When you take on your first employee, payroll becomes one of your most regular responsibilities. Every payday you need to work out the right tax and National Insurance, report the payment to HMRC and give your employee a payslip — and getting any of it wrong can lead to penalties.
This guide explains PAYE and payroll basics for UK employers: how to register with HMRC, how Real Time Information works, what to submit and when, how to pay HMRC, and the records you must keep.
Registering as an Employer with HMRC
Before you pay anyone for the first time, you need to register as an employer with HMRC. Registration gives you an employer PAYE reference and an Accounts Office reference.
Register online through HMRC as soon as you decide to employ someone, and allow time for your references to arrive before the first payday. You will need your business details. There is no exemption for small employers — even a one-person company paying a salary to its director must operate PAYE.
How PAYE and Payroll Basics Work in Practice
PAYE — Pay As You Earn — is the system for deducting Income Tax and National Insurance from employees’ pay before they receive it. As the employer, you calculate the deductions, pay them to HMRC and keep the records to prove it. Getting PAYE and payroll basics right starts with these three duties.
Real Time Information and the Full Payment Submission
Under Real Time Information (RTI), you report pay to HMRC every time you pay your employees, rather than once a year. The report is called a Full Payment Submission (FPS), and it must reach HMRC on or before the day you pay your employees — not after.
The FPS includes each employee’s pay, tax and National Insurance deductions, and starter or leaver details. Payroll software normally prepares and sends it for you. If you are comparing options, this guide to payroll software for small businesses in the UK explains what to look for.
Employment Payment Summary
If you pay no employees in a tax month, or you need to claim back statutory payments such as statutory maternity pay, send an Employment Payment Summary (EPS) instead. The EPS tells HMRC that no FPS is due for that period, or that you are reclaiming an amount.
Tax Codes and National Insurance
Each employee has a tax code, issued by HMRC, which tells you how much tax-free pay they get before Income Tax applies. Apply the code exactly as issued — never guess or reuse an old one.
National Insurance is deducted from employees’ pay above the relevant threshold, and employers also pay National Insurance on top of each employee’s pay. Payroll software calculates the amounts automatically.
Gross Pay and Net Pay
An employee’s gross pay is the total amount they have earned before deductions. Net pay — often called take-home pay — is what is left after Income Tax, National Insurance, pension contributions and any other deductions. Payslips must show both figures. For a fuller explanation, see this guide to gross pay and net pay.
Paying HMRC
The tax and National Insurance you deduct, plus your employer’s National Insurance, must be paid to HMRC each tax month. If you pay electronically, the payment is due by the 22nd of the following month. If you pay by cheque, it is due by the 19th. Paying late can lead to interest and penalties. Paying HMRC on time is a core part of PAYE and payroll basics.
Payslips, Starters and Leavers
Giving Payslips
Every employee must receive a payslip on or before their payday, showing their gross pay, each deduction and their net pay. Payslips can be printed or electronic, but they must be itemised — a single net figure is not enough.
Starters
When a new employee starts, ask for their P45 from their previous employer. If they do not have one, use the HMRC starter checklist to work out their tax code until HMRC issues one. The wrong code can mean the wrong tax is deducted from the first pay onwards.
Leavers
When an employee leaves, give them a P45 showing their pay and tax up to their leaving date, and report the leaving date on your next FPS. Do this promptly.
Year-End: The P60
At the end of each tax year, give every employee who is still employed on 5 April a P60 by 31 May. The P60 summarises their total pay and the tax deducted during the year, which employees use for tax returns and mortgage applications. Your final FPS of the tax year also carries a declaration that your payroll is complete for the year, so check it carefully.
Workplace Pension Auto-Enrolment
Most employers must also enrol eligible staff into a workplace pension scheme and contribute towards it. This is called auto-enrolment, and the duties include assessing your staff, enrolling those who qualify, making minimum contributions set by law and re-enrolling staff every three years. Get advice early if you are setting up a pension scheme for the first time.
Payroll Deadlines and Penalties
HMRC charges penalties for late FPS submissions and for late payment of PAYE. The amount depends on how late the submission is and how many employees you have, and interest is charged on late payments. Run payroll on the same day each period, submit the FPS on or before payday and pay HMRC by the 22nd. Knowing PAYE and payroll basics helps you avoid these penalties.
Keeping Payroll Records for 3 Years
You must keep payroll records for at least 3 years after the end of the tax year they relate to. That includes payslips, FPS and EPS submissions, tax code notices, starter and leaver records and pension scheme records. Good records also feed into your bookkeeping,
and they are the first thing HMRC asks to see in a compliance check. For more on keeping your records in order, read our bookkeeping basics guide. Keeping these records for the full 3 years is part of PAYE and payroll basics.
Related reading: Employer National Insurance and the Employment Allowance Explained (UK)
Related reading: How Much Tax Do You Pay on a Second Job in the UK?
Related reading: Understanding Your UK Tax Code: What 1257L and the Letters Mean
Related reading: CIS: The Construction Industry Scheme Guide for Contractors and Subcontractors
Frequently Asked Questions
When do I need to register as an employer?
Before you pay anyone for the first time. Register with HMRC as soon as you decide to employ staff and allow time for your references to arrive. This is the first step in PAYE and payroll basics.
What happens if I submit the Full Payment Submission late?
HMRC can charge a late-filing penalty, which depends on how late the submission is and how many employees you have. Submit the FPS as soon as you realise it is late.
Do I have to give payslips to my employees?
Yes. Every employee must receive an itemised payslip on or before payday, showing gross pay, each deduction and net pay. Payslips can be printed or sent electronically.
How long must I keep payroll records?
Keep payroll records for at least 3 years after the end of the tax year they relate to, including payslips, FPS and EPS submissions, tax code notices, starter and leaver records, and pension scheme records.
How We Can Help
Running payroll takes time and care, and mistakes are expensive. Financial Accounting Firm runs payroll for UK employers of all sizes, from a single director to a growing team, including businesses that have just set up a limited company. Find out more about our payroll services or contact us to discuss your payroll needs.
This article is general information only and should not be taken as personal tax or financial advice. Tax rules can change, and your position will depend on your own circumstances.
