from employees, you have your own payment obligations. Employer contributions add to the total cost of employment.
Employer national insurance rates and thresholds
Employers pay National Insurance on employee earnings above certain thresholds, separate from the employee’s contribution. You pay this on top of gross salary.
The Employment Allowance may reduce your liability if you’re eligible. Check HMRC’s guidance to see if your business qualifies.
Workplace pension auto-enrolment
UK law requires you to automatically enrol eligible workers into a workplace pension scheme. Eligible workers are those aged between 22 and State Pension age, earning at least £10,000 per year, and working in the UK.
Both you and the employee contribute minimum percentages of qualifying earnings. Register with The Pensions Regulator and maintain ongoing compliance with contribution deadlines.
Statutory sick pay and parental leave obligations
You may pay statutory amounts when employees are absent:
- Statutory Sick Pay (SSP): £118.75 per week for employees off sick for more than three consecutive days (paid from day four)
- Statutory Maternity Pay (SMP): For eligible employees taking maternity leave
- Statutory Paternity Pay (SPP): For eligible partners following a birth or adoption
- Shared Parental Pay: When parents share leave between them
UK payroll compliance and hmrc reporting
Running payroll in the UK means ongoing compliance obligations. HMRC expects regular reporting, and penalties apply when you miss deadlines or submit incorrect information.
Real time information submissions
RTI is the system for reporting payroll data to HMRC. Submit a Full Payment Submission (FPS) on or before each payday, detailing what you’ve paid each employee and what you’ve deducted.
If you report adjustments, such as recovering statutory payments, use an Employer Payment Summary (EPS).
P45, p60 and p11d forms
Several forms play important roles in UK payroll:
- P45: Given to employees when they leave, showing their earnings and tax paid during the tax year
- P60: Annual summary provided to each employee after the tax year ends (by 31 May)
- P11D: Reports benefits in kind and expenses to HMRC (due by 6 July)
Payroll record-keeping requirements
HMRC requires you to keep payroll records for at least 3 years after the end of the tax year they relate to. Records include pay calculations, employee details, HMRC correspondence, and leave records.
Penalties for late or incorrect submissions
Late RTI filings result in monthly penalties based on the number of employees. Late payment of PAYE attracts interest and additional charges. HMRC allows a 3-day grace period before penalising late FPS submissions.
How to process payroll in the UK: step by step
Once you’re set up, payroll becomes a regular cycle. Here’s what happens each pay period.
1. Calculate gross pay and allowances
Start with each employee’s contracted salary or hourly rate. Add any overtime, bonuses, commission, or allowances earned during the pay period. This gross figure is your starting point before any deductions.
2. Apply tax codes and calculate deductions
Using the employee’s tax code, calculate their income tax liability for the period. Then calculate National Insurance, student loan deductions if applicable, and pension contributions. The result is their net pay: what actually lands in their bank account.
3. Submit rti reports to hmrc
On or before payday, submit your FPS through your payroll software. This tells HMRC exactly what you’ve paid and deducted for each employee.
4. Pay employees and remit taxes
Transfer net pay to employees via BACS or bank transfer. Pay HMRC what you owe by the 22nd of the following month for electronic payments (or 19th if paying by post).
UK payroll options compared
Different approaches suit different situations. Your choice depends on whether you have a UK entity, your team size, and how much compliance work you want to manage directly.
| Option | Best for | What you’re responsible for |
|---|---|---|
| In-house with software | Established UK businesses with payroll resource | All calculations, submissions, and compliance |
| Outsourced bureau | SMEs without dedicated HR or finance | Providing accurate data each pay period |
| Employer of Record | Foreign companies without a UK entity | Hiring decisions and day-to-day management |
Running payroll in-house
Managing payroll internally gives you direct control over the process. You’ll purchase HMRC-recognised software, handle all calculations and submissions, and maintain compliance yourself.
Outsourcing to a payroll bureau
A payroll bureau runs payroll on your behalf. You provide employee data and any changes each period, and they handle calculations, submissions, and payslip distribution. You’re still responsible for providing accurate information.
Using an Employer of Record
An Employer of Record (EOR) becomes the legal employer of your UK workers. They handle employment contracts, payroll, tax, National Insurance, pensions, and all compliance obligations. This suits companies hiring in the UK without a local entity. Platforms like RemotePass offer EOR services across 150+ countries, so you can hire UK talent without establishing your own presence.
How to pay UK employees without a local entity
International companies can hire UK employees compliantly through an Employer of Record, even without a registered UK business. The EOR registers as the employer with HMRC, handles all payroll and tax obligations, and employs workers on your behalf.
What is an Employer of Record
An EOR is a third party that legally employs workers on your behalf. They sign the employment contract, appear on payslips, and handle all interactions with HMRC. You maintain the working relationship, assigning tasks, managing performance, and directing daily activities.
Benefits of EOR for UK payroll
Using an EOR removes the main barriers to UK hiring:
- No entity required: Hire compliantly without setting up a UK company
- Faster onboarding: Start employing within days rather than months
- Built-in compliance: The EOR stays current with UK employment law changes
- Consolidated payments: Pay one invoice rather than managing HMRC submissions separately
Paying UK contractors alongside employees
Some platforms let you pay contractors and EOR employees from one system. RemotePass enables this unified approach: you can onboard UK employees through EOR while managing contractors separately, all from a single dashboard.
UK payroll calendar and key deadlines
Missing deadlines triggers penalties. The UK payroll calendar helps you plan ahead.
Tax year dates
The UK tax year runs from 6 April to 5 April the following year. P60s go to employees by 31 May. P11D forms are due to HMRC by 6 July.
Monthly rti and payment deadlines
Submit your FPS on or before each payday. PAYE and National Insurance payments to HMRC are due by the 22nd of the month following the pay period (or 19th by post).
National minimum wage rates
UK law sets minimum hourly rates that vary by age. The National Living Wage applies to workers aged 21 and over, while younger workers and apprentices have different minimums. Rates update each April.
Run compliant UK payroll from a single global platform
Managing UK payroll alongside teams in other countries creates complexity. Different tax years, varying compliance requirements, and multiple payment systems drain time and increase error risk.
RemotePass acts as an Employer of Record in the UK, handling employment contracts, payroll calculations, HMRC reporting, pension auto-enrolment, and statutory compliance. You hire UK talent without setting up a local entity, and your employees receive compliant contracts, proper payslips, and all statutory benefits.
Book a RemotePass demo to see how it works for your UK hiring plans.
FAQs about payroll in the UK
What is a paycheck called in the UK?
In the UK, employees receive a “payslip” detailing their earnings and deductions. The payment itself is typically called “wages” or “salary” rather than a paycheck.
Is UK payroll difficult to manage for foreign companies?
UK payroll involves specific compliance requirements including PAYE registration, RTI reporting, and National Insurance calculations. Many international employers use an Employer of Record to handle these obligations.
Can a foreign company run payroll in the UK without a local entity?
A foreign company cannot run UK payroll directly without registering as an employer with HMRC. The compliant alternative is an Employer of Record, which registers as the employer and handles all tax obligations on your behalf.
What is IR35 and how does it affect UK payroll?
IR35 is UK tax legislation determining whether a contractor working through an intermediary should be taxed as an employee. Medium and large businesses are responsible for assessing contractor tax status.
How often are UK employees typically paid?
Most UK employees are paid monthly on a fixed date, though weekly and fortnightly schedules exist in some industries.
Does a foreign employer need a UK bank account to pay employees?
Foreign employers using an Employer of Record don’t need their own UK bank account. The EOR handles all local payment processing.
