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How does payroll work?

Find out how payroll works, and its key components.

Understanding UK Payroll

Payroll is a critical function for businesses, ensuring employees are paid accurately and on time while complying with the complex web of tax and employment regulations. In the UK, payroll encompasses several responsibilities, from calculating wages and taxes to handling statutory deductions and maintaining accurate records. Proper payroll management is essential for maintaining employee satisfaction and staying compliant with legal requirements.

Key Components of UK Payroll

Wage Calculation: At the heart of payroll is the calculation of employee wages. This involves determining gross pay, which includes basic salary, overtime, bonuses, and any other earnings. For hourly employees, this calculation is based on the hours worked, while salaried employees receive a fixed amount each pay period.

Tax Deductions: One of the most significant aspects of UK payroll is the deduction of taxes. Employers must calculate and deduct Income Tax through the Pay As You Earn (PAYE) system. The amount deducted depends on the employee’s tax code, which is provided by HM Revenue and Customs (HMRC) and indicates the amount of tax-free income the employee is entitled to.

National Insurance Contributions (NICs): Employers must also deduct National Insurance contributions from employees’ wages. NICs are used to fund various state benefits, including the National Health Service (NHS), state pensions, and other social security benefits. Both employees and employers contribute to NICs, with the employer responsible for calculating and remitting these contributions to HMRC.

Pension Contributions: Under the UK’s auto-enrolment scheme, employers must enrol eligible employees into a workplace pension scheme and make contributions on their behalf. Employees can opt out if they choose, but employers are obligated to re-enrol them every three years.

Statutory Payments: Payroll also involves managing statutory payments such as Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), and Statutory Adoption Pay (SAP). These payments are governed by specific regulations and ensure that employees receive financial support during certain life events.

RTI Submissions: Real-Time Information (RTI) is a mandatory system for reporting payroll information to HMRC. Employers must submit details of payments and deductions each time they pay their employees, ensuring that HMRC has up-to-date information on employee earnings and tax contributions.

The Importance of Accurate Payroll

Happy employees are the heart of a successful business, and that’s where accurate payroll comes in! When employees receive their salaries on time and without errors, it fosters a sense of trust and appreciation.

Adhering to payroll regulations is essential to avoid penalties and legal issues. HMRC imposes strict guidelines on payroll management, and non-compliance can result in fines, back payments, and reputational damage.

Payroll is a significant expense for most businesses, and accurate payroll management helps in maintaining financial control. Proper recording and reporting of payroll expenses are essential for budgeting, financial planning, and tax reporting.

Employers are required to keep detailed payroll records, including payslips, RTI submissions, and records of statutory payments, for a minimum of three years. These records are crucial for audits, resolving disputes, and ensuring transparency.

Challenges in UK Payroll

Managing payroll can be complex, especially for small businesses without dedicated HR or finance departments. Challenges include keeping up with changing tax codes and legislation, managing payroll for a diverse workforce, and ensuring data security. Many businesses choose to outsource payroll to specialised providers to mitigate these challenges and ensure compliance.


Ensuring smooth and accurate payroll is an essential part of running a successful business in the UK. At Jenkins & Co, our team’s knowledge and experience guarantee a clean and precise payroll service for your company.

Contact us today to discuss your payroll needs.