What Is Payroll? A Simple Guide for UK Employers

by | Nov 13, 2025 | Guidance

Payroll is the process of calculating pay, deducting the right amounts, and paying employees correctly and on time.
As an employer, you’re responsible for making sure payroll is accurate, compliant and reported to HMRC every time you run it.

This guide breaks payroll down into simple steps so you understand what’s involved — and where common mistakes happen.

Why Payroll Exists

Payroll ensures:

  • Employees receive the pay they’re entitled to

  • HMRC receives the correct tax and National Insurance

  • Pension contributions are collected and paid

  • Employers meet legal obligations such as RTI reporting

  • Records are kept for audits, compliance and budgeting

It’s not just data entry — it’s a legal and financial responsibility.

What Payroll Includes

Payroll in the UK typically involves 7 key areas:

1. Collecting Pay Information

Every pay period you must gather:

  • Hours worked

  • Overtime and variable pay

  • Bonuses or commission

  • Holiday taken

  • Absence (sickness, maternity/paternity leave, unpaid leave)

  • New starters and leavers

  • Changes to pay or benefits

If this step is wrong, the final pay will be wrong.

2. Calculating Gross Pay

Gross pay includes:

  • Basic salary or hourly rate

  • Overtime

  • Shift pay

  • Commission

  • Bonuses

  • Allowances

How gross pay is calculated depends on whether the employee is salaried, hourly, irregular hours or part-year.

3. Applying Statutory Payments

You must apply statutory rules correctly for:

  • SSP (Statutory Sick Pay)

  • SMP, SPP, SAP, ShPP (family leave payments)

  • Leave entitlements

  • Unpaid leave

  • Holiday pay

These rules change regularly — and are a common source of errors.

4. Deducting Tax and National Insurance

Payroll must deduct:

  • Income Tax

  • Employee National Insurance

  • Student loan repayments

  • Court orders (AEOs)

  • Salary sacrifice deductions

These deductions must be calculated using the correct codes and thresholds.

5. Pension Contributions

Auto enrolment requires employers to:

  • Assess workers each pay period

  • Enrol eligible employees into a pension

  • Deduct employee contributions

  • Pay employer contributions

  • Submit files to the pension provider

Many payroll errors involve incorrect pension handling.

6. Paying Employees and HMRC

Once payroll is approved:

  • Employees must be paid on the correct date

  • Payslips must be issued

  • HMRC must receive PAYE and NIC owed

  • Pension payments must be paid to the provider

Late or incorrect payments cause immediate issues for employers.

7. Sending RTI Submissions to HMRC

RTI (Real Time Information) requires:

  • FPS (Full Payment Submission) every pay run

  • EPS (Employer Payment Summary) where needed

  • Year-end submissions

  • P11D(b) if benefits are provided

Failure to submit RTI on time can lead to penalties.

Employer Responsibilities

Employers must:

  • Keep accurate payroll records

  • Apply legislation correctly

  • Pay employees correctly and on time

  • Make correct deductions

  • Submit RTI on time

  • Manage pensions and auto enrolment

  • Ensure compliance with NMW and holiday pay rules

Even if payroll is outsourced, the employer is still legally responsible.

Common Payroll Mistakes

Employers often encounter issues with:

  • Wrong tax codes

  • Incorrect holiday pay

  • NMW underpayment (accidental but serious)

  • Unreported benefits

  • Salary sacrifice errors

  • Late RTI submissions

  • Incorrect overtime or variable pay

A small mistake can grow into a big problem if not corrected quickly.

Who Should Run Payroll?

Your payroll can be managed by:

  • HR teams

  • Finance teams

  • An in-house payroll specialist

  • An outsourced payroll provider

  • A white-label provider (for accountants)

As payroll becomes more complex, many employers choose to outsource for accuracy and compliance.

How We Help

Your Payroll Team supports employers with:

  • Outsourced payroll services

  • Payroll audits and health checks

  • Compliance reviews

  • Holiday pay and NMW support

  • Payrolling benefits setup

  • Consultancy for HR and finance teams

Whether you need full outsourcing or a one-off review, we can help you stay compliant and confident.

FAQ: Payroll Basics

Do employers have to run payroll every month?
Most run monthly, but weekly and four-weekly payrolls are also common.

Is payroll the same as bookkeeping?
No. Payroll involves tax, NI, pensions and employment law — it’s a specialist function.

Do I need payroll software?
Yes. HMRC-compliant payroll software is required to send RTI submissions.

What happens if payroll is wrong?
You must correct the error, tell HMRC if needed, and repay any underpayments.