Employers and employees alike must be aware of payroll laws in UK. Employers can prevent fines, foster trust, and guarantee efficient business operations by adhering to these laws. Employees should be aware of their rights regarding compensation, perks, and deductions. Regardless of one’s background in accounting or human resources, this guide makes payroll legislation in the UK easy to understand.
What Is Payroll?
The process of determining and disbursing employee wages is known as payroll. It comprises deductions for things like income tax and National Insurance contributions, as well as the overall amount of money that a business pays workers during a given time period. Payroll also entails maintaining correct financial records and sending data to HM Revenue and Customs (HMRC).
Payroll in the UK is strictly controlled to guarantee that workers receive their salaries on schedule, fairly, and with the appropriate deductions and contributions.
Legal Responsibilities of Employers
Employers in the UK have several legal obligations when it comes to payroll. One of the first responsibilities is to register as an employer with HMRC before the first payday. Once registered, the employer receives a PAYE (Pay As You Earn) reference number and is expected to operate the PAYE system correctly.
Under PAYE, employers deduct income tax and National Insurance from employees’ wages before paying them. These deductions must then be reported and paid to HMRC. Employers must also provide each employee with a payslip, showing how their pay has been calculated, including hours worked, deductions, and net pay.
The PAYE System Explained
PAYE is the system HMRC uses to collect Income Tax and National Insurance contributions (NICS) from employment. If you employ people and they earn above a certain amount, you must operate PAYE as part of your payroll.
Employers must submit a Full Payment Submission (FPS) to HMRC every time they pay employees. The FPS includes details of employees’ pay, tax, NICS, and other deductions. If any corrections need to be made, an Employer Payment Summary (EPS) is submitted.
It’s important to submit the FPS on or before the employee’s payday. Late submissions can result in penalties unless there’s a reasonable excuse.
Minimum Wage Laws
One of the most fundamental aspects of payroll law in the UK is the National Minimum Wage (NMW) and National Living Wage (NLW). These are the minimum hourly rates that workers must be paid, and they vary depending on age and whether the worker is an apprentice.
As of April 2025 (check for latest rates on GOV.UK), the rates are reviewed and typically updated every April. Employers must make sure they pay at least the current minimum wage to all employees. Failure to do so is illegal and can result in serious consequences, including fines and public naming by HMRC.
Statutory Payments
Employers are required by UK payroll regulations to make specific statutory payments to qualified workers. These consist of:
Employees who are too sick to work are eligible for Statutory Sick Pay (SSP) if they fulfil specific requirements. Employees can receive ÂŁ116.75 each week for a maximum of 28 weeks starting in 2025.
Statutory Maternity Pay (SMP): Up to 39 weeks of maternity pay are available to qualified workers. 90% of average weekly wages is paid for the first six weeks, and then either 90% or a standard rate, whichever is lower, for the next thirty-three weeks.
Statutory Paternity Pay (SPP), Shared Parental Pay (Shpp), and Adoption Pay: These follow similar structures, and employers must make sure they provide them to qualifying employees.
All these statutory payments are subject to eligibility rules, including how long the employee has worked for the employer and how much they earn.
Holiday Pay
Employees in the UK are entitled to a minimum of 5.6 weeks of paid holiday per year. For someone who works a five-day week, that’s 28 days. This includes bank holidays, although there’s no legal requirement to give bank holidays as paid leave—this is up to the employer.
The regular rate of pay should be applied to holiday compensation. Holiday compensation is calculated using the average salary for the preceding 52 weeks for employees with variable hours or pay.
Payroll computations must account for holiday pay, and employers are responsible for making sure it is paid accurately and on schedule.
Deductions from Pay
Payroll laws in UK strictly control what deductions employers can make from employees’ pay. Some deductions are required by law, such as tax and National Insurance, student loan repayments, and pension contributions. Others may be agreed in writing, such as union fees or repayment of a salary advance.
Employers cannot make unauthorised deductions. The Employment Rights Act 1996 protects workers against unlawful deductions. If an employer takes money without agreement or a legal reason, the employee can take them to an employment tribunal.
Auto-Enrolment and Pensions
Auto-enrolment is a legal requirement that makes sure workers are saving for retirement. All employers must automatically enrol eligible employees into a workplace pension scheme and make contributions.
Eligible employees for automatic enrolment into a workplace pension scheme are those who are aged between 22 and the State Pension age, earn at least ÂŁ10,000 per year, and work in the UK. These criteria ensure that individuals who are most likely to benefit from long-term retirement savings are automatically included in a pension plan, with contributions made by both the employer and the employee.
Employers must contribute a minimum amount (currently 3% of qualifying earnings), while employees contribute a minimum of 5%, bringing the total to 8%.
Employers must also provide employees with information about the scheme and their rights, and they must complete a declaration of compliance with The Pensions Regulator.
Real Time Information (RTI)
Real Time Information (RTI) is a system introduced by HMRC that requires employers to submit payroll information every time they pay employees. This replaces the old system where employers reported payroll figures only once a year.
RTI allows HMRC to keep up-to-date information on employees’ income, tax, and National Insurance, which improves accuracy and reduces fraud.
Employers must submit the FPS each payday and any necessary EPS for adjustments. Failure to comply with RTI rules can result in fines.
Keeping Payroll Records
Payroll laws in UK require employers to maintain accurate and detailed records for a minimum of three years. These records must include essential information such as employee pay, tax and National Insurance deductions, and the number of hours worked, particularly important for ensuring compliance with minimum wage regulations. Additionally, employers must keep track of holiday pay, sick leave, and any periods of maternity, paternity, or adoption leave. Records should also reflect any other benefits provided or deductions made from an employee’s pay. Maintaining these records is crucial for transparency, legal compliance, and resolving any future disputes or audits.
Keeping good records protects both the employer and employee in the event of disputes, audits, or investigations by HMRC.
Dealing with Leavers and Starters
Employers are required to gather personal and tax information from new hires, such as their P45 or starter checklist. A last payslip and a P45, which details the total amount of taxes paid so far in the tax year, must be provided to departing employees.
In the subsequent FPS submission, employers must mark the employee as a leaver to notify HMRC. The employee’s most recent payslip must reflect any final compensation, such as unused vacation time.
Penalties for Non-Compliance
Failing to follow payroll laws in UK can lead to serious consequences for employers. HMRC has the authority to issue penalties for a range of non-compliance issues. These include submitting Full Payment Submissions (FPS) late or with incorrect information, not operating the PAYE system correctly, failing to pay the correct amount of tax or National Insurance contributions, underpaying employees below the National Minimum Wage, and neglecting to provide or comply with pension auto-enrolment requirements. Such violations can result in financial penalties, legal action, and reputational damage to the business.
Penalties vary depending on the severity of the breach and how quickly the issue is corrected. In some cases, businesses may also be named publicly or taken to court.
Using Payroll Software or Services
To manage the intricacies of payroll, many companies opt to employ payroll software. A list of authorised payroll programs that assist with pay calculations, deductions, and report submissions in compliance with RTI regulations is provided by HMRC.
Others might contract with accountants or payroll service providers to handle their payroll. This can save time and lower the possibility of mistakes, particularly for small organisations without a specialised human resources department.
Employers are still legally obligated to adhere to payroll regulations regardless of how payroll is handled.
Conclusion
Navigating payroll laws in UK might seem overwhelming at first, but once you understand the basics, it becomes much more manageable. Employers must ensure that they register with HMRC, pay employees correctly, deduct the right amounts, and submit information on time. Staying compliant with payroll laws not only avoids penalties but also builds a stronger, more trustworthy relationship with employees.
By using the right tools and keeping good records, businesses can stay on top of their responsibilities and create a healthy work environment where employees feel secure and valued. Whether you’re just starting or reviewing your current payroll setup, understanding these laws is an essential part of managing a successful business in the UK.
