How to run payroll in the UK: PAYE, National Insurance and RTI

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To run payroll in the UK, you register as an employer with HMRC, calculate income tax and National Insurance on every payment using each employee's tax code, report each pay run to HMRC in real time, pay what you owe by the monthly deadline, and enrol eligible staff into a workplace pension. It sounds like a lot, but with payroll software the monthly routine is quick. This guide covers each step for the 2026/27 tax year, with current rates, worked examples, statutory payments and common mistakes.

When you need to run payroll

You need to run payroll if you employ anyone in the UK, including yourself as a director of your own limited company if you pay yourself a salary. You must register as an employer with HMRC before the first payday, and you can register up to two months before you start paying people. If you only pay employees below the Lower Earnings Limit and they have no other job or benefits, you may not need to operate PAYE, but in practice most employers register from the start because it keeps records simple and protects employees' National Insurance records.

Foreign companies employing staff in the UK without a UK entity can register as an employer directly in some cases, or use an employer of record; see what an employer of record is.

Step 1: register as an employer

Register online with HMRC. You will receive an employer PAYE reference and an Accounts Office reference, which you need for filing and payments. Registration usually takes a few working days, so do it well before the first payday. You will also need a Government Gateway account to file and view your PAYE account.

At the same time, set up employer's liability insurance, which is a legal requirement for most employers, and check your workplace pension duties with The Pensions Regulator. Your duties start on the day your first employee starts work.

Step 2: choose payroll software

Payroll in the UK runs through Real Time Information (RTI), which means every pay run must be reported to HMRC electronically on or before payday. You need HMRC-recognised payroll software to do this; HMRC offers a free basic tool for employers with fewer than ten employees, and many commercial products and accounting packages include payroll.

Compare options in our UK payroll software ranking and UK payroll software guide, and see Sage Payroll pricing. Many small businesses choose payroll built into their accounting software; see UK accounting software and Xero vs Sage Accounting.

Step 3: collect employee information

For each new employee, collect their full name, address, date of birth, National Insurance number, start date, bank details, and either a P45 from their previous employer or answers to HMRC's starter checklist. The P45 or checklist tells you which tax code to use. You must also check that each employee has the right to work in the UK before they start, and keep a record of the check.

Add the employee to payroll with their tax code, NI category letter, pay details and student loan or postgraduate loan plan if applicable. Their first full payment submission tells HMRC they have started.

Income tax rates for 2026/27

For England, Wales and Northern Ireland, income tax on employment income is:

• Personal allowance: £12,570 tax-free, reduced by £1 for every £2 of income above £100,000.
• Basic rate: 20% on income from £12,571 to £50,270.
• Higher rate: 40% from £50,271 to £125,140.
• Additional rate: 45% above £125,140.

Scotland sets its own income tax bands for Scottish taxpayers, with more bands and different rates; payroll software applies them automatically when the tax code starts with S. Wales currently uses the same rates as England, with codes starting with C.

Tax codes

Each employee's tax code tells the payroll how much tax-free pay they get and which rates apply. The most common is 1257L, which gives the standard £12,570 personal allowance spread across the year. Other codes reflect benefits, other income, underpaid tax from previous years, or a second job (BR, D0, D1). Emergency codes, marked W1, M1 or X, are used when you do not yet have full information.

HMRC sends tax code changes to employers electronically. Apply them from the date shown, and never change a code yourself without an HMRC notice or a starter process that requires it.

National Insurance rates for 2026/27

Employees pay Class 1 National Insurance of 8% on earnings between the Primary Threshold (£12,570 a year) and the Upper Earnings Limit (£50,270), and 2% on earnings above that.

Employers pay secondary Class 1 National Insurance of 15% on earnings above the Secondary Threshold of £5,000 a year. There is no upper limit for employer NI. Reduced employer rates apply for employees under 21, apprentices under 25, and some veterans and freeport workers, up to the Upper Secondary Threshold. Eligible employers can claim the Employment Allowance to reduce their annual employer NI bill; check current eligibility on GOV.UK.

Worked example: £35,000 salary

An employee on £35,000 a year with tax code 1257L, in England:

• Income tax: 20% of (35,000 − 12,570) = £4,486 a year.
• Employee NI: 8% of (35,000 − 12,570) = £1,794.40 a year.
• Take-home pay before pension and other deductions: about £28,720 a year, or roughly £2,393 a month.
• Employer NI: 15% of (35,000 − 5,000) = £4,500 a year.

Workplace pension contributions would reduce take-home pay further and add an employer cost, as explained below. Check figures with the UK take-home pay calculator.

Worked example: £60,000 salary

• Income tax: 20% of 37,700 (£7,540) plus 40% of (60,000 − 50,270) (£3,892) = £11,432.
• Employee NI: 8% of 37,700 (£3,016) plus 2% of 9,730 (£194.60) = £3,210.60.
• Take-home before pension: about £45,357 a year.
• Employer NI: 15% of 55,000 = £8,250.

Salary sacrifice for pension contributions can reduce both employee and employer NI, which is why many employers offer it, though rules on salary sacrifice for pensions are changing in future years, so check current guidance before setting up a scheme.

Step 4: run each pay run

1. Enter hours, overtime, bonuses, leave and any changes.
2. Let the software calculate gross pay, tax, NI, pension and student loan deductions.
3. Review the results, especially for new starters and leavers.
4. Pay employees by their payday.
5. Send the Full Payment Submission (FPS) to HMRC on or before payday.
6. Give employees payslips showing pay and deductions.

If you pay nobody in a tax month, or need to reclaim statutory payments or claim the Employment Allowance, send an Employer Payment Summary (EPS) by the 19th of the following tax month.

Step 5: pay HMRC

The tax month runs from the 6th of one month to the 5th of the next. Pay HMRC the tax, NI and student loan deductions for each tax month by the 22nd of the following month if you pay electronically, or the 19th by post. Small employers whose average monthly payments are below a threshold can pay quarterly instead.

Late payments and late FPS submissions can lead to penalties and interest. HMRC's online account shows what you owe based on your submissions.

Workplace pensions and auto-enrolment

Every employer must automatically enrol eligible workers into a qualifying workplace pension scheme. Eligible workers are those aged at least 22 and under State Pension age who earn above the earnings trigger, currently £10,000 a year. Others can ask to join. The minimum total contribution is 8% of qualifying earnings, of which the employer must pay at least 3%.

You must declare your compliance to The Pensions Regulator within five months of your duties starting, re-enrol eligible workers who opted out every three years, and keep records. Most payroll software works with pension providers to handle enrolment and contributions automatically.

Statutory payments

Employers pay several statutory payments through payroll when employees qualify:

• Statutory Sick Pay (SSP) when employees are off sick. The Employment Rights Act 2025 is changing SSP, including paying it from the first day of sickness; check GOV.UK for current rules and rates.
• Statutory Maternity, Paternity, Adoption and Shared Parental Pay for qualifying employees, much of which employers can reclaim from HMRC.
• Statutory Parental Bereavement Pay and other statutory payments.

Payroll software calculates eligibility and amounts, and you reclaim eligible amounts through the EPS.

Minimum wage

You must pay at least the National Minimum Wage or National Living Wage for each worker's age band. Rates rise every April. Check that pay for hours worked, after certain deductions, meets the minimum, including for salaried staff who work long hours and for apprentices. Underpaying can lead to arrears, penalties and public naming by the government.

Year end: P60s and P11Ds

After the tax year ends on 5 April, give every employee on your payroll at that date a P60 showing their pay and deductions for the year, by 31 May. If you provided taxable benefits or expenses not processed through payroll, report them on P11D forms by 6 July and pay Class 1A employer NI on them by 22 July. When someone leaves, give them a P45 showing pay and tax to date.

Paying yourself as a director

Directors of their own limited companies often pay themselves a small salary plus dividends. Directors' NI is calculated on an annual earnings basis rather than per pay period, which payroll software handles if you mark the employee as a director. Salary levels relative to the NI thresholds affect both personal and company tax, so many directors take advice each year. If you are setting up a company abroad instead, see how to form a US LLC from abroad.

Hiring in the UK from abroad

Overseas companies with UK employees must operate PAYE, either by registering as an employer themselves or through a UK entity or payroll agent. Many prefer an employer of record for the first hires, which handles payroll, pensions and employment law; compare providers in the EOR ranking and see global payroll explained. Current entry prices: Deel From USD 599 per employee per month, Remote From USD 699 per employee per month.

VAT and Making Tax Digital

Payroll is separate from VAT, but most UK businesses deal with both. VAT-registered businesses must keep digital records and file VAT returns through Making Tax Digital compatible software; see Making Tax Digital for VAT and our UK VAT calculator. Choosing accounting software that does both payroll and MTD keeps things simple; see FreeAgent pricing and Xero pricing.

Common mistakes

• Sending the FPS after payday.
• Using an old tax code instead of HMRC's latest notice.
• Missing auto-enrolment duties or the declaration of compliance.
• Forgetting right-to-work checks.
• Paying below the minimum wage after deductions or long hours.
• Missing P11D deadlines for benefits.

Student loans and other deductions

If a new employee's P45 or starter checklist shows a student loan or postgraduate loan, deduct repayments through payroll at the rate for their plan once their earnings pass the plan's threshold. HMRC also sends start and stop notices. Other deductions, such as attachment of earnings orders from courts or council tax orders, must be applied as instructed. Voluntary deductions, such as cycle-to-work or give-as-you-earn schemes, need the employee's written agreement. Keep every deduction on the payslip so employees can see exactly where their pay went.

Questions