Mastering Payroll: Essential Insights for UK Businesses

Payroll needn’t be a stress. 

This handy how-to guide contains everything you need to know about mastering payroll. 

Calculating tax rates, working out National Insurance contributions, and which government funded benefits your team members are eligible for - you name it. We’ll cover it. 

What Is Payroll?

Payroll is the name for all the combined tasks involved in calculating and distributing pay to your team members. Most payroll work goes on behind the scenes. It’s an essential task for your HR function. 

Processing payroll means setting your team members up for the Pay As You Earn (PAYE) tax system. This means calculating wages or salaries based on hours worked, accounting for overtime, bonuses, or commissions, and deducting taxes and national insurance contributions. It also includes distributing payslips, ensuring new starter documentation is completed, educating team members on their tax codes, and ensuring the business abides by all relevant tax laws.

Everything You Need To Know About UK Payroll

New starter documents

A lot of the information you need to properly calculate a worker’s pay will be included on their new starter documentation. New starter documents include:

• A new starter checklist for PAYE. This will include the worker's full name, address, information about their student loan repayment plan, their passport number, and national Insurance number (NiNo).
• Their contract of employment. This will include the worker’s salary, working hours, place of work, and the terms and conditions of employment. 
• P45. It’s also helpful if team members can provide you with their P45 from their previous role. This can help you include the right tax code on their payslips so they aren’t taxed at the emergency rate. However, if they can’t provide you with their P45 or didn’t receive one, they will automatically be put on an emergency tax code and will need to contact HMRC to have this corrected. 

UK pay and wages

Team members in the UK are entitled to the UK minimum wage. This went up to £11.44 for over 21s as of April 1st 2024. 18-20 year olds must be paid a minimum of £8.40 an hour, and under 18s must be paid a minimum of £6.40 an hour. 

The UK minimum wage is different to the UK living wage. The UK minimum wage is the minimum hourly salary team members need to be paid, while the living wage is the salary that the Living Wage Foundation have calculated that an adult needs to survive in the UK. Over 21s must be paid the UK living wage, but you can decide for yourself whether your business pays under 21s the living wage. The UK living wage translates to a salary of £20,820.80 for a 35 hour working week or £23,795.20 for a 40 hour working week. 

Pro tip: Team members in the UK are allowed to work unpaid overtime where necessary, and many do. 

For example, if someone works late a few nights a week to complete a project. However, if teams are regularly working unpaid overtime and this brings their pay below the legal minimum wage, they may be able to raise a claim against your business to recoup this money.

Tax

UK income tax is paid based on income tax bands.Your personal allowance is the amount you’re allowed to earn before you pay tax. Team members will then pay 20% tax on any earnings above this amount and up to £50,270, and 40% on any earnings above £50,271. They may also be liable for national insurance contributions. 

It’s a common misconception that moving into the higher tax bracket will make you worse off than earning less and being in the lower tax bracket. This isn’t the case. There’s no instance in which you will be worse off because of tax, because you’re earning more. Team members may, however, lose specific means tested benefits when moved into the higher tax bracket. For example, team members may lose their child benefit or have to pay a ‘child benefit tax charge’ if they earn over £50,000. 

Team members will need to pay 45% on every £1 earned over £125,141, essentially meaning they lose £1 for every £2 earned over this amount. Team members making over £100,000 will also need to submit a self assessment tax return every year, regardless of their employment status. They need to register to do this by the 5th of October in the tax year they expect to earn £100,000. It is their responsibility to do this. However, it can be a big help if you, as their employer, remind them.

The non-taxable allowance is slightly different in Wales and Scotland, so double check with your local tax authority for accurate information.

National insurance contributions 

Teams pay around 8% National Insurance Contributions (NIC) on their salary. There are some niche groups who pay less than this, for example widows or those who work in freeports. 

This is taken out of their gross salary. Team members must pay National Insurance if they earn over £242 per week (£12,584 per annum) and are over 18 years of age. 

Businesses are also required to pay 13.8% NIC on behalf of their team members. Again, the rates are slightly different for niche groups, but the majority of the time businesses are expected to pay this 13.8% nominal rate. 

Student loan

Your worker’s new starter documentation will tell you which student loan plan they have. There are slightly different rates for Plan 1, Plan 2, Plan 4, and Postgraduate loans, so it's essential to accurately determine which plan your worker is on.

For Plan 1 loans, teams pay 9% of their income above the repayment threshold. The threshold may vary each year but is currently set at £22,015. This means team members pay 9% on everything they earn above this figure. 

Plan 2 loans have a higher repayment threshold, with team members repaying 9% of their income above the repayment threshold, which is currently £27,295 per year. 

Team members with Plan 4 loans may repay 9% of their income above £27,660. The difference with a Plan 4 loan is that it is for team members who studied in Scotland. There is also now a Plan 5 Loan for students who started their studies after April 2023. Most student loans are written off when the worker is 65, but those with Plan 5 Loans were not offered this term. 

Postgraduate loan repayments mean team members repay 6% of their income above the payment threshold. This is currently £21,000 per year. 

Student loan repayments are deducted directly from the employee's net salary, so it’s important to understand which plan they’re on to ensure you made accurate deductions. 

Pension

Team members must pay at least 5% of their net pension into a workplace pension scheme. Their workplace must also contribute 3% of the worker’s salary into the same pension pot. Team members need to be auto-enrolled into this scheme, and must manually opt out if they don’t want to be part of the workplace pension scheme. 

Opting out means they won’t receive any of the benefits of the workplace pension scheme, including the employer contributions, so it's important that team members carefully consider their options before making a decision.

Worker benefits

There are some mandatory UK worker benefits that you need to be aware of when making payroll calculations. You need to make sure team members don’t miss out on any of the benefits they may be eligible for, otherwise your business may be liable for fines or penalties. Some of the key mandatory worker benefits in the UK include:

Statutory Sick Pay (SSP)

If your team member is unable to come in due to sickness or injury, they’re entitled to be paid SSP. 

This is paid at £116.75 per week as of April 2024. Teams must have been absent for at least 4 days in a row to qualify for SSP. They must also earn above the Lower Earnings Limit (LEL) of £123 per week. This works out as £6,939 per annum. 

SSP must be paid in the way employee wages are paid, meaning it should be paid at the same time and frequency as the worker’s regular wages. SSP is paid for a maximum of 28 weeks. After this, if the worker is still unwell, they will go onto unpaid sick leave. 

You can choose to pay team members if they are unwell, too. This is called Paid Sick Leave (PSL). This is a nice benefit to have. However, you’re under no obligation to pay teams for their sickness beyond SSP. 

Statutory Parental Pay (SMP, SAP, SPP, SPBL, and SShPL)

Team members are also entitled to reasonable time off after they have a baby or if they adopt a child. They must earn above the LEL of £123 to qualify, and can claim up to £184.03 per week depending on their earnings. 

Parents can claim 90% of their average weekly earnings for the first 6 weeks of either Statutory Maternity Pay (SMP) or Statutory Adoption Pay (SAP), and then £184.03 for 33 weeks thereafter. 

This has to be taken as one block of time, meaning team members can’t come back for a few days in the middle of their Maternity or Adoption leave unless it is for a Keeping In Touch (KIT) day. The rate of SMP and SAP is based on the worker’s average weekly salary in the qualifying period.

The qualifying period is the worker’s average gross earnings over a period of eight weeks before the qualifying week, including the last payday before the qualifying week ends. The qualifying week is the 15th week before the baby’s due date or placement date. The baby’s due date can be found on the Mother’s MATB1 form, and the placement date can be found on the adopted child’s adoption paperwork. Count back 15 weeks from this date to find the qualifying week. 

Non-birthing or secondary adoptive parents can claim two weeks of Statutory Paternity Pay (SPP), also paid at £184.03 or 90% of their average earnings. As with SMP or SAP, secondary birth parents can claim whichever figure is lower.  

If parents suffer the loss of an unborn child after 24 weeks, experience a stillbirth, or if a person’s child dies before they turn 18, they are eligible for up to two weeks of Statutory Parental Bereavement Pay (SPBP).

Parents may also be eligible for Statutory Shared Parental Leave (SShPL). This is where both parents can share up to 37 weeks of paid Statutory Parental leave between them. There are specific criteria for SShPL eligibility. If your team members want to take this leave, it’s best for them to let you know of their intentions as soon as possible so you can work through the arrangement together. You can learn more about SShPL here. 

Key points:

• Mothers, or birthing parents, can claim SMP for up to 39 weeks after the child is born. 
• Primary adoptive parents can also claim SAP for 39 weeks.
• Fathers, non-birth parents, or secondary adoptive parents can claim SSP for up to two weeks. 

Statutory Redundancy Pay

If a worker is going through redundancy and has been with your business for at least two years, they are entitled to Statutory Redundancy Pay (SRP). SRP is calculated differently based on the worker’s age. This includes:

• Under 22. Half a week’s pay for each full year you worked for the business while you were under 22. 
• Between 22 and 41. A week’s pay for each year you worked for the business and were between these ages. 
• Over 41. A week and a half’s pay for each year you worked for the business and were over 41. 

This is capped at 20 year’s service and any payout under £30,000 is not taxed. The maximum weekly pay is £700. 

Minimum Notice Periods

Team members are also entitled to a minimum notice period if you’re terminating their contract or dismissing them. 

This is one week’s pay if they’ve worked for you longer than one month but less than 2 years, or one week’s pay for each complete year if they’ve been with you longer than 2 years. This is up to a maximum of 12 years.

Holiday Pay

Regardless of their length of service, team members are entitled to 5.6 weeks of holiday pay per year. This includes all bank holidays. Holiday pay is based on the worker’s regular salary. 

Team members don’t need to take bank holidays on the actual bank holiday. This is fairly common for retail, hospitality, or other shift team members where bank holidays are their busiest times. Instead, they can take their holiday entitlement at another time agreed upon with their employer.

HR compliance

You will need to keep records of employee payslips for up to 3 years from the last data of the tax year they refer to. For example, you can destroy your records of the 2022/2023 tax year in April 2026. 

You will also need to keep records of new starter checklists, P45s, worker contracts, and Right To Work (RTW) documents for the duration of a worker’s tenure with you. This ensures compliance with UK GDPR laws and provides documentation for any potential audits or disputes.

The Bottom Line On UK Payroll

Payroll is one of the most important parts of running your business. Everyone deserves to be paid correctly and on time. But, more than that, you have a legal obligation as an employer to ensure everyone’s pay is accurate, legally compliant, and above the national minimum wage. 

Managing payroll can be stressful, so it’s important you get your head on straight to understand exactly what benefits your teams are eligible for, how much tax they owe, and your obligations as an employer. You should also be prepared for ad-hoc worker questions and to dispel any payroll disagreements. We all come to work to get paid, so take the time to ensure your team members are paid quickly, fairly, and accurately. 

Ready to simplify people management, optimise performance, and take better care of your team? To experience the impact of our comprehensive approach first-hand, book a demo now!