How to Do Payroll in the UK: Step-by-Step Guide

Running payroll in the UK requires registering as an employer with HMRC, choosing payroll software, calculating tax and National Insurance each pay period, submitting Real Time Information (RTI) reports, and managing auto-enrolment pensions. This guide walks through every step using current 2025/26 tax year figures.

Whether you are employing your first member of staff or switching from outsourced to in-house payroll, this step-by-step process covers everything from HMRC registration through to year-end reporting. All thresholds, rates, and deadlines verified for the 2025/26 tax year (6 April 2025 to 5 April 2026).

Step 1: Register as an Employer with HMRC

Register as an employer with HMRC at least 2 weeks before your first payday – you need a PAYE reference number and Accounts Office reference to run payroll.

Before you can pay anyone, you must register as an employer with HMRC. You can do this online at GOV.UK – the process takes 5-10 minutes, but HMRC can take up to 2 weeks to send your employer PAYE reference number and Accounts Office reference by post. Register well before your first employee’s start date.

You need to register if you pay any employee £123 or more per week (£533/month) in the 2025/26 tax year, or if any employee has another job or receives a pension. Even if you pay below the threshold, you may need to register for auto-enrolment purposes.

During registration you will need: your business name and address, company UTR (Unique Taxpayer Reference) or National Insurance number if sole trader, the date you first pay an employee, and the number of employees. You will receive a PAYE reference (format: 123/AB456) and an Accounts Office reference (format: 123PA00012345) – keep both safe, as your payroll software needs them.

Step 2: Choose Payroll Software

You need HMRC-recognised payroll software to calculate tax, generate payslips, and submit RTI – options range from free (HMRC BPT, Collegia) to £20/month (Sage).

HMRC requires you to use recognised payroll software for RTI submissions. Your main options are:

• Free: HMRC Basic PAYE Tools (up to 9 employees, no payslips), Collegia FreePayroll (unlimited employees, full features) – see our free payroll software guide
• Budget: Moneysoft (£90/year, Windows desktop), Xero Payroll (£1.50/employee/month add-on)
• Mid-range: Sage Payroll (from £20/month), Staffology (from £39/month)

For a full comparison, see our best payroll software UK guide, our roundup of the cheapest payroll software UK, or our HR and payroll software guide if you want both functions in one platform. If you prefer someone else to handle payroll entirely, our outsourced payroll companies guide compares managed payroll providers – our payroll outsourcing vs in-house guide weighs up the trade-offs.

Whichever software you choose, you will enter your PAYE reference and Accounts Office reference during setup. Most software also connects to your chosen pension provider for auto-enrolment submissions.

Step 3: Collect Employee Information

Before running payroll, collect each employee’s P45 (or complete a starter checklist), National Insurance number, bank details, and student loan status.

For each new employee, you need:

• P45 from their previous employer – contains their tax code and year-to-date earnings. If they do not have a P45 (first job, lost, or gap in employment), they complete an HMRC starter checklist instead
• National Insurance number – essential for RTI. If they do not have one yet, enter temporary NI placeholder and update when received
• Bank account details – sort code and account number for salary payments
• Date of birth, address, and start date – required for HMRC records
• Student loan status – Plan 1 (before 2012), Plan 2 (2012-2023), Plan 4 (Scotland), Plan 5 (from 2023), or Postgraduate Loan. Your software calculates deductions automatically

Enter all employee details into your payroll software before running the first pay period. Getting this right from the start prevents tax code errors and incorrect deductions that are time-consuming to fix.

Step 4: Calculate Gross Pay, Tax, and National Insurance

Your payroll software calculates income tax, employee NIC (8%), and employer NIC (15%) automatically – you just enter gross pay, hours, and any additions or deductions.

Each pay period (weekly, fortnightly, or monthly), your payroll software calculates deductions from each employee’s gross pay. For the 2025/26 tax year, the key rates are:

Income tax (2025/26):

• Personal Allowance: £12,570 (no tax on this amount)
• Basic rate: 20% on £12,571 to £50,270
• Higher rate: 40% on £50,271 to £125,140
• Additional rate: 45% above £125,140

Employee National Insurance (2025/26):

• 8% on earnings between £12,570 and £50,270 per year
• 2% on earnings above £50,270

Employer National Insurance (2025/26):

• 15% on earnings above £5,000 per year (secondary threshold)
• Employment Allowance: £10,500 – reduces your employer NIC bill (available to most employers with NIC below £100,000)

Your payroll software handles all these calculations automatically. You enter gross pay (salary, overtime, bonuses, commission), and the software calculates income tax, employee NIC, employer NIC, student loan deductions, and pension contributions. The output is each employee’s net (take-home) pay.

Step 5: Process Payslips

You are legally required to give every employee a payslip on or before each payday showing gross pay, deductions, and net pay – your software generates these automatically.

UK employers must provide itemised payslips to all employees (and workers, since April 2019). Each payslip must show:

• Gross pay (before deductions)
• Variable deductions itemised (tax, NIC, student loan, pension)
• Fixed deductions (can be shown as a total with a separate annual breakdown)
• Net pay (take-home amount)
• Hours worked (if pay varies by hours)

Your payroll software generates compliant payslips automatically. You can distribute them by email, through an employee self-service portal, or as printed documents. Most cloud payroll software includes an employee portal where staff can access current and historical payslips anytime.

Step 6: Submit RTI to HMRC

Submit a Full Payment Submission (FPS) to HMRC on or before every payday – this reports each employee’s pay and deductions in real time via your payroll software.

Real Time Information (RTI) is HMRC’s system for collecting PAYE data. You must submit two types of report:

Full Payment Submission (FPS): Due on or before every payday. Reports each employee’s gross pay, tax deducted, NIC contributions, student loan deductions, and pension contributions. Your payroll software sends this directly to HMRC – you click “submit” after approving the payroll run.

Employer Payment Summary (EPS): Due by the 19th of the following month. Reports any reductions to your HMRC payment (Employment Allowance, statutory pay reclaims, CIS deductions suffered). Only submit if you have something to report – not every month.

Penalties for late FPS: HMRC charges £100/month for 1-9 employees, £200 for 10-49, £300 for 50-249, and £400 for 250+. These are automatic – no warnings. A single late submission in month 1 of a new PAYE scheme is forgiven, but subsequent late filings trigger penalties immediately.

Step 7: Pay Employees and HMRC

Pay employees their net salary by payday, then pay HMRC the total tax and NIC by the 22nd of the following month (electronic) or 19th (cheque).

After submitting RTI, you need to make two sets of payments:

Pay your employees: Transfer each employee’s net pay to their bank account by the agreed payday. You can use BACS (takes 3 working days), Faster Payments (same day), or CHAPS (same day, higher fees). Some payroll software includes BACS integration – others require manual bank transfers.

Pay HMRC: The total tax and NIC deducted (employee tax + employee NIC + employer NIC – Employment Allowance) must be paid to HMRC by the 22nd of the following month (electronic payment) or 19th (cheque). If your total monthly PAYE liability is under £1,500, HMRC may allow quarterly payments instead.

Your payroll software calculates exactly how much you owe HMRC each period. Keep this figure and pay it on time – late payment attracts interest and penalties.

Step 8: Manage Auto-Enrolment Pensions

All UK employers must auto-enrol eligible workers into a pension scheme – minimum contributions are 5% employee and 3% employer (8% total) of qualifying earnings.

Auto-enrolment is a legal obligation for every UK employer. You must assess each employee and enrol those who meet the criteria:

• Eligible jobholders (must be enrolled): aged 22 to State Pension age, earning over £10,000/year. These employees are automatically enrolled
• Non-eligible jobholders (can opt in): aged 16-74, earning between £6,240 and £10,000/year. They can request enrolment
• Entitled workers (can join): aged 16-74, earning under £6,240. They can join but you do not need to contribute

Minimum contributions (2025/26):

• Employee: 5% of qualifying earnings (£6,240 to £50,270)
• Employer: 3% of qualifying earnings
• Total: 8% minimum

You need to choose a pension provider (NEST is free for employers, or commercial options like The People’s Pension, NOW: Pensions, or Aviva). Your payroll software calculates pension deductions and most connect directly to major pension providers for submission.

Step 9: Handle Statutory Payments

UK employers must calculate and pay statutory sick pay (£118.75/week), maternity pay (90% then £187.18/week), and other statutory payments – most is reclaimable from HMRC.

During the year, you may need to process statutory payments for employees. Your payroll software handles the calculations, but you should understand the main types:

Statutory Sick Pay (SSP): £118.75/week for up to 28 weeks. Paid from the 4th consecutive day of sickness. Employee must earn at least £123/week. SSP is not reclaimable from HMRC – it is an employer cost.

Statutory Maternity Pay (SMP): First 6 weeks at 90% of average weekly earnings, then 33 weeks at £187.18/week (or 90% if lower). Small employers (NIC below £45,000) can reclaim 103% from HMRC.

Other statutory payments: Statutory Paternity Pay (SPP), Shared Parental Pay (ShPP), and Statutory Parental Bereavement Pay (SPBP) are all paid at £187.18/week. Your payroll software manages the calculations – you claim reimbursement through your EPS submission.

Step 10: Year-End Reporting

After the final pay period in April, submit your final FPS (marked as final), issue P60s to all employees by 31 May, and report any benefits on P11D by 6 July.

After your last payroll run of the tax year (5 April), you need to complete year-end tasks:

Final FPS: Mark your last Full Payment Submission as the “final submission for the year.” Most payroll software has a checkbox for this. This tells HMRC you have finished reporting for the tax year.

P60s: Issue a P60 to every employee who was on your payroll on 5 April. This shows their total pay, tax, and NIC for the year. Deadline: 31 May. Your payroll software generates these automatically.

P11D (benefits in kind): If you provide non-cash benefits (company car, private medical, etc.), submit a P11D to HMRC by 6 July. Not required if all benefits are payrolled (reported through RTI).

New tax year setup: Update your payroll software for the new tax year’s rates and thresholds. Most cloud software does this automatically. Desktop software like Moneysoft releases a tax year update each March/April.

Common Payroll Mistakes to Avoid

The most common UK payroll mistakes are late RTI submissions, incorrect tax codes, missed auto-enrolment duties, and failing to account for the new 15% employer NIC rate.

• Late RTI submissions: Submit FPS on or before payday, not after. Set up payroll processing 1-2 days before payday to allow time for checking
• Wrong tax codes: Always use the tax code from the employee’s P45 or HMRC notification. Do not guess tax codes – use the starter checklist for new employees without a P45
• Forgetting the Employment Allowance: £10,500 off your employer NIC bill – many small employers forget to claim this. Apply through your first EPS of the tax year
• Auto-enrolment delays: You must enrol eligible employees from their first qualifying pay period. Waiting causes backdated contributions and potential Pensions Regulator fines
• Not updating for new tax year: Tax thresholds and rates change every April. For 2025/26, employer NIC rose to 15% and the secondary threshold dropped to £5,000 – missing these changes means incorrect calculations all year
• Manual payslip errors: If you create payslips outside your software, ensure they match exactly. Discrepancies between payslips and RTI submissions trigger HMRC queries

Getting Started: Your First Payroll Checklist

To run your first UK payroll: register with HMRC, choose software, collect employee details, run calculations, submit RTI on payday, and pay HMRC by the 22nd.

Here is a condensed checklist for running your first payroll:

1. Register as an employer with HMRC (allow 2-4 weeks)
2. Choose payroll software – see our best payroll software comparison or free payroll software guide
3. Set up a pension scheme for auto-enrolment (NEST is free)
4. Collect employee P45s, NI numbers, and bank details
5. Enter employee details into your payroll software
6. Run your first payroll calculation and check the figures
7. Generate and distribute payslips
8. Submit FPS to HMRC on or before payday
9. Pay employees their net salary
10. Pay HMRC by the 22nd of the following month

If this process seems overwhelming, outsourcing payroll to a managed payroll provider costs £4-£12 per employee per month and eliminates the compliance burden entirely. For a cost comparison, see our payroll costs guide.

Clara Wenslow

Finance & Business Services Editor

Clara analyses SME finance and procurement markets, covering business loans, invoice finance, payroll, and related B2B services. She ensures each comparison and guide is transparent and data-driven.

Reviewed by

Sarah Mitchell

B2B Commerce & Finance Reviewer