How UK payroll works
From gross salary to the number that lands in your bank account: how PAYE collects tax in real time, and what employers send HMRC every payday.
PAYE: tax collected as you earn
Almost every UK employee is paid through PAYE (Pay As You Earn). Instead of receiving a tax bill once a year, your employer deducts income tax, National Insurance and other amounts from each pay packet and sends them to HMRC on your behalf. The system spreads your personal allowance evenly across the year, so a monthly-paid employee gets one twelfth of it each month.
The order of operations matters. Broadly, a payroll run works through your pay like this:
- Gross pay – salary, overtime, bonus and commission for the period.
- Pre-tax deductions – most workplace pension contributions and salary sacrifice items come off before tax is worked out.
- Income tax – calculated from your tax code and the year-to-date figures.
- National Insurance – 8 percent on earnings between £12,570 and £50,270 a year, then 2 percent above that. Unlike income tax, NI is worked out per pay period, not cumulatively. See the NI guide.
- Student loan – 9 percent (6 percent for postgraduate loans) of pay above your plan threshold.
- Net pay – what actually arrives in your account.
RTI: what your employer tells HMRC
Since 2013, employers must report payroll under Real Time Information (RTI). On or before every payday they send HMRC a Full Payment Submission (FPS) listing every employee, their pay and their deductions. A monthly Employer Payment Summary (EPS) handles adjustments such as statutory pay reclaims or the Employment Allowance. This is why HMRC usually spots a wrong tax code or a second job quickly – they see your pay data in real time.
What it costs to employ you
Your payslip only shows half the picture. On top of your gross salary, your employer pays 15 percent employer National Insurance on almost all of it (everything above £5,000 a year) plus at least 3 percent pension contributions. On a £35,000 salary the real cost to the employer is roughly £40,550. Try it yourself with the cost of an employee calculator.