How to Set Up Payroll in the UK: A Beginner's Guide
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How to Set Up Payroll in the UK: A Beginner's Guide


How to Set Up Payroll in the UK: Why It Matters for Employers?

Setting up payroll is not just a formality in the UK. It is a legal requirement for every employer.


You need payroll to:

  • Pay your team correctly and on time

  • Meet tax obligations set by HMRC

  • Avoid penalties and compliance issues


In 2023, 23% of small UK businesses outsourced payroll. This shows how challenging payroll can be if you try to manage it yourself.


Mistakes in payroll setup can lead to:

  • Payment errors

  • Late tax filings

  • Fines from HMRC

  • Unhappy employees


Do you want to avoid these risks? This guide will show you, step by step, how to set up payroll in the UK the right way.


Are you ready to take control of your payroll process?

 

What Is Payroll and Why Is It Important?

Payroll is the system that handles employee compensation, deductions, and tax compliance. It ensures your team gets paid accurately while meeting legal obligations.


Payroll includes:

  • Employee salaries, wages, and bonuses

  • Statutory pay (sick leave, maternity/paternity leave)

  • Deductions for taxes, pensions, and student loans


Why payroll matters:

  • Employee Satisfaction: Errors in pay damage trust. Payslips must show gross/net pay, deductions, and hours worked.

  • Tax Compliance: The PAYE system requires you to deduct income tax and National Insurance before paying employees.

  • Financial Accuracy: Incorrect records lead to HMRC penalties and misreported earnings.


Key responsibilities for employers:

  • Submit Real-Time Information (RTI) reports to HMRC before payday.

  • Enroll eligible employees in workplace pensions (auto-enrolment).

  • Keep payroll records for at least 3 years.

 

Practical example: If you fail to submit an FPS (Full Payment Submission) on time, HMRC can fine you up to £400 per month.


(Note: The £400 fine is inferred from common penalties for late filings; specific amounts depend on business size and frequency of errors. For exact figures, refer to HMRC’s penalty calculator.)

 

Step-by-Step: How to Set Up Payroll in the UK

Follow these steps to set up payroll correctly and avoid compliance risks.


1. Register as an Employer with HMRC

  • When: Up to 8 weeks before your first payday.

  • How: Use HMRC’s online portal to get your PAYE reference number.

  • Next: Activate HMRC’s online services for submissions.


2. Choose How You’ll Run Payroll

  • Manual: Spreadsheets or pen-and-paper (error-prone and time-consuming).

  • Software: Automates tax calculations, NI deductions, and RTI reporting.

  • Outsource: Best for businesses lacking time or expertise.


 3. Collect Employee Information: Gather:

  • Full name, NI number, and address

  • Date of birth and tax code

  • Starter form (P45 or new starter checklist)


 4. Set Up Payroll Software or Templates

  • Input employee details (salary, pay frequency).

  • Configure deductions (tax, pensions, student loans).

  • Verify if your software is HMRC-recognized.


Why this matters: Manual methods increase errors. Software like Xero or QuickBooks reduces compliance risks.

 

Set a Payroll Schedule

Your payroll schedule determines how often employees get paid and how you report to HMRC.


Decide on pay frequency:

  • Weekly: Common for hourly workers or contractors

  • Fortnightly: Every two weeks (aligns with some industries)

  • Monthly: Most common for salaried employees


Key rules:

  • Consistency: Match the schedule in employment contracts

  • HMRC tax month: Runs from the 6th of one month to the 5th of the next

  • Deadlines: Submit Full Payment Submissions (FPS) on or before payday


Example:

If you pay employees on the 28th monthly:

  • Tax month for April runs from March 6th to April 5th

  • Align deductions with HMRC’s monthly thresholds


Why this matters: Late submissions trigger fines. Inconsistent pay dates confuse employees and complicate tax calculations.

 

Calculate Pay and Deductions

Accurate pay calculations prevent errors and keep HMRC compliance on track.


Gross pay:

  • Base salary or hourly rate

  • Bonuses, overtime, and commissions

  • Statutory pay (e.g., sick leave or maternity pay)


Deductions to apply:

  • Income tax: Use employee tax codes (e.g., 1257L) and HMRC’s tax bands

  • National Insurance:

    • Employee NICs: 12% on earnings between £242–£967/week (2024 rates)

    • Employer NICs: 13.8% on earnings above £175/week

  • Student loans: Plan 1 (9% over £22,015/year) or Plan 2 (9% over £27,295/year)

  • Pensions: Auto-enrolment requires 3% employer contributions (minimum)


Tools to use:

  • HMRC’s Basic PAYE Tools for manual calculations

  • Payroll software (e.g., Sage, QuickBooks) for automation


Why accuracy matters: Underpaying HMRC risks fines. Overpaying employees creates payroll reconciliation issues.


Step-by-step visual of the UK payroll setup process including registration, choosing payroll method, collecting employee information, system setup, scheduling, and calculating pay and deductions.

 

Issue Pay Slips

Pay slips are a legal requirement for all UK employees. They ensure transparency and compliance.


What to include:

  • Gross pay: Total earnings before deductions

  • Net pay: Amount after taxes and deductions

  • Deductions: Income tax, NI, pensions, student loans

  • Hours worked: Required for variable-hour employees


Format options:

  • Digital pay slips: Secure email or employee portal

  • Paper pay slips: Physical copies (less common now)


Why this matters: Missing or incomplete pay slips risk employment tribunal claims. Employees must verify their pay and deductions.


Key rule: Issue pay slips on or before payday, even for zero-hour contracts.

 

Report to HMRC (Real-Time Information - RTI)

RTI ensures HMRC receives accurate payroll data in real time.


Key submissions:

  • Full Payment Submission (FPS):

    • Submit on or before payday

    • Includes employee pay, deductions, and hours


  • Employer Payment Summary (EPS):

    • Report adjustments (e.g., statutory sick pay reclaims)

    • Submit by the 19th of the following tax month


  • Payment deadlines:

    1. Pay HMRC what you owe (tax/NI) by the 22nd of the next month

    2. Late payments incur interest charges (e.g., 7.75% in 2024)


Why RTI Matters:

Late FPS filings risk fines up to £400/month for persistent errors. Accurate reporting avoids HMRC investigations.


Example:

If payday is April 28th:

  • Submit FPS by April 28th

  • Pay HMRC by May 22nd


Manage Statutory Pay and Pensions

Handling statutory pay and pensions correctly keeps you compliant and builds employee trust.


Statutory pay types:

  • Statutory Sick Pay (SSP): £116.75/week (2024 rate) for eligible employees

  • Statutory Maternity Pay (SMP): 90% of average weekly earnings for 6 weeks, then £184.03/week for 33 weeks

  • Statutory Paternity Pay (SPP): £184.03/week for 1-2 weeks

  • Statutory Adoption Pay (SAP): £184.03/week for 39 weeks


Pension rules:

  • Auto-enrolment: Enroll eligible employees (aged 22+ earning £10,000+/year)

  • Contributions:

    • Employee: 5% (minimum)

    • Employer: 3% (minimum)

  • Opt-out: Employees can leave the scheme within 1 month


Why this matters: Failing to enroll employees risks £400/day fines. Incorrect statutory pay calculations lead to HMRC disputes.


Key action: Review pension contributions annually to ensure compliance with rising minimums.

 

Keep Payroll Records

Proper record-keeping protects your business during audits and ensures compliance.


What to retain:

  • Pay slips (digital or physical copies)

  • PAYE records: Tax codes, deductions, and payments

  • Statutory pay documents: SSP, SMP, and SAP calculations

  • Pension logs: Opt-ins, opt-outs, and contribution details


Retention period:

  • 3 years minimum for most records

  • 6 years if HMRC investigates your business


Best practices:

  • Store digitally: Use encrypted cloud storage for security

  • Backup weekly: Prevent data loss from system failures

  • Organize by tax year: Simplify audits and HMRC requests


Why this matters: Missing records risk £3,000+ fines per violation. Accurate logs resolve disputes with employees or HMRC quickly.


Flowchart showing the HMRC payment and reporting process: payday, Full Payment Submission (FPS), paying HMRC, managing statutory pay, and auto-enrolment for pensions.

Avoid Common Mistakes

Steer clear of these errors to prevent fines, audits, and employee disputes.


1. Late FPS submissions:

  • Risk: Fines up to £400/month for repeated delays

  • Fix: Set calendar reminders 2 days before payday


2. Incorrect tax codes:

  • Risk: Underpaid taxes or overpaid employees

  • Fix: Verify codes via HMRC’s online portal monthly


3. Pension non-compliance:

  • Risk: £400/day fines for missed enrolments

  • Fix: Auto-enroll employees immediately when eligible


4. Poor record-keeping:

  • Risk: £3,000+ penalties during audits

  • Fix: Use payroll software with automatic backups


5. Misclassifying workers:

  • Risk: Incorrect NI/tax calculations

  • Fix: Use HMRC’s CEST tool to check employment status


Key takeaway: Double-check deductions, deadlines, and employee data monthly.

 

Final Thoughts: Get Payroll Right from the Start

Setting up payroll correctly protects your business and employees.


Key takeaways:

  • Compliance is non-negotiable: Follow HMRC’s rules for RTI, pensions, and statutory pay.

  • Automate where possible: Software reduces errors and saves time.

  • Stay organized: Keep records for 3+ years and back up data securely.


Your options:

  • DIY: Use HMRC-recognized software for full control.

  • Outsource: Free your team to focus on core business goals.


Why this matters: Accurate payroll builds employee trust and prevents costly legal action. A single error can snowball into fines, audits, or reputational damage.


 

Infographic of payroll compliance strategy with key elements: record-keeping, accurate payroll, worker classification, HMRC compliance, and automation.

Conclusion

Payroll outsourcing saves time, cuts costs, and keeps your business compliant. It reduces errors, avoids fines, and lets you focus on growth.


Key benefits:

  • Cost efficiency: Eliminate software and staffing expenses

  • Compliance: Expert handling of HMRC rules and pension laws

  • Security: Protect sensitive employee data with encrypted systems

  • Scalability: Adapt to hiring spikes or regulatory changes effortlessly


Outsourcing transforms payroll from a chore into a strategic tool for sustainable success.


Struggling to keep up with payroll deadlines and HMRC rules?


AMS Admin Services takes the hassle out of payroll with expert support, real-time compliance, and secure systems you can trust.


Whether you're a small business or growing fast, we’ll ensure your team is paid correctly and on time — every time.


And if you're also wondering when it’s time to hand over your bookkeeping and tax responsibilities, this guide can help you decide when to pass the torch!


Stop worrying about errors and penalties. Let us simplify your payroll process and free up your time to focus on what matters most.


Get in touch with AMS today and take the stress out of payroll!

 

 

 

 
 
 
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