This blog post will guide you through a high level overview of the UK payroll system and how it works. We also have in-depth blogs to describe different areas of payroll in more detail.

If you are unsure, have questions, or need help with anything payroll related, contact us!

hand writing payroll notes

How Does PAYE work?

You’ll need to register for PAYE if you have employees who make over £120 per week and get expenses or benefits, another job on the side, or a pension.

Employers in the UK are mandated by HMRC to operate this system as part of their monthly payrolls. It’s been used since 1958 when it was introduced with three main goals:

  • Collecting Income Tax from employment income
  • Building up social security contributions which would eventually be paid into National Insurance Schemes that provide state pensions
  • Safeguarding against fraudulence through an audit trail. In order to avoid penalties due to incorrect tax calculations

Employers will input all payments made during one month at once including wages earned before taxes were calculated (known as gross pay).

Payroll Payments & Deductions

Payments to your employees include their salary or wages, as well as things like any tips or bonuses, or statutory sick or maternity pay.

You’ll then need to deduct most, if not all, of the following:

  • Income tax
  • Employers National Insurance
  • Employees National Insurance
  • Student Loans
  • Employers Pension Contributions
  • Employees Pension Contributions

** During the current times, your payroll process may also include furlough claims for some employees **

Reporting to & Paying HMRC

Reporting pay and deductions

Reporting pay and deductions can be a tedious task, but it is important to keep track of all the information. You’ll need to report your employees’ payments and deductions on or before each payday in order for HMRC to know how much tax you owe them.

Your payroll system should calculate exactly what an employee needs paid out as well as their National Insurance contributions which are calculated at different percentages depending on how much they earn.

To check that this is correct, you can double check the breakdowns on the HMRC website.

Paying HMRC

You’ll be able to view what you owe HMRC, based on your reports. You then have to pay HMRC, usually every month. If you’re a small employer that expects to pay less than £1,500 a month, you can arrange to pay quarterly – contact HMRC’s payment enquiry helpline.

Other things to report.

As part of your regular reports, you should tell HMRC when a new employee joins and if an employee’s circumstances change, for example they reach State Pension age or become a director. You have to run annual reports at the end of the tax year – including telling HMRC about any expenses or benefits.

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If all of this sounds way too confusing, don’t worry- we are here to help. Just schedule a free consultation and we can walk you through what you’ll need to do to run your payroll. Payroll services are also included in all of our monthly subscriptions!