How To Pay Employees In The UK

Hiring your first employee is a big milestone. It’s also the point where you’ll need to get payroll, tax and legal compliance right from day one.

The good news? Paying employees in the UK is manageable if you follow a clear process and understand your obligations. In this guide, we’ll walk you through how to pay employees in the UK, what the law requires, and the practical steps to set up compliant payroll without stress.

We’ll keep things simple and actionable, so you can pay your team accurately and on time - and stay on the right side of HMRC and employment law.

What Does UK Law Require When You Pay Employees?

Before you look at software or pay calendars, it helps to know the core legal rules that apply when you pay employees in the UK. At a high level, you must:

• Pay at least the applicable National Minimum Wage or National Living Wage (rates vary by age and change each April under the National Minimum Wage Act 1998).
• Operate PAYE (Pay As You Earn) to deduct Income Tax and National Insurance contributions (NICs) and report to HMRC in real time (RTI) on or before each payday.
• Provide an itemised payslip on or before the payday, showing gross pay, deductions and net pay (required by the Employment Rights Act 1996).
• Auto-enrol eligible workers into a qualifying workplace pension and make employer contributions (Pensions Act 2008).
• Pay statutory entitlements correctly, including holiday pay (Working Time Regulations 1998), Statutory Sick Pay (SSP), and statutory family leave pay (for example, SMP, SPP, ShPP and SAP) where eligibility criteria are met.
• Keep accurate payroll records for HMRC and employment law compliance (for example PAYE records, pension records, and working time records).
• Handle personal data lawfully under UK GDPR and the Data Protection Act 2018 (payroll data is personal data and often “special category” information can be involved, such as medical notes for SSP).

These are the essentials, but they sit alongside the terms you agree with staff. Make sure your terms of employment are set out clearly in a written Employment Contract, backed by a practical Staff Handbook covering pay periods, overtime approval, expenses, and payroll cut-offs. Clear documents reduce misunderstandings and keep your payroll running smoothly.

Step-By-Step: How To Set Up Payroll And Pay Employees

Here’s a straightforward process to follow when you’re setting up to pay employees in the UK.

1) Register As An Employer With HMRC

As soon as you decide to hire, register as an employer with HMRC. You’ll receive an employer PAYE reference and Accounts Office reference. You’ll need these to run payroll and submit RTI reports. You can use commercial payroll software or HMRC’s free Basic PAYE Tools (better for micro-employers).

2) Choose Your Pay Frequency And Cut-Offs

Decide whether you’ll pay weekly, fortnightly or monthly. Monthly is common for SMEs and simpler to administer. Set a payroll cut-off (for time records, expenses and commission approvals) so you can process pay accurately. Put the schedule in contracts and your handbook so everyone is aligned.

3) Collect Starter Details And Right To Work Docs

Gather each employee’s starter information (including National Insurance number, P45 or starter checklist, student loan status, address and bank details). Confirm their right to work and keep copies as required. Accurate starter data ensures correct tax codes from day one.

4) Set Up Pay Elements In Your Software

Configure base pay (salary or hourly rates), overtime rules, commission, bonuses, tips/tronc (if applicable), expenses reimbursements, and pension contributions. Use clear pay codes so payslips are accurate and understandable. If you pay commission, consider using an Employee Commission Agreement to set calculation rules and payment timing.

5) Onboard To A Pension Scheme

Choose a workplace pension (for example, NEST or another provider), assess each worker for auto-enrolment, and set contribution rates. Issue statutory communications about auto-enrolment and opt-outs. Keep records for six years (opt-out notices for four years).

6) Run Payroll And Submit RTI

Each pay period, input pay, approved overtime, and any statutory pay due. Process deductions (PAYE tax, NICs, pensions, student loans, attachment of earnings orders where applicable). Submit a Full Payment Submission (FPS) to HMRC on or before payday, and an Employer Payment Summary (EPS) for adjustments (for example reclaiming statutory payments) when required.

7) Pay Employees And HMRC

Pay net pay to staff via BACS or Faster Payments and issue itemised payslips. Pay PAYE/NICs to HMRC by the due date (usually the 22nd of the following month if paying electronically). Pension contributions must be paid to the provider within their required timeframe.

8) Keep Records And Review

Retain payroll, tax, pension and working time records for the required periods. Periodically review minimum wage compliance (including for salaried hours work), holiday pay calculations, and system permissions to maintain accuracy and data security. For retention periods specific to staff data, see guidance on how long to keep ex‑employee records.

What Can You Put In An Employee’s Pay?

Most small businesses pay a combination of base pay and variable elements. The key is to set clear rules upfront and reflect them in your contracts and policies.

Base Pay: Salary Or Hourly

Salaried employees receive a fixed monthly amount. Hourly workers are paid for actual hours worked each pay period. In both cases, you must pay at least the current minimum wage for their age/apprenticeship category. Keep an eye on annual April rate changes to avoid accidental underpayments.

Overtime

You don’t have to offer overtime unless your contract provides for it, but many businesses do. If you do pay overtime, define when it applies, how it’s authorised, and the rate (for example, time-and-a-quarter). Remember, average weekly hours must align with the Working Time Regulations unless there’s a valid opt-out. For the rules and risks, see this guide to working overtime. It’s also wise to reference hours, breaks and rest entitlements in line with break rules under UK law.

Commission

Commission can be a great motivator in sales roles, but it needs careful drafting to avoid disputes about clawbacks, thresholds, territory or when commission is “earned”. Use a clear Employee Commission Agreement so the calculation method and payment timing are unambiguous and consistent.

Bonuses

Bonuses may be contractual or discretionary. If discretionary, say so clearly and set out the criteria you’ll consider. Be explicit about eligibility cut-offs (for example, if someone is under notice). For practical and tax points, this overview of bonus pay covers common employer questions.

Tips And Tronc

If you operate in hospitality, be aware of the Employment (Allocation of Tips) Act 2023 and the new statutory Code requiring fair allocation and transparency (commencement is staged; check current start dates). Many employers use a tronc system for distributing tips. Build your approach into your contracts and staff handbook, and keep clear records.

Expenses And Allowances

Reimburse legitimate business expenses promptly and state your rules for approvals, mileage rates and cut-offs. HMRC’s Advisory Fuel Rates and Approved Mileage Allowance Payments (AMAPs) can help with tax treatment; and if staff drive for work, have a policy and pay arrangements that reflect employee fuel pay best practice.

Deductions

Only make deductions you’re legally allowed to make. That usually means required deductions (PAYE/NICs), agreed deductions (expressly permitted in a contract/consent), or lawful deductions (for example, attachment of earnings orders). The rules are strict - review this overview of wage deductions before implementing set-offs or deductions for breakages, till shortages or uniform costs.

Deductions, Payslips And Record-Keeping

Once you’re running payroll, accuracy and documentation matter as much as paying on time.

Payslip Content And Timing

You must give an itemised payslip on or before payday showing gross pay, variable hours where relevant, each deduction (with a description), and net pay. Digital payslips are fine if staff can access and save them easily.

Lawful Deductions And Overpayments

In addition to tax, NICs and pensions, you may have other lawful deductions (for example season ticket loans). If you accidentally pay too much, you can generally recover an overpayment of wages, but handle it sensitively and agree a reasonable repayment plan - this helps maintain trust and reduces the risk of complaints. For the steps and pitfalls, see guidance on wage overpayments.

Minimum Wage Compliance Checks

Minimum wage breaches often arise inadvertently - for example, deductions that bring pay below the threshold (certain uniform costs or training time not counted as working time). Build periodic checks into your payroll process, especially after April rate changes or when you alter shifts or deductions.

Record-Keeping And Data Protection

Keep PAYE records for HMRC (generally for at least three years after the end of the tax year), working time records (typically two years), and pension/auto-enrolment records (usually six years). Payroll files contain personal data, so store them securely, restrict access, and have a clear retention schedule. As staff leave, make sure your HR retention plan aligns with UK GDPR - here’s a helpful summary on keeping ex‑employee records.

Paying Statutory Entitlements And Managing Your Pay Calendar

Beyond base pay, you’ll need to fund and administer the statutory rights most employees are entitled to.

Holiday Pay

Most workers are entitled to 5.6 weeks’ paid holiday per leave year (pro-rated for part-time staff). For irregular hours and part-year workers, holiday pay calculations can be more complex due to case law and recent reforms - use payroll software that supports percentage-based accrual and average earnings calculations where relevant. Make sure your contracts and handbook explain how holiday accrues and is booked.

Statutory Sick Pay (SSP)

Employees may qualify for SSP if they’re off sick for four or more days in a row and meet earnings thresholds. Track fit notes and sickness dates carefully and ensure SSP isn’t offset in a way that breaches minimum wage for the pay reference period. If you offer enhanced company sick pay, set out the rules clearly in writing.

Statutory Family Leave And Pay

Manage statutory maternity, paternity, adoption and shared parental pay in line with eligibility criteria, notice requirements and evidence. Payroll software can help you calculate amounts and reclaim what you can from HMRC via EPS.

Working Time, Breaks And Overtime

Pay calendars should reflect break entitlements and maximum working time limits. If your team work variable or long hours, ensure your processes align with the Working Time Regulations and that breaks are respected. This overview of break rules is a useful practical checkpoint, and you can reinforce expectations in your Staff Handbook.

Trial Shifts, Probation And Pay

Be careful with unpaid trial shifts - in many scenarios you’ll need to pay at least the minimum wage for time worked. During probation, pay and benefits should still follow the same legal rules unless the contract lawfully sets different arrangements for that period and they’re compliant. If you use trial periods, sanity-check them against minimum wage rules and fairness standards.

Pay Frequency, Cut-Offs And Cash-Flow

Choose a pay frequency that you can maintain comfortably. Monthly pay is simpler for payroll and cash-flow forecasting, but if you operate weekly shifts or tips, weekly pay may suit better. The crucial point is consistency - set clear cut-offs and publish your pay dates in your contracts and handbook so staff expectations are managed.

Confidentiality Around Pay

Many employers discourage staff from sharing pay. However, UK law protects “relevant pay disclosures” for the purpose of discussing equal pay. If you include confidentiality language, keep it narrow and compliant. If you’re considering pay transparency or “no discussion” rules, sense-check them against equal pay protections and evolving expectations.

When Things Change

If you plan to change pay frequency, pay dates, or structure (for example moving to commission-heavy pay), consult staff, provide reasonable notice, and document changes properly. Avoid unilateral changes that could risk breach of contract or constructive dismissal claims.

Common Mistakes To Avoid When You Pay Employees

You’ll save time and cost by avoiding these payroll pitfalls we see frequently in small businesses.

• Not issuing written terms: Without a clear Employment Contract, pay disputes escalate quickly.
• Late or missing RTI submissions: HMRC can charge penalties and interest; build a reliable payroll timetable.
• Minimum wage slip-ups: Uniform deductions or unpaid pre-shift briefings can push pay below legal minimums.
• Messy overtime rules: If you pay overtime, use a clean authorisation process and align with a sensible overtime policy.
• Unclear commission schemes: Always document your commission framework in an Employee Commission Agreement.
• Unlawful deductions: Double-check your approach against deductions rules to avoid unlawful set-offs.
• Poor records and retention: Payroll is data-heavy - align retention with UK GDPR, especially for leavers, using a plan for ex‑employee records.
• Forgetting breaks and working time: Build scheduling around legal break entitlements to limit fatigue and risk.

If this feels like a lot to juggle, don’t worry - with the right templates, processes and software, you can run a compliant payroll that supports your people and your business.

Key Takeaways

• Get the foundations right: Register with HMRC for PAYE, choose a realistic pay frequency, and set clear rules in a written Employment Contract and Staff Handbook.
• Know your legal duties: Pay at least minimum wage, issue itemised payslips, auto‑enrol eligible staff in a pension, and meet RTI reporting and payment deadlines.
• Define pay components: If you pay overtime, commission or bonuses, document the rules carefully and ensure alignment with working time and minimum wage law.
• Be careful with deductions: Only deduct where lawful and agreed; use a consistent process and watch the impact on minimum wage. Have a plan for handling overpayments fairly.
• Protect data and records: Keep accurate payroll, time and pension records for the right periods, and make sure your retention schedule works for ex‑employee records under UK GDPR.
• Build in compliance checks: Review minimum wage each April, audit holiday pay for irregular hours, and keep your processes aligned with break and working time rules.

If you’d like help setting up your payroll terms, drafting robust documents or sense‑checking your approach to paying employees, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no‑obligations chat.