How To Pay Employees In The UK: Legal Basics For Employers

Hiring your first employee (or scaling from one to five, or five to fifty) is a huge milestone.

But once you’ve got someone on the team, the day-to-day reality kicks in: you need to pay your employees correctly, on time, and in a way that lines up with UK employment law, payroll rules, and your own contractual promises.

For small businesses and startups, payroll mistakes are usually not about bad intent - they happen because you’re moving fast, wearing multiple hats, and trying to keep costs under control. The problem is that pay issues can escalate quickly into disputes, HMRC problems, and employee relations headaches.

Below, we break down the legal basics you should understand so you can run pay confidently, build trust, and protect your business from day one.

Note: this article is general information, not financial or tax advice. HMRC rules and rates change, and your obligations can vary depending on your circumstances - so get professional advice if you’re unsure.

What Do You Need To Put In Place Before You Pay Employees?

Before you run payroll, it’s worth stepping back and checking you’ve got the right foundations in place. Paying employees isn’t just a bank transfer - it’s tied to your legal obligations as an employer.

1) Confirm The Person’s Employment Status

First, be clear whether the person is:

• an employee (most common for team members with set hours, ongoing work, and direction/control from you),
• a worker (often more casual, but still with important rights), or
• a self-employed contractor (usually providing services to your business, but running their own business).

This matters because your pay obligations (holiday pay, statutory pay, PAYE, pension auto-enrolment, deductions) will differ depending on the status. Misclassifying someone can get expensive later.

2) Use A Written Contract (And Make Pay Terms Crystal Clear)

You don’t want “we’ll sort it out later” to be your payroll plan.

Even where the law doesn’t require a single formal contract document, you should set out pay terms in writing so everyone is aligned on:

• salary or hourly rate
• when pay is processed (weekly / fortnightly / monthly)
• overtime rules (if any)
• bonuses and commission (and whether they’re discretionary)
• deductions (when lawful and how they’ll work)
• expense reimbursement approach

This is usually done through an Employment Contract and supported by workplace policies (especially if you have different categories of staff, remote working, or shift-based work).

3) Register With HMRC As An Employer And Set Up PAYE

If you’re paying employees (rather than contractors invoicing you), you’ll generally need to operate PAYE - meaning you withhold income tax and National Insurance contributions and report/pay these to HMRC.

Practically, most small businesses do this through payroll software and/or an accountant, but it’s still your responsibility to ensure it’s done correctly.

4) Have Policies That Support Payroll Decisions

Pay issues often overlap with workplace management issues - overtime approvals, timekeeping, sickness absence, parental leave, performance, and expenses.

A Staff Handbook can be a simple way to document the “how we do things here” rules that support consistent, defensible payroll decisions.

What Counts As “Pay” (And What Do You Need To Include)?

When you pay employees, it’s not just about their headline salary. In the UK, “pay” can include multiple components, and some of them come with specific legal rules.

Basic Pay (Salary Or Hourly Wages)

This is the core payment you agree with your employee. Make sure your pay arrangements comply with the National Minimum Wage / National Living Wage rates (which change over time and depend on age and apprentice status).

Be careful if you:

• deduct for uniforms
• deduct for till shortages or breakages
• require unpaid “trial” work
• expect employees to fund tools/equipment for your business

These can accidentally push pay below minimum wage, creating legal risk.

Overtime And Shift Pay

There’s no single “overtime law” that says overtime must be paid at a higher rate. The key is what you’ve agreed in the contract and whether the total pay keeps the employee at or above minimum wage for the hours worked.

If your business uses long days or irregular patterns, it’s also worth keeping an eye on the Working Time Regulations, which set rules around working hours, rest breaks, and opt-outs.

Bonuses And Commission

Bonuses and commission can be brilliant incentives - but they’re also a common dispute area.

To reduce risk, be clear on:

• how commission is calculated
• when it is earned (for example, at sale, at invoice, at payment received)
• what happens if the employee leaves (is there a “leaver” clause?)
• when you can change or withdraw a scheme

If it’s meant to be discretionary, your wording and how you actually operate it in practice both matter.

Holiday Pay

Employees and most workers have the right to paid holiday. The tricky part is that holiday pay calculations can depend on working patterns and whether pay varies (for example, because of overtime, commission, or allowances).

If you’re using casual staff, seasonal workers, or variable hours, it’s worth getting advice so you don’t accidentally underpay holiday (or use a method that isn’t permitted for the type of arrangement you have).

Sick Pay (Including Statutory Sick Pay)

If an employee is off sick, you may need to pay:

• Statutory Sick Pay (SSP) (if the eligibility conditions are met - including that the employee qualifies and has been off sick for the required period), and/or
• contractual sick pay (if your contract offers more than SSP).

The important point is: whatever you promise in the contract can become a binding obligation, so keep your pay terms realistic and aligned with your budget.

How Do Deductions And Payslips Work (And What Can You Legally Deduct)?

Deductions are one of the easiest ways for payroll to go wrong - often because employers assume “it’s fine, they agreed verbally” or “it’s company policy”.

In the UK, deductions from wages are heavily regulated. If you get it wrong, you can end up facing an unlawful deduction claim.

Mandatory Deductions (PAYE)

These typically include:

• Income Tax
• National Insurance contributions
• student loan repayments (where applicable)

These are usually processed via PAYE through payroll.

Other Deductions (Only If They’re Lawful)

Other deductions (like repayment of training costs, uniform deductions, salary sacrifice schemes, or recovering overpayments) need careful handling.

As a general rule, you should only make deductions if:

• they’re required/allowed by law, or
• they’re authorised by the employee’s contract (or a separate written agreement), or
• the employee has given prior written consent.

If you’re dealing with recovering pay mistakes, read up on the risks first - for example, wage overpayments can create legal and practical complications if handled too aggressively.

Payslips: What You Need To Provide

Employees are entitled to an itemised payslip. In practice, your payroll software typically generates this, but you should still check it includes the key basics, like:

• gross pay
• net pay
• variable deductions (and what they are)
• fixed deductions (if applicable)
• hours worked (where the employee’s pay varies depending on time worked - for example, many hourly-paid roles)

Payslips aren’t just admin - they’re evidence. If there’s ever a dispute about pay, the quality and consistency of your payroll records really matters.

When Should You Pay Employees (And What Happens If You Pay Late)?

Most small businesses choose weekly or monthly payroll. There’s no single “correct” schedule - the key is that you do what you’ve agreed in the contract and you pay on time.

If cash flow is tight (a common startup reality), it can be tempting to “just pay a few days late” and catch up next week. The problem is that late payment isn’t just inconvenient - it can be unlawful and can damage trust fast.

If you want the detailed legal and practical implications, it’s worth reading up on paying employees late - because it can create:

• unlawful deduction of wages risk (depending on what was due and when)
• breach of contract risk
• grievances and morale issues
• in serious or repeated cases, a risk of constructive dismissal arguments

Practical Tips If You’re Worried About Cash Flow

If you can see a cash flow crunch coming, you’re usually better off acting early rather than hoping it resolves itself.

• Don’t change pay dates unilaterally. Changing pay timing can be a contract change.
• Communicate early. If there’s an issue, explain it and set a clear plan.
• Get advice before you vary terms. Even “temporary” changes can become messy.
• Consider whether hiring needs to slow down. It’s better than repeated payroll problems.

And if you’re considering reducing pay or changing working arrangements to manage costs, treat it as a legal change-management exercise - not just a financial decision.

Common Payroll Pitfalls For Small Businesses (And How To Avoid Them)

Most payroll disputes aren’t about someone being “difficult” - they’re about expectations and documentation not matching reality. Here are some common issues we see with small businesses when they start paying employees.

Pay Terms Aren’t Written Down (Or Are Too Vague)

If your contract says “bonus may be paid” or “overtime as required”, you may still end up in an argument about what that means in practice.

Clear, practical drafting helps avoid misunderstandings - especially if you’re scaling quickly and different managers are approving time or commission in different ways.

“Cash In Hand” Arrangements

Some businesses assume paying cash is easier. Paying wages in cash isn’t automatically illegal, but “cash in hand” is often used to describe payments that aren’t properly taxed or recorded - and that’s where the risk sits.

You still need proper payroll records, lawful deductions, and compliance with HMRC and employment law obligations.

Unpaid Work, Trial Shifts, And Interns

It’s common in hospitality, retail and startups to ask someone to “do a trial” or “help out for experience”. But unpaid work can trigger minimum wage obligations, especially if the individual is effectively doing real work for your business.

If you use work experience placements, interns, or trial shifts, get the structure right from day one so you don’t accidentally create employment rights you didn’t budget for.

Overtime And Timekeeping Aren’t Controlled

If you don’t have a clear process for approving overtime (and recording hours), you can end up paying more than you expected - or worse, accused of underpaying for time actually worked.

Your contract and policies should match how your business actually runs, including:

• who can authorise overtime
• whether overtime is paid or time off in lieu
• how hours must be recorded

Probation And Pay Reviews Aren’t Aligned

Many startups plan to increase pay after probation - but forget to document it clearly, or forget to run the review properly.

Probation clauses should be practical and consistent with how you manage performance. If you’re using probation periods, it’s worth making sure your approach matches your written terms, including your review timeline - see probation periods for the key points employers often miss.

Key Takeaways

• To pay employees properly, you need more than payroll software - you need clear written terms, correct HMRC setup, and consistent processes.
• An employee’s pay should be documented clearly, including salary/hourly rates, pay frequency, overtime rules, commission/bonus terms, and lawful deductions.
• Make deductions carefully: outside of PAYE, deductions usually need to be authorised in the contract or agreed in writing, otherwise you risk unlawful deduction claims.
• Paying late can create legal and employee relations risks, so plan ahead and get advice before changing pay timing or pay amounts.
• Common pitfalls for small businesses include vague contracts, uncontrolled overtime, unpaid “trial” work, and inconsistent pay practices as you scale.
• Strong legal foundations (including a tailored Employment Contract and supporting policies) help you stay compliant and avoid disputes as your team grows.

If you’d like help putting the right pay terms and employment documents in place, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.