UK Payroll: Laws, Rates and the Payroll Process (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 workplace pension, and meeting a stack of statutory pay and record-keeping duties. Get it wrong and you face automatic penalties, interest and unhappy employees. This guide covers how UK payroll works, the legislation behind it and every rate that applies in the 2026/27 tax year.

In short: UK payroll runs on PAYE. Each payday you deduct income tax (0/20/40/45% by band) and National Insurance (employee 8% then 2%; employer 15% above £5,000 a year), report it to HMRC in real time through a Full Payment Submission on or before payday, auto-enrol eligible staff into a pension at a minimum 8% of qualifying earnings, and pay statutory entitlements such as sick, holiday and family leave. You need a UK entity to register a PAYE scheme — or an Employer of Record to employ without one.

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

Since 2013, reporting has been real time. Under Real Time Information (RTI) you submit a Full Payment Submission (FPS) to HMRC on or before the day you pay employees, detailing pay, tax and deductions for every person on the payroll — not once a year, but every single pay run. Each employee has a tax code (the standard code is 1257L) that tells you how much tax-free pay to apply. At year end you give each employee a P60, and a P45 when someone leaves.

A compliant UK pay run follows the same sequence every period:

1. Register and set up. Register as an employer with HMRC, get your PAYE reference, choose payroll software that is RTI-recognised, and enrol in a workplace pension scheme.
2. Collect employee details. A P45 from the previous employer or a starter checklist, the right to work check, bank details and the correct tax code.
3. Calculate gross pay. Salary, hourly pay, overtime, commission, bonuses and any statutory payments due that period.
4. Apply deductions. Income tax under the employee’s tax code, employee National Insurance, pension contributions, student loan repayments and any court orders.
5. Calculate employer costs. Employer National Insurance, the employer pension contribution and, over a £3 million pay bill, the Apprenticeship Levy.
6. File the FPS. Report to HMRC on or before payday. File an Employer Payment Summary (EPS) if you are reclaiming statutory payments or the Employment Allowance.
7. Pay employees and issue payslips. The itemised payslip is a legal right, on or before payday.
8. Pay HMRC. Income tax and NICs for the tax month are due by the 22nd electronically.
9. Handle year end. P60s by 31 May, P11Ds for taxable benefits by 6 July, and updated tax codes for the new year.

There is no single UK payroll act. The obligations come from a stack of separate statutes, and payroll has to satisfy all of them at once:

• Income Tax (Earnings and Pensions) Act 2003 and the PAYE Regulations — the machinery of deducting income tax at source and RTI reporting.
• Social Security Contributions and Benefits Act 1992 — National Insurance, employee and employer.
• Pensions Act 2008 — automatic enrolment, minimum contributions and re-enrolment, enforced by The Pensions Regulator.
• National Minimum Wage Act 1998 — the statutory hourly floor, with criminal penalties and public naming for underpayment.
• Employment Rights Act 1996 — itemised payslips, lawful deductions, statutory sick and family pay.
• Working Time Regulations 1998 — 5.6 weeks of paid annual leave and the 48-hour average working week.
• Equality Act 2010 — equal pay, and gender pay gap reporting for employers with 250 or more staff.
• UK GDPR and the Data Protection Act 2018 — payroll data is sensitive personal data and has to be held and retained accordingly.

Rates and thresholds change every April, and the Autumn Budget usually sets them. Payroll compliance is therefore an annual review, not a one-off setup.

Income tax is deducted at source using the employee’s tax code. The bands below apply to England, Wales and Northern Ireland; Scotland sets its own rates and bands, signalled by an “S” prefix on the tax code.

Personal Allowance taper: the £12,570 allowance is reduced by £1 for every £2 of income above £100,000, disappearing entirely at £125,140 — which creates an effective 60% marginal rate in between. Payroll software applies this through the tax code, but it is worth knowing when you explain a payslip to a senior hire.

Every employee has a tax code telling the employer how much tax-free pay to apply each period. HMRC issues and updates them, and applying the wrong one is one of the most common sources of payroll complaints:

• 1257L — the standard code for someone with one job and the full £12,570 Personal Allowance (the number is the allowance divided by 10).
• BR / D0 / D1 — flat-rate codes taxing all pay at 20%, 40% and 45% respectively; common for second jobs and pensions.
• W1 / M1 / X — non-cumulative “emergency” codes, used when previous pay and tax details are missing.
• K codes — used when deductions such as taxable benefits exceed allowances, adding to taxable pay rather than reducing it.
• NT — no tax to be deducted.
• S / C prefix — routes the employee to Scottish (S) or Welsh (C) income tax rates.

National Insurance (NIC) is paid by both employee and employer on earnings above set thresholds. The employer’s share is a real cost on top of salary and the line foreign employers most often underestimate.

The employer rate rose to 15% and the secondary threshold dropped to £5,000 from April 2025, materially increasing the cost of employing in the UK. The Employment Allowance is claimed through the EPS. For a full breakdown of the employer side, see our 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 statutory minimum is 8% of qualifying earnings (the band between £6,240 and £50,270), of which at least 3% must come from the employer and the balance from the employee.

The duty does not end at enrolment. Employers must handle opt-outs and opt-ins, re-enrol eligible staff roughly every three years, file a declaration of compliance with The Pensions Regulator, and keep records. Auto-enrolment failures are enforced with fixed and escalating penalty notices.

For the mechanics of the scheme itself — assessment categories, the qualifying earnings band, opt-outs and the re-enrolment cycle — see our glossary entry on the auto-enrolment pension scheme.

Statutory Sick Pay (SSP) changed significantly in 2026, and payroll has to reflect it:

• SSP is payable from the first qualifying day of sickness — the three unpaid “waiting days” are gone.
• The minimum earnings condition has been removed, so employees qualify regardless of how much they earn; gov.uk now confirms that staff with less than eight weeks of earnings still qualify.
• The rate is £123.25 a week, or 80% of the employee’s average weekly earnings if that is lower, for up to 28 weeks.
• SSP is paid only for qualifying days — the days the employee normally works.

Both changes widen the pool of staff entitled to sick pay and remove the unpaid waiting period, so budget for higher SSP exposure than in previous years.

Beyond gross salary, UK employers fund a range of statutory payments. Several can be partly reclaimed from HMRC through the EPS, but all must be calculated correctly each run:

• Annual leave — a statutory minimum of 5.6 weeks, which is 28 days for a full-time worker on a five-day week and may include the eight UK bank holidays. Holiday pay must reflect normal remuneration, including regular overtime and commission.
• Statutory Maternity Pay — up to 39 weeks: 90% of average weekly earnings for the first 6 weeks, then the lower of £194.32 a week or 90% of average weekly earnings for the remaining 33.
• Paternity, adoption and shared parental pay — the lower of £194.32 a week or 90% of average weekly earnings.
• Working time — an average 48-hour week over a 17-week reference period, which workers may individually opt out of.
• Apprenticeship Levy — employers with a pay bill over £3 million pay 0.5% through PAYE, offset by a £15,000 annual allowance.

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

Rates are reviewed every April. Paying below the minimum — including through unpaid working time, uniform costs or excessive deductions — triggers HMRC enforcement, back pay, penalties of up to 200% of the arrears and public naming.

Missing an RTI deadline triggers automatic HMRC penalties, so this calendar is the backbone of a compliant UK payroll:

Late FPS filing carries monthly penalties that scale with headcount, and late payment of PAYE attracts penalties and interest. Employers get one unpenalised late filing per tax year; after that, the charges are automatic.

An itemised payslip is a legal requirement: 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 keep payroll records for at least three years, and payroll data is personal data under UK GDPR, so retention, access and security all have to be handled properly. Accurate records are your first line of defence in any HMRC or employee dispute.

To register a PAYE scheme with HMRC and act as the legal employer, you need a UK entity, a registered place of business, or a partner who already holds these. There are two routes:

• You have a UK entity. A global payroll provider can run compliant payroll under it, handling PAYE, RTI, NICs, pensions and statutory pay.
• You do not. An Employer of Record in the UK becomes the legal employer, so you can hire and pay staff without incorporating — the EOR model. You can switch to managed payroll later, once your own entity is live.

If the hire also needs a visa, note that sponsoring an overseas worker is a separate obligation with its own costs — see our guide to the UK skilled worker visa and sponsor licence.

Running UK payroll in-house means owning PAYE calculations, RTI filing, pension auto-enrolment, statutory pay and year-end reporting — plus the penalty risk when any of it slips, and the annual work of rebasing every rate each April. Outsourcing hands that to named UK payroll specialists for a single managed fee, with the provider accountable for filing on time and getting the calculations right.

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. Our UK payroll service keeps PAYE, RTI, NICs, pensions and statutory pay compliant without an in-house team. Talk to our UK team to get your payroll set up correctly from the first pay run.