The UK Payroll Process: Laws and Rates Employers Need to Know (2026/27)

Running payroll in the UK means far more than paying salaries. Employers are legally responsible for calculating and reporting income tax and National Insurance to HM Revenue & Customs (HMRC) in real time, enrolling staff into a pension, and meeting a stack of statutory pay and record-keeping duties. Get it wrong and you face penalties, interest and unhappy employees. This guide walks through the UK payroll process and the key laws and rates for the 2026/27 tax year, so you know exactly what compliant payroll looks like.

UK payroll runs on PAYE (Pay As You Earn), the system through which employers deduct income tax and National Insurance from employees’ pay and send it to HMRC. Before your first payday you must register as an employer with HMRC and set up PAYE. The UK tax year runs from 6 April to 5 April.

Reporting is done under Real Time Information (RTI): you must submit a Full Payment Submission (FPS) to HMRC on or before the day you pay employees, detailing pay, tax and deductions. Each employee has a tax code (the standard code for 2026/27 is 1257L) that tells you how much tax-free pay they get. At year end you provide each employee a P60, and a P45 when someone leaves. Missing RTI deadlines triggers automatic penalties, so payroll discipline matters.

For employees in England and Northern Ireland, income tax applies above the personal allowance of £12,570:

• Basic rate — 20%: on taxable income up to £37,700 (i.e. earnings up to £50,270).
• Higher rate — 40%: from £50,271 to £125,140.
• Additional rate — 45%: above £125,140.

The personal allowance tapers away for incomes above £100,000. Scotland sets its own income tax bands and rates, so employees who are Scottish taxpayers are taxed differently — an easy point to miss when hiring across the UK.

National Insurance Contributions (NICs) are the second major deduction, and the employer’s share is a real cost on top of salary:

• Employer (secondary) Class 1 NICs: 15% on earnings above the secondary threshold of £5,000 per year. This rate rose to 15% and the threshold dropped to £5,000 from April 2025, materially increasing employer cost.
• Employee (primary) Class 1 NICs: 8% on earnings between £12,570 and £50,270, then 2% above the upper earnings limit.
• Employment Allowance: eligible employers can reduce their annual employer NIC bill by up to £10,500.

Employer NICs are the line foreign employers most often underestimate. For a full breakdown, see our dedicated guide to employer National Insurance rates for UK employers.

By law, employers must automatically enrol eligible workers — those aged 22 to State Pension age earning over £10,000 a year — into a qualifying workplace pension. The minimum total contribution is 8% of qualifying earnings (the band between £6,240 and £50,270), of which the employer must pay at least 3%. Employees can opt out, but you must enrol them first and re-enrol periodically. Failing to meet auto-enrolment duties is enforced by The Pensions Regulator.

Statutory Sick Pay (SSP) changed significantly from 6 April 2026, and employers must update their payroll accordingly:

• SSP is now payable from the first day of sickness, removing the previous three “waiting days”.
• The Lower Earnings Limit qualifying threshold has been abolished, so all employees are eligible regardless of how much they earn.
• The weekly rate for 2026/27 is £123.25, or 80% of the employee’s average weekly earnings if that is lower.

This widens the pool of staff entitled to sick pay and removes the unpaid waiting period, so budget for higher SSP exposure than in previous years.

Almost all workers are entitled to 5.6 weeks of paid statutory annual leave — 28 days for a full-time employee working five days a week, which an employer may include the eight UK bank holidays within. Holiday pay must reflect normal remuneration, including regular overtime and commission. Statutory family leave (maternity, paternity, shared parental and adoption pay) adds further payroll obligations with their own rates and eligibility rules.

Every employer must pay at least the statutory hourly minimum, which increased on 1 April 2026:

• National Living Wage (age 21+): £12.71 per hour.
• Age 18–20: £10.85 per hour.
• Under 18 and apprentices: £8.00 per hour.

Rates rise every April, and underpayment — including through unpaid working time or excessive deductions — carries penalties and public naming, so review pay against the new rates each year.

An itemised payslip is a legal requirement in the UK: every employee (and, since 2019, every worker) has the right to a written payslip on or before payday showing gross pay, variable and fixed deductions, and net pay, with hours shown where pay varies by time worked. Employers must also keep payroll records for at least three years and report and pay HMRC by the 22nd of each month (electronic payment). Accurate records are your first line of defence in any HMRC or employee dispute.

UK payroll is manageable but unforgiving: real-time reporting, annually changing rates, pension duties and the 2026 SSP reform all have to be right, every pay run. If you have a UK entity, our UK payroll service keeps PAYE, RTI, NICs, pensions and statutory pay compliant without an in-house team. If you want to employ someone in the UK without setting up an entity at all, an Employer of Record in the UK becomes the legal employer and runs the whole payroll and compliance stack for you — the EOR model. Talk to our UK team to get your payroll set up correctly from the first pay run.