Payroll is the end-to-end process an employer follows to pay its workers. It involves calculating gross pay, deducting income tax and National Insurance through the PAYE system, applying other deductions such as pension contributions and student loan repayments, paying the net amount to the employee, producing a payslip, and reporting the figures to HMRC under Real Time Information on or before each payday.

What deductions does payroll handle?

UK payroll handles statutory deductions including PAYE income tax based on your tax code, employee National Insurance, student or postgraduate loan repayments, and workplace pension contributions under auto-enrolment. It can also process voluntary deductions such as additional pension payments, charitable giving via Payroll Giving, and salary-sacrifice arrangements. The employer also calculates its own employer National Insurance and pension contributions.

Does a small business need to run payroll?

If a business has any employees earning above the National Insurance or PAYE thresholds, or who have another job or pension, it generally must operate PAYE payroll and report to HMRC. Sole traders with no employees do not run payroll for themselves; they pay tax through Self Assessment instead. Once you take on staff, payroll and Real Time Information reporting become a legal obligation.

What is the difference between payroll and PAYE?

PAYE is the specific HMRC system for deducting income tax and National Insurance from wages. Payroll is the broader process that uses PAYE alongside everything else: calculating gross pay, handling pensions and student loans, producing payslips, paying employees and reporting to HMRC. In short, PAYE is one part of running payroll.

Can I run payroll myself or do I need software?

You can technically run payroll manually, but in practice you need HMRC-recognised payroll software because Real Time Information must be submitted electronically on or before each payday. Most small employers use commercial payroll software or HMRC's Basic PAYE Tools, or outsource to an accountant or payroll bureau to stay compliant.

What happens if payroll deductions are wrong?

Errors in tax or National Insurance can lead to under or overpayments that HMRC reconciles, often through a change to the employee's tax code or a P800 calculation after the tax year. Employers who report late or incorrectly under RTI can face penalties. This is why accurate tax codes and timely submissions matter, both for the employee's take-home pay and the employer's compliance.

What Is Payroll? UK Definition Explained

Payroll sounds like a simple idea, paying people, but in the UK it is a tightly regulated process that calculates tax, National Insurance and pensions, then reports every figure to HMRC in real time. For anyone who employs staff, getting payroll right is a legal duty; for employees, it is what turns a salary into the net figure that lands in your account.

Key takeaways

Payroll is the full process of paying employees and deducting the right tax, National Insurance and pensions.
Income tax is deducted under PAYE based on your tax code; the £12,570 Personal Allowance is spread across the year.
Employee National Insurance is 8% on earnings between £12,570 and £50,270, and 2% above that in 2025/26.
Employers must report pay and deductions to HMRC under Real Time Information on or before each payday.
Payroll also handles pensions, student loans and produces the payslip that itemises every deduction.

What Payroll Actually Involves

Running payroll means working through several steps every pay period, whether weekly, monthly or otherwise:

Calculate gross pay — salary, hourly pay, overtime, bonuses and any taxable benefits.
Deduct income tax under PAYE — using the employee's tax code to apply the right Personal Allowance and rates.
Deduct National Insurance — both the employee's contribution and the employer's separate liability.
Apply other deductions — workplace pension contributions, student loan repayments, and any voluntary items.
Pay the net amount and issue a payslip — the take-home figure plus an itemised breakdown.
Report to HMRC — submit a Full Payment Submission under Real Time Information on or before payday.

This is built on the PAYE system, which collects tax as you earn rather than in an annual lump sum.

PAYE (Pay As You Earn): The system through which employers deduct income tax and National Insurance from wages and pass them to HMRC, so employees pay tax gradually across the year instead of in a single bill.

How Deductions Are Calculated in 2025/26

The two big statutory deductions are income tax and National Insurance.

Income tax uses your tax code. A standard 1257L code gives £12,570 tax-free, spread evenly across the year. Earnings above that are taxed at 20% to £50,270, 40% to £125,140, then 45%.
Employee National Insurance is 8% on earnings between £12,570 and £50,270 a year, and 2% on anything above £50,270.
Employer National Insurance is a separate cost to the business, charged at 15% on earnings above £5,000 a year (the secondary threshold) from April 2025.

A Worked Example: 2025/26 Figures

Leah earns £35,000 a year and is paid monthly with a standard 1257L tax code. Her monthly gross pay is £2,916.67. Payroll works out her deductions like this (annualised for clarity):

Item	Annual amount
Gross salary	£35,000.00
Less Personal Allowance	£12,570.00
Taxable income	£22,430.00
Income tax at 20%	£4,486.00
Employee NI (8% on £35,000 − £12,570)	£1,794.40
Total deductions	£6,280.40
Net (take-home) pay	£28,719.60

Payroll divides this across 12 months, so Leah takes home roughly £2,393 a month and her payslip itemises each deduction. Try your own figure in the salary calculator and see the breakdown on a typical payslip.

£4,486

Leah's annual income tax

£1,794

Leah's annual employee NI

£28,720

Leah's annual take-home pay

Reporting to HMRC

Modern UK payroll is real-time. Every time an employer pays staff, it must send HMRC a Full Payment Submission detailing pay, tax and National Insurance, on or before the payday. This is the Real Time Information (RTI) regime. Employers also send an Employer Payment Summary to account for items such as statutory pay reclaims, and pay over the tax and NI they have collected, usually monthly, by the 22nd. Getting RTI right keeps employees' tax codes and records accurate and avoids penalties for the business.

Payroll is the quiet machinery of the tax system: every payday it calculates, deducts and reports, turning a headline salary into the precise figure that reaches your bank.

TapTax, UK tax glossary

Related terms

PAYE — the system payroll uses to collect tax and National Insurance.
Salary calculator — model your gross-to-net pay.
Payslip — the document payroll produces each pay period.

What Is Payroll? UK Definition Explained

What Payroll Actually Involves

How Deductions Are Calculated in 2025/26

A Worked Example: 2025/26 Figures

Reporting to HMRC

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