Payroll is one of the most essential functions in any business; it ensures employees are paid accurately, on time, and in compliance with UK tax laws. But for many small business owners and employees, payroll can seem complex and confusing.
In this guide, we explain what payroll is, how it works, and why getting it right is critical to business success and employee satisfaction.
What is Payroll?
Payroll is the process of calculating and distributing wages to employees. It includes everything from working out gross pay and tax deductions to issuing payslips and submitting reports to HMRC.
Payroll covers:
- Employee salaries and wages
- Statutory payments (e.g. sick pay, maternity pay)
- Income Tax and National Insurance contributions
- Pension deductions
- Student loan repayments
- Benefits in kind (e.g. company cars, private healthcare)
How Payroll Works in the UK
Here’s a step-by-step overview of the payroll process:
1. Collect Employee Information
Employers need details such as employment contracts, working hours, tax codes, and National Insurance numbers.
2. Calculate Gross Pay
Gross pay includes the total amount an employee has earned before deductions. This may include salary, overtime, bonuses, or holiday pay.
3. Apply Deductions
Mandatory deductions include:
- PAYE Income Tax
- National Insurance Contributions (NICs)
- Pension contributions
- Any other relevant deductions (e.g. student loans or benefits in kind)
4. Determine Net Pay
Net pay is what the employee takes home after deductions. This amount is then paid to their bank account.
5. Generate Payslips
Employers must issue payslips on or before payday, showing gross pay, deductions, and net pay.
6. Submit Reports to HMRC
Employers must report payroll data to HMRC using Real Time Information (RTI). This includes every employee’s pay and tax details.
7. Make HMRC Payments
Employers must pay the deducted Income Tax and NICs to HMRC, usually by the 22nd of each month (or the 19th if paying by post).
Why Payroll Accuracy Matters
Getting payroll right is vital for:
- Maintaining employee trust and morale
- Avoiding penalties from HMRC
- Meeting legal obligations
- Ensuring timely payments and pension contributions
Mistakes in payroll can lead to disputes, fines, or even legal action. That’s why many businesses trust Payroll Services Accountants to manage payroll with expert precision and full compliance.
Final Thoughts
Payroll is more than just paying staff; it’s about managing financial and legal responsibilities with accuracy and consistency. Whether you're handling payroll for the first time or looking to improve your current system, understanding how payroll works is essential.