Payroll in the United Kingdom: A Comprehensive Guide for 2026

Introduction

Payroll in the United Kingdom runs through Pay As You Earn (PAYE), which ties reporting to payday. Employers send a Full Payment Submission (FPS) to His Majesty's Revenue and Customs (HMRC) on or before payday, deduct income tax and National Insurance from wages, and settle the bill by the 22nd of the next tax month.

Most of the work lands before anyone is paid. Employer registration has to be in place before the first payday, and it cannot open more than two months ahead. Income tax bands differ across the four nations of the United Kingdom, so two employees on identical salaries take home different amounts. Employer National Insurance runs at 15% with no upper limit, and penalties attach to each duty separately for incomplete records.

In this guide, we walk through the UK payroll process, compliance duties and penalties, statutory pay and leave, 2026 tax rates, termination rules, and how to outsource payroll in the UK.

What is the payroll process in the UK?

Managing payroll in the United Kingdom means understanding how the three different stages of this complex process work: pre-payroll, payroll calculation, and post-payroll.

Pre-payroll processes

This initial phase involves establishing a business in the United Kingdom while also getting familiar with the country's many laws affecting labor and employment.

• Setting up the organization: To begin with, you will need to set up a business entity in the United Kingdom. This is paramount, as it means that you can operate legally in the country. The entity alone will not let you pay anyone. You must also register as an employer with His Majesty's Revenue and Customs (HMRC) before the first payday to get your employer PAYE reference number, and registration cannot open more than 2 months before you start paying people.
• Business profile: Once you have registered your business as a legal entity, you will be provided with your unique business number. This will appear on all official payroll paperwork and documentation. In the United Kingdom, the references that matter for payroll are the employer PAYE reference and the Accounts Office reference, both issued by HMRC after registration. Your payroll software needs both of them before it can file anything.
• Work location: The United Kingdom is formed of four different countries: England, Wales, Scotland, and Northern Ireland. Depending on precisely where you will be operating your business, you might need to follow specific laws that only apply in that area. For payroll, the effect shows up in the tax code. S means the income is taxed using the rates in Scotland, and C means the rates in Wales, so a team spread across the four nations will not share one set of rates on identical salaries.
• Leave policy: Defining policies around sick leave, vacation leave, and parental leave is another essential step of the pre-payroll phase.
• Attendance policy: Another crucial aspect of this part of payroll is creating rules and regulations on work attendance, and communicating them clearly to your workforce.
• Statutory components: Remember that, while your company can create and define all these provisions, it also must do so in legal compliance with the country's laws.
• Salary components: In the United Kingdom, salaries include both deductions and allowances, which is important to bear in mind when calculating your employees' wages.
• Pay schedule: Employees in the United Kingdom are paid once a month. Your company may decide the specific payday, and should ensure that its salaries are always paid out on the closest business day to that. Whichever date you fix, your HMRC filing has to carry the usual date that you pay your employees, even if you pay them earlier or later. A payday landing on a bank holiday is the usual reason for an early transfer, and the filing should still show the regular payday.
• Employee information: It's important to find out what exact information on your employees you need to gather before you finalize payroll. In the United Kingdom, this starts with the P45 from the employee's previous job, since it carries the tax code and the pay and tax already recorded for the current tax year. Where there is no recent P45, the employee completes a starter checklist instead.

How is payroll calculated in the UK?

After completing the pre-payroll stage, you are ready to move on to payroll calculation. Most companies operating in the United Kingdom work with an automated payroll system. This means that they are able to transfer all the information obtained during the pre-payroll phase onto their payroll system to calculate individual salaries.

Software choice is constrained in the United Kingdom. You must get payroll software that reports PAYE information online, unless you're exempt, and HMRC publishes a list of recognised products.

Every time you pay your employees, the software has to record their pay, calculate deductions such as tax and National Insurance, calculate the employer's National Insurance contribution, produce payslips, and report their pay and deductions to HMRC in a Full Payment Submission (FPS).

Post-payroll processes

• Salary payments: Paying out salaries is one of the central parts of post-payroll. You can do so either manually by communicating with your bank, or by using automated payment software.
• Payroll accounting: Tracking your employees' salaries each month is an essential aspect of your internal accounting.
• Payroll reporting and compliance: United Kingdom payroll reporting works in real time. The FPS goes to HMRC on or before your employees' payday, which puts reporting inside every pay cycle. What you owe follows from what you filed: you can view the amount from your FPS online from the 10th of the next tax month, and you then have to pay HMRC, usually every month.

What is payroll compliance in the UK?

Payroll is done once a month in the UK. Compliance means running that cycle through Pay As You Earn (PAYE), with reporting tied to payday rather than to a fixed filing date: a Full Payment Submission goes to HMRC on or before your employees' payday, and the PAYE bill is paid by the 22nd of the next tax month, or the 19th if paying by post.

Three standing duties run alongside the filings. Employees and workers get a payslip on or before their payday, showing gross wages, deductions such as tax and National Insurance, net wages, and the number of hours worked where pay varies by time worked. Payroll records are kept for 3 years from the end of the tax year they relate to. At year end, employees still on the payroll get a P60 by 31 May.

Each obligation carries its own penalty. Late filing is charged monthly on a scale set by headcount, from £100 for 1 to 9 employees up to £400 for 250 or more. Late payment attracts interest charged daily at the standard rate. Incomplete records carry a penalty of up to £3,000, and HMRC may estimate what you have to pay.

Skuad helps teams carry that reporting load through a single global payroll platform.

Here is what Skuad helps with:

• Supports payroll processing in 70+ currencies, with tax withholding and statutory deductions applied at the point of calculation
• Helps generate and issue payslips for every pay cycle across supported markets
• Facilitates statutory contribution workflows across supported markets, covering applicable social insurance and pension obligations
• Assists with payroll record keeping and year-end documentation across supported markets
• Helps payroll teams stay aligned with local filing requirements as those requirements change across 160+ countries

For a finance team covering several markets at once, that keeps the monthly cycle inside one system.

What are the main payroll components in the UK?

Below, we will examine the major components of payroll in the United Kingdom. Familiarizing yourself with these aspects is a fundamental part of calculating your employees' wages.

Compensation

In the United Kingdom, the minimum wage is established and protected by law. Rates depend on the worker's age and whether they are an apprentice, and they change on 1 April every year. These rates apply from 1 April 2026:

Working hours

Working patterns vary across the United Kingdom, and the traditional 9 to 5, Monday to Friday workweek is not always followed by all employees. Whatever the pattern, a worker cannot work more than 48 hours a week on average, normally averaged over 17 weeks. They can choose to work more by opting out of the 48-hour week, which has to be a written agreement.

Overtime laws

In the United Kingdom, there is no minimum overtime pay, which can mean that employers might decide not to pay their employees for working overtime. Employers do not have to pay workers for overtime, though one floor still applies: average pay for the total hours worked must not fall below the National Minimum Wage. Unpaid extra hours that pull average hourly pay under the rate for that worker's age band become a minimum wage breach.

Sick leave

Statutory Sick Pay (SSP) is either £123.25 a week or 80% of average weekly earnings, whichever is lower. It's paid for up to 28 weeks.

Two points affect budgeting. SSP is payable from the first day of illness, so short absences now carry a cost. Recovery is also unavailable, since you cannot recover Statutory Sick Pay from HMRC, which separates it from parental pay below.

Parental leave

In the United Kingdom, new moms can receive up to 52 weeks of statutory maternity leave. This leave can start 11 weeks before the due date, and must last for at least the first two weeks after giving birth.

Statutory Maternity Pay (SMP) covers up to 39 of those weeks, with the first 6 weeks at 90% of average weekly earnings and the remaining 33 weeks at £194.32 or 90% of average weekly earnings, whichever is lower. The last 13 weeks of leave are unpaid.

New fathers are entitled to a maximum of two weeks of paternity leave, which can now be taken consecutively or separately. Statutory Paternity Pay is £194.32 a week or 90% of average weekly earnings, whichever is lower.

Parental pay is largely recoverable, unlike sick pay. You can usually reclaim 92% of the amount, or 109% if you qualify for Small Employers' Relief.

Annual leave

The majority of workers in the United Kingdom receive 28 days of annual leave. The statutory floor is 5.6 weeks' paid holiday a year, which for someone on a 5-day week comes to at least 28 days. Part-time staff get 5.6 weeks pro rata, so someone working 3 days a week must get at least 16.8 days.

What are the UK public holidays in 2026?

In the UK, bank holidays are the statutory public holidays, and the festive holidays are all included within the bank holiday list. There are no additional paid public holidays beyond these dates. An employer does not have to give paid leave on bank or public holidays, as these can count toward the statutory 5.6 weeks' annual leave entitlement.

The number of bank holidays and specific dates differ across the four nations.

What are the payroll taxes in the UK?

Payroll taxes in the United Kingdom are collected through Pay As You Earn (PAYE) and break into three pieces: income tax withheld from the employee, National Insurance paid by both the employee and the employer, and employer-only costs the business pays in addition to salary. Income tax rates depend on where the employee lives, since Scotland sets its own bands.

What are the UK income tax rates?

The standard employee personal allowance for the 2026 to 2027 tax year is £242 per week, £1,048 per month, or £12,570 per year. The rates below apply to annual earnings above that threshold.

England, Northern Ireland, and Wales share one set of rates:

Scotland runs six bands instead of three:

Two employees on identical salaries take home different amounts if one lives in Scotland, which is why the tax code marker matters at setup.

How much National Insurance do employees pay?

Social security in the United Kingdom is represented by contributions to the National Insurance system. This is mandatory for all businesses that operate a PAYE scheme.

The thresholds that drive the calculation for 2026 to 2027 are:

For a standard employee on category letter A, the employee rate is 0% between the lower earnings limit and the primary threshold, 8% from the primary threshold up to the upper earnings limit, and 2% on the balance above it. The rate falls once earnings pass the upper earnings limit, so National Insurance is not proportional the way income tax is.

What payroll taxes do employers pay in the UK?

Four employer costs are added above gross salary:

Employer National Insurance at 15% with no upper limit, a minimum 3% employer pension contribution, and the Apprenticeship Levy above a £3 million pay bill push the real cost of a hire well past the salary figure, and the gap widens as salaries rise.

Skuad's employee cost calculator helps you model that gap before an offer goes out. It estimates total employment cost across 160+ countries, covering gross salary and applicable employer contributions, and supports cost comparison between markets in 70+ currencies while the salary number is still moving.

Estimate the cost of a UK hire.

What are the notice period and termination rules in the UK?

In the United Kingdom, employees can generally be terminated only when a just cause has been found. In any case, it is mandatory to follow a specific dismissal procedure, particularly if the terminated employee has been with the company for more than two years.

Valid reasons include their capability or conduct, making them redundant, and something that prevents them from legally being able to do their job, for example a driver losing their driving licence. There could be other fair reasons too, sometimes called 'other substantial reasons'.

Notice period in the UK

Statutory notice scales with service:

Contracts frequently set longer periods, and the longer of the two applies. For payroll, the figure that matters is the average earned per week over the 12 weeks before the notice period starts, which is the basis for notice pay.

Two situations end employment without a worked notice period. Employment can be ended without notice where payment in place of notice is included in the contract, and summary dismissal, meaning instant dismissal without notice or pay in lieu, usually applies for gross misconduct such as theft, fraud, or violence.

Statutory redundancy pay in the UK

Statutory redundancy pay applies where the employee has been working for their current employer for 2 years or more. The amount is age-banded:

Three limits keep the figure bounded. Length of service is capped at 20 years, and for a redundancy on or after 6 April 2026, weekly pay is capped at £751, and the maximum statutory redundancy pay is £22,530.

On the payroll side, a termination payment can include statutory redundancy pay, holiday pay, unpaid wages, and company benefits such as bonuses, and statutory redundancy pay under £30,000 is not taxable. The other elements are treated on their own terms, so the final pay run rarely applies one rule across the whole payment.

Unfair dismissal in the UK

For dismissals with an effective date of termination before 1 January 2027, the current two-year qualifying period for unfair dismissal protections will still be in force. The two-year period covers ordinary unfair dismissal only. Claims for discrimination or automatically unfair dismissal have no qualifying period, so exposure starts on day one.

Termination brings several moving parts at once. Statutory notice that scales to 12 weeks, redundancy pay banded by age and capped at £22,530, notice pay calculated on average weekly earnings over the previous 12 weeks, and discrimination claims that carry no qualifying period at all. Getting any one of those points wrong is enough to put a dismissal in front of a tribunal.

Skuad helps reduce that exposure through the Shield platform, a compliance layer covering employer obligations across supported markets.

Here is what Skuad helps with:

• Assists with termination and offboarding aligned with local labor requirements across supported markets
• Helps calculate notice periods and severance in line with local statutory minimums
• Supports employment contract generation across 160+ countries, so terms are documented from the start
• Helps flag worker classification risk before it turns into a compliance issue
• Helps keep employment records and documentation in order across the full employment lifecycle

How to outsource payroll in the UK?

Once the obligations are clear, the question becomes who carries them. Running UK payroll means holding a PAYE scheme, filing on or before every payday, and settling with HMRC each month, and those duties stay with whoever the legal employer is. There are a few different ways to cover that.

One option is in-house payroll through a UK entity. You incorporate, register as an employer with HMRC before the first payday, buy payroll software that reports PAYE information online, and build a team to run the monthly cycle. Full control, and the slowest and most expensive route to a first hire.

A second option is remote payroll, where your parent company runs the UK payroll from outside the UK. Cheaper to start, though none of the statutory duties move with it: the PAYE registration, the Full Payment Submission on or before payday, and the payment to HMRC by the 22nd all still apply, and the compliance load falls on a finance team working at a distance from the rules.

A third option is a UK payroll bureau. They know the filing calendar and the software, though the employment relationship, the employer National Insurance at 15%, the pension duties, and the termination exposure all remain yours. A bureau processes the payroll. It does not become the employer.

All three routes leave the statutory duties with your business. The entity, the employer registration, the monthly filing, and the employer-side costs stay in-house, and so does the exposure when something is filed late or calculated wrong.

A fourth option moves the employment relationship itself. Skuad acts as the legal employer across 160+ countries, so your company can hire, onboard, and pay people without setting up a local entity.

Here is what Skuad helps with:

• Supports employment contract generation across 160+ countries, aligned with local labor laws and statutory requirements
• Supports payroll processing in 70+ currencies, with tax withholding and statutory deductions
• Facilitates statutory contribution workflows across supported markets, covering applicable social insurance and pension obligations
• Helps administer statutory benefits, paid leave, and parental entitlements in line with local requirements
• Assists with termination and offboarding, including notice periods and severance calculations as required locally
• Supports work permit and visa applications for foreign nationals joining your team

Get the full employment picture beyond payroll in Skuad's UK hiring guide.

Start running payroll in the United Kingdom the right way

Payroll in the United Kingdom is a monthly cycle with a fixed set of duties attached to it, and those duties keep running while a team is hiring, restructuring, or offboarding.

Skuad supports the operational side of employing people internationally, covering employment contracts, payroll processing in 70+ currencies, statutory contribution workflows, benefits administration, and offboarding, all from one platform.

Companies across SaaS, fintech, professional services, and technology use Skuad to support hiring in new markets and to keep payroll operations in one place as headcount grows across 160+ countries.

Book a demo to see how Skuad supports payroll and employment across 160+ countries.

FAQs

1. How does payroll in the United Kingdom work?

Payroll in the United Kingdom runs through Pay As You Earn, which ties reporting to payday. The employer deducts income tax and National Insurance from wages, sends a Full Payment Submission to HMRC on or before payday, and pays the bill by the 22nd of the next tax month.

2. When do employers register for PAYE in the UK?

Employers generally register with HMRC before the first payday, and registration cannot open more than two months ahead. The reference numbers can take time to arrive, so registering early matters. PAYE registration is usually required once an employee earns at or above the lower earnings limit.

3. How much does UK payroll cost an employer beyond gross salary?

Beyond salary, the main employer costs are National Insurance at 15% on earnings above the secondary threshold with no upper limit, a minimum 3% workplace pension contribution, and, for larger pay bills, the 0.5% Apprenticeship Levy. Eligible employers can offset some National Insurance through the Employment Allowance.

4. Why do two UK employees on the same salary take home different pay?

Income tax bands differ across the four nations. Scotland runs six bands and sets its own rates, while England, Wales, and Northern Ireland share one set. An employee's tax code carries a nation marker, so two people on identical salaries can take home different amounts.

5. What are the penalties for getting UK payroll wrong?

Each duty carries its own penalty. Late filing is charged monthly on a scale set by headcount, late payment attracts daily interest, and incomplete records can cost up to £3,000, with HMRC able to estimate what is owed. The penalties attach separately, so one run can trigger several.

6. Can a company run UK payroll without a local entity?

Running payroll directly generally requires a UK entity and a PAYE scheme, since the statutory duties sit with the legal employer. Options like remote payroll or a payroll bureau do not move those duties. An Employer of Record becomes the legal employer, which shifts the obligations off your company.