How to Run Payroll UK
Table of Contents
Use this section to check what you need to do when you start paying employees. Your regular payroll tasks will include recording employee pay, calculating deductions, and giving payslips.
Note: What if you did not pay any of your employees in any given tax month? Even if this happens, you would still need to inform HM Revenue and Customs about it (see details below).
Tasks to Perform On Your Employees’ Payday
As an employer, if you are operating PAYE, you need to carry out certain tasks on a regular basis (monthly). But, many of them need completing before the day that you pay your employees.
Thus, every time you pay salary or wages to someone that you employ, you should use your payroll software to:
- Record the payments made to ‘all’ of your employees (including expenses, benefits, and tips).
- Calculate deductions (e.g. tax, National Insurance, student loan repayments, pension contributions) from their pay.
- Work out your National Insurance contribution (as an employer). You only need to pay this on employee earnings above £190 a week.
- Produce payslips for each of your employees (another section explains how to find payroll software for producing wage slips).
- Send a Full Payment Submission (FPS) – used to report employees’ pay and deductions to HM Revenue and Customs (HMRC).
Note: As a rule, you only need to record and report the pay for any employee who receives less than £123 a week (providing they do not have another job or get a pension).
During the Next Tax Month (from the 6th)
New tax months start on the sixth (6th) for employers running payroll. You will be able to view the amount that you owe from your FPS online from the twelfth (12th) of each month.
Other tasks include:
- Claiming any reduction against the amount that you owe HMRC (e.g. statutory pay). If so, you would need to send an Employer Payment Summary (EPS) no later than the 19th of the month.
- Viewing the balance of your HMRC online account (within a couple of days). You would need to wait until the 14th if you sent the EPS before the 11th.
- Paying HMRC no later than the 22nd of the month (or the 19th if you pay by postal methods). Failing to pay on time can result in a financial penalty.
Some employers will be paying out less than £1,500 per month as part of running payroll. If so, you can contact the employer PAYE helpline to request making quarterly payments (instead of monthly).
Late Payroll Submissions or Payments
HMRC will send an online penalty warning message if you file a late report or fail to send an FPS. Furthermore, to avoid a penalty, you would need to have a valid reason for reporting late.
Employers must try to avoid making late payroll reports. In fact, having missing or inaccurate reports can affect income-related benefits (e.g. Universal Credit) for your employees.
Note: New employers should send a report to HMRC (or pay them) within 120 days. Otherwise, they will close your PAYE scheme. You can read more about late reporting and late payment alerts on the GOV.UK website.
How to Record Employees’ Pay
Having registered as an employer with HMRC, you should use your payroll software to record the amount that you pay your employees. In most cases, this will include their salary, wages, overtime, commission bonuses, and fees.
Note: You need to include everyone that you pay in your records, even if they are getting less than £123 a week.
Recording other Kinds of Employees’ Pay
Most of your employees will be eligible for certain kinds of payments enacted by statute in the United Kingdom. Like normal pay, statutory pay is also taxed. So, you will need to record the payments in your payroll software.
Further information is available in the following sections:
- Statutory Sick Pay (SSP): employer guide
- Statutory Maternity Pay and Leave: employer guide
- Statutory Paternity Pay and Leave: employer guide
- Statutory Adoption Pay and Leave: employer guide
- Shared Parental Leave and Pay: employer guide
Note: As an employer, you can get financial help with statutory pay (e.g. to reclaim statutory pay for parents).
Expenses and Benefits (BIK)
You should report expenses or benefits that you provide to employees (e.g. company cars, workplace uniforms) as part of your annual reporting and tasks at the end of the tax year.
Special rules apply to certain types of company benefits. The GOV.UK website explains what counts as expenses and benefits and which ones need recording as ‘normal pay’ in payroll software.
Staff Tips and other Payments
As a rule, you should treat tips paid to your staff as normal pay (e.g. those paid into your till). But, it also applies to any tips added to the card or cheque payments of your customers.
The rules differ for certain other types of tips at work (e.g. gratuities or service charges through a tronc or money given directly to your employees by customers).
Some of the other payments that employers give to their employees also need recording as normal pay. They include:
- Holiday pay (some exceptions apply to PAYE procedures if you pay holiday pay in advance or run a holiday pay scheme for your employees)
- Payments for time employees spend travelling
- Passenger payments (excluding the first 5 pence per mile)
- Medical suspension payments (e.g. after suspending an employee for health reasons)
- Maternity suspension payment (e.g. given to an employee that you suspended for her health (or that of her baby))
- Guarantee payments, paid to an employee for a day they do not work (and not paid holiday)
- Honoraria (office holders’ payments) given to employees for providing a service (e.g. being a sports-club secretary for your company)
- Benefits capable of being turned into money (e.g. cheques, Savings Certificates, or Premium Bonds)
- Inducement payments (often called ‘golden hello’ payments)
- Cash prizes for competitions that you run
Note: The rules differ when paying employees in shares, commodities or other non-cash pay, paying employees cash in hand or guaranteed take home pay, and for employee incentive awards.
How to Make Deductions on Payroll
Payroll software uses Income Tax rates and National Insurance rates to calculate how much you need to deduct from your employees’ pay. It uses the tax code and NI category letters for each employee to work out the deductions.
In some cases, you may also need to deduct:
Note: Another section contains more information if you need help understanding employee tax codes (e.g. what the numbers and letters mean).
Deducting Student Loan Repayments
Payroll software can record instances when employees need to make student loan repayments. Hence, use it to keep records in your software and on your employee payslips.
The plan that they are on will determine how much they repay. The same figure also determines how you calculate the deductions for employees who are repaying a student loan.
How to Deduct Pension Contributions
As a rule, deductions made for pension contributions take place before you take off tax. Your workplace pension provider can confirm this in more detail. But, you should take off National Insurance before you make any pension deductions.
Besides that, you must also pay any employer contributions into the pensions of your employees.
Deducting Payroll Giving Donations
Employees can choose to donate money to charity ‘directly’ from their pay. Thus, the process of Payroll Giving occurs before the deduction of tax.
You must register with one of the HMRC approved agencies for Payroll Giving to set up a scheme. The agency would then provide you with further details on how to make the deductions.
Keeping accurate and up-to-date records is part of PAYE and payroll for employers. But, as part of Payroll Giving you would also need to keep:
- Agency contract
- Details of payments made to the agency
- Employee authorisation forms
Child Maintenance Deductions
You can learn more about making child maintenance deductions from your employee’s pay, such as when you need to deduct child maintenance directly from the earnings or pension of a paying parent.
Producing Payslips for Employees
One of the main responsibilities for employers is giving payslips to any of their staff with ‘employment status‘ or ‘classed as a worker‘. Furthermore, they must receive their wage slip either in advance of, or on, their actual payday.
What Does a Payslip Need to Include?
All wage slips given to employees must show:
- Gross wages (employee pay before any deductions)
- Deductions (e.g. tax, National Insurance, pension contributions)
- Net wages (pay after deductions)
- How many hours the employee worked (if their pay varies according to the time worked)
A payslip can also include other information about your staff members. For example, it is not uncommon for payslips to include:
- National Insurance number and tax code.
- Rate of pay.
- The running total of pay and deductions so far in a given tax year.
There are several ways of producing payslips for your employees (e.g. printed or in electronic format). You can get free or paid-for payroll software to report PAYE information online to HMRC.
How to Submit FPS to HMRC
Payroll software makes it easy to send a Full Payment Submission (FPS) to HM Revenue and Customs. It provides HMRC with accurate information about payments and deductions made to employees.
Note: You should include everyone that you pay in your payroll software, even if they receive less than £123 a week.
When to Submit FPS to HMRC?
Some employers will be paying HMRC on a quarterly basis (instead of monthly). Even so, you must send the Full Payment Submission (FPS) no later than your employees’ payday (e.g. on or before).
In some cases, you might be paying your employees earlier or later. But, you must still enter the regular date that you pay them.
You might decide to pay your employees early because payday will fall on one of the UK Bank Holidays. If so, you should still enter your usual payday into the FPS software.
Sending an FPS Before Regular Payday
Early reporting means you will send your FPS to HMRC before your usual payday. It happens most often when payroll staff will be on holiday.
But, you should avoid reporting FPS too early. So, if the information changes you would need to send a corrected FPS to update HMRC. Another section explains how to fix problems with running payroll.
A typical example would be if an employee leaves your company or their tax code changes. Nonetheless, you must wait until after March before sending FPS reports for the new tax year.
Note: Some exceptions exist that allow you to send a late FPS. See below for further details on sending an FPS after payday.
How to Complete and Send an FPS
After registering as an employer, HMRC will send you a PAYE reference and Accounts Office reference. You must enter these details in your payroll software and then follow its instructions to complete and send the FPS to HMRC.
Some employers find it easier to split FPS into batches (e.g. one for their employees and another for any directors). But, special rules apply when calculating deductions (e.g. for NI) for any employees that have more than one job with you.
Note: HM Revenue & Customs provides extra guidance on what to put in your Full Payment Submission (FPS) and Employer Payment Summary (EPS) if you pay your employees through PAYE.
After Sending Your FPS to HMRC
Once you have sent FPS, the next tax month always begins on the 6th. From this date, you will then be able to:
- View the details of your FPS in your HMRC online account as well as how much tax and National Insurance you owe (from the 12th of the month).
- Claim any reduction on the amount owing to HMRC (e.g. statutory pay). You would need to send an Employer Payment Summary (EPS) by the 19th to claim it (see below).
- Pay the balance no later than the 22nd of the month (the 19th if you pay by post).
It is not uncommon for some employers to send FPS after payday (e.g. to make an extra payment to an employee). In this case, you should send an extra FPS before the next regular report. Check whether your payroll software has this feature.
Correcting Errors in Your FPS
What if you need to fix a mistake in your FPS or EPS? If this happens, you must correct any errors as soon as you discover them and without delay.
Reporting Additional Information on FPS
There may be situations where you need to report extra information on a Full Payment Submission (FPS), such as when:
- You are registering your new employee.
- You start paying a workplace pension or annuity.
- One of your employees leaves or retires.
- Sending your final payroll report (e.g. the last report of the tax year).
- Reporting employee changes (see below).
Note: Special rules apply for employers operating a National Insurance contributions only scheme (e.g. for overseas employers who do not need to pay UK tax).
How to Send FPS after Payday
Submitting a late Full Payment Submission (FPS) – without having valid grounds for doing so – can result in:
- An online penalty warning message (applies to the first late FPS sent each month).
- A late or non-filing PAYE penalty (for reporting late or inaccurate information).
Valid Reasons for Submitting a Late FPS Report
Certain situations allow employers to send a late FPS report to HM Revenue and Customs (e.g. after paying employees).
|Examples of Circumstances||When You Need to Report|
|You do not get a P45 from your employee and they get less than £123 a week or they worked with you for less than one (1) week.||Within seven (7) days of paying the employee.|
|Payday for your employee falls on a non-banking day (e.g. a weekend or a bank holiday).||The next available banking day (enter the regular payment date in the field titled ‘payment date’ and select code G in the ‘Late reporting reason’ section.|
|You made an ad hoc payment outside your regular payroll (e.g. you learn about a new starter or a missed overtime payment after sending your FPS). Note that payments made outside your normal payroll run on a regular basis are not ‘ad hoc’.||In the next regular FPS or an additional FPS.|
|You pay an expense or benefit to an employee where you need to pay National Insurance – but not Income Tax – through payroll.||Within fourteen (14) days of the end of the relevant tax month (depending on the actual benefit).|
|You are unable to calculate or report the pay to your employee in advance due to their work on the day (e.g. harvest workers who get paid based on how much they pick).||No later than seven (7) after paying your employee.|
|You make certain types of ‘non-cash payments’ to any of your employees.||Within fourteen (14) days of the end of the tax month (or when you deduct tax and National Insurance if that date occurs earlier). You should contact HMRC if yours are complex situations (e.g. if exercising share options).|
|You did not yet receive your employer PAYE reference from HMRC.||As soon as possible after receiving the employer PAYE reference and select code G in the ‘Late reporting reason’ section.|
Note: You need to supply HMRC with a ‘late reporting reason‘ after sending an FPS after your employee’s payday. Failing to do so, or if HMRC disputes your reason, can result in an online penalty warning message and a penalty.
Viewing Late FPS Reports in Your HMRC Online Account
You will be able to view the report in your HMRC online account (from the 12th of the next tax month) providing you send an FPS in the same tax month that you paid your employees.
The process differs if you send a Full Payment Submission (FPS) to HM Revenue and Customs in the tax month after payday.
|Sending a Late FPS in Tax Month after Payday||When HMRC Updates Your Online Account|
|Between the 6th and the 11th.||By the 14th.|
|Between the 12th and the 19th.||Within two (2) days.|
|On or after the 20th (if you did not send FPS in the previous tax month).||Within two (2) days.|
|On or after the 20th (if you sent FPS in the previous tax month).||By the 12th of the next tax month.|
Reporting EPS to HMRC UK
You can use free and paid-for payroll software tools to send both an Employer Payment Summary (EPS) and a Full Payment Submission (FPS) any time you:
- Get financial help with statutory pay (e.g. reclaim statutory maternity, paternity, adoption or shared parental payments). The same process applies even if you received an advance payment from HMRC to cover them.
- Choose to claim the Employment Allowance (providing it is the first time).
- Get a refund of your Construction Industry Scheme (CIS) deductions (e.g. if you paid too much tax or National Insurance).
- Make a retrospective claim for NICs holiday scheme for previous tax years (the scheme ended on the 5th of September 2013).
- Pay Apprenticeship Levy (such as if you, or employers you have connections with, have an annual pay bill of more than £3 million).
Note: There may be times when you do not pay any employees in a given tax month. If so, you should send an EPS instead of an FPS.
HMRC EPS Deadline
EPS deadlines are the 19th of the following tax month. This allows HMRC to apply any reduction to the amount owing on your FPS (e.g. example statutory pay). Remember, the new tax month will begin again on the 6th.
How to Submit an EPS to HMRC
Follow the instructions provided on your payroll software when completing and sending the EPS. HMRC has further guidance on what payroll information you need to report, including what to put in each field on an EPS.
What if your software cannot send EPS reports? In this case, you can download HMRC’s Basic PAYE Tools (e.g. free from HMRC for businesses with fewer than ten employees).
After Sending an EPS
When you have sent your EPS reports to HM Revenue and Customs you will then be able to:
- See the amount that you claimed along with the balance of what you owe on your HMRC online account within two (2) days (the 14th if you sent EPS before the 11th).
- Make a payment to HMRC by the 22nd (or the 19th if you pay by postal methods).
Correcting Errors in Your EPS
It is important to fix problems with running payroll (including your EPS) as soon as you discover any mistakes in the system.
What if You Haven’t Paid Employees in a Tax Month?
You should not send an FPS if you do not pay any employees in a tax month. Instead, send an EPS report no later than the 19th after the tax month for which you did not pay them. Failing to send an EPS means HMRC may:
- Send a notice (e.g. using PAYE Online service for employers)
- Estimate how much you should be paying
- Administer a late filing penalty based on the number of employees you have. You can avoid having to pay interest by paying the penalty within thirty (30) days.
Note: The process for running payroll differs if you do not pay any employees or workers for a longer period. In this case, you can inform HMRC up to one (1) year in advance that you will not be paying any employees by entering the relevant dates in the ‘Period of inactivity’ fields in your EPS report.
Paying Employers’ PAYE to HMRC
Paying HMRC every month is one of the responsibilities for all employers who run payroll. As a rule, this will include:
- Payments for tax and National Insurance (and any other relevant deductions) that you owe. You will have reported these on your Full Payment Submission (FPS) in the previous tax month.
- Reductions for any Employer Payment Summary (EPS) that you sent before the 19th in the current tax month.
Note: You can view reports of what you sent and what you owe on your HMRC online account. This is a useful way to check the details if your PAYE bill is not what you expected it to be.
How to Pay Your PAYE Bill
There are several different ways to pay your PAYE bill. Another section explains how to pay employers’ PAYE in more detail.
Late Payment Penalties for PAYE
As a rule, HMRC uses PAYE Online for employers (or a letter) to notify you if they think you paid late. They also charge interest on late payment of PAYE (charged daily at the standard rate).
Note: HM Revenue and Customs (HMRC) administer late payment penalties on PAYE amounts that have not been paid in full and on time.
How to Report Employee Changes
There are times when it may be necessary to report extra information on your Full Payment Submission (FPS), such as when:
- You need to tell HMRC you’re starting a new employee.
- Following the steps of what to do when an employee leaves.
- You start paying someone a workplace pension or annuity.
- Completing your payroll: annual reporting and tasks (i.e. the last report of the tax year).
- Any of your employees change their address.
There may also be certain circumstances when it becomes necessary to inform HM Revenue and Customs (HMRC) about any employee who:
- Becomes a director (read more about National Insurance for company directors).
- Goes to work abroad.
- Performs jury service (read more about giving staff time off for jury service).
- Dies (check what to do when an employee dies).
- Joins (or leaves) a contracted-out company pension.
- Reaches the age of sixteen (16) and falls under the rules of paying children and young people.
- Gets called up as a reservist (read more about the rights and responsibilities for reservists and employers).
- Changes gender (check what to do if an employee changes gender via the GOV.UK website).
- Reaches State Pension age.
If Your Employee Takes a Leave of Absence
It is not uncommon for an employee to take a leave of absence. When this happens, you should insert ‘Yes’ in the ‘Irregular payment pattern indicator’ in all the FPS reports that you send to HMRC until the employee returns.
How to Change Paydays or Frequency
Employers can move the day they pay their employees to a different day or change the actual frequency of paydays.
Moving Your Employees’ Payday
The process of moving your paydays is simple if the new payday falls in the same tax month or week. In this case, you should treat the first new payment as an extra payment for that particular period.
Similarly, there are no special requirements when recording pay, if the new payday will fall in a different tax month or week.
Note: HMRC has guidance on how to realign the payment date of your FPS with the tax month or week if you reported it incorrectly or you changed your payday.
Can You Change How Often You Pay Your Employees?
In simple terms, yes you can change the frequency of your paydays. But, you would need to contact the employer helpline if you start paying your employees less often.
Even so, it would be important to stop HMRC sending you a non-filing notice through PAYE Online for employers.
Note: Nowadays, most of the payroll software systems can manage payday changes (e.g. from monthly to weekly) and work out any associated deductions by automatic process.
Using HMRC’s Basic PAYE Tools (BPT)
You can download HMRC’s Basic PAYE Tools for free. But, they have some limitations and restrictions on changing how often you pay your employees.
How to Pay Your Employees More Often
It is not difficult to start paying your employees more often (e.g. weekly from monthly). If you have yet to pay them, use the new earnings period (found in the ‘Pay frequency’ field) in your FPS report the next time you pay them.
So, what if you already paid your employees? In this case, use the new earnings period from the next tax month.
How to Pay Your Employees Less Often
You can also start paying your employees less often. You would need to calculate and deduct National Insurance on both if a payment from your old pay period also occurs in your new pay period.
It would be important not to deduct more National Insurance than what would have been due on the combined total of both payments.
You would also need to deduct National Insurance (NICs) at the contracted-out rate on the total of both payments if the employee also joins your contracted-out pension scheme during this same period.
Remember, you would need to deduct tax based on the new earnings period the next time that you pay your employees.
Annual Payroll Scheme for PAYE
Some employers pay their employees only once a year (often in the same tax month). If this applies to your situation, you can register for the ‘annual scheme’ with HMRC.
You would send reports and make payments to HMRC on an annual basis. But, you would need to send an FPS on or before payday if you are paying your employees on different days in the same tax month.
Thus, there would be no need to send an Employer Payment Summary (EPS) for the months you are not paying your employees.
Note: Contact the employer helpline to register for the annual payroll scheme for PAYE. They will ask for your 13-character Accounts Office reference number (found on the letter you received from HMRC when you registered as an employer).
Changing the Month You Pay Your Employees
You can also change the month that you pay your employees. If this applies to you, send your FPS in the month that you are moving the new annual payment to.
It could be later than the actual month that you usually pay your employees. If so, you must send an EPS for that particular month to notify HMRC that you will not be paying any employees.
Important: Sending more than one FPS in one year means HMRC will assume you are not operating as an annual scheme. Thus, they will send you a letter asking for confirmation.