When it comes to running a compliant, efficient business in the UK, understanding payroll laws isn’t just useful — it’s essential. At EOR Services UK, we help simplify the process, ensuring employers avoid penalties while keeping employees informed and empowered.
Whether you're a growing startup or an established company, knowing your obligations — and your rights — matters. This guide breaks down complex payroll legislation into easy-to-understand sections for both employers and employees.
What Is Payroll?
The process of determining and disbursing employee wages is known as payroll. It comprises deductions for things like income tax and National Insurance contributions, as well as the overall amount of money that a business pays workers during a given time period. Payroll also entails maintaining correct financial records and sending data to HM Revenue and Customs (HMRC).
Payroll in the UK is strictly controlled to guarantee that workers receive their salaries on schedule, fairly, and with the appropriate deductions and contributions.
Legal Responsibilities of Employers
Employers in the UK have several legal obligations when it comes to payroll. One of the first responsibilities is to register as an employer with HMRC before the first payday. Once registered, the employer receives a PAYE (Pay As You Earn) reference number and is expected to operate the PAYE system correctly.
Under PAYE, employers deduct income tax and National Insurance from employees’ wages before paying them. These deductions must then be reported and paid to HMRC. Employers must also provide each employee with a payslip, showing how their pay has been calculated, including hours worked, deductions, and net pay.
The PAYE System Explained
PAYE is the system HMRC uses to collect Income Tax and National Insurance contributions (NICS) from employment. If you employ people and they earn above a certain amount, you must operate PAYE as part of your payroll.
Employers must submit a Full Payment Submission (FPS) to HMRC every time they pay employees. The FPS includes details of employees' pay, tax, NICS, and other deductions. If any corrections need to be made, an Employer Payment Summary (EPS) is submitted.
It’s important to submit the FPS on or before the employee's payday. Late submissions can result in penalties unless there's a reasonable excuse.
Minimum Wage Laws
One of the most fundamental aspects of payroll law in the UK is the National Minimum Wage (NMW) and National Living Wage (NLW). These are the minimum hourly rates that workers must be paid, and they vary depending on age and whether the worker is an apprentice.
As of April 2025 (check for latest rates on GOV.UK), the rates are reviewed and typically updated every April. Employers must make sure they pay at least the current minimum wage to all employees. Failure to do so is illegal and can result in serious consequences, including fines and public naming by HMRC.
Statutory Payments
Employers are required by UK payroll regulations to make specific statutory payments to qualified workers. These consist of:
- Statutory Sick Pay (SSP): Employees who are too sick to work are eligible for £116.75 per week for a maximum of 28 weeks starting in 2025.
- Statutory Maternity Pay (SMP): Paid for up to 39 weeks — 90% of average weekly wages for the first 6 weeks, followed by 90% or a flat rate (whichever is lower) for 33 weeks.
- Statutory Paternity Pay (SPP), Shared Parental Pay (ShPP), and Adoption Pay follow similar structures.
All payments are subject to eligibility rules regarding employment length and earnings thresholds.
Holiday Pay
Employees in the UK are entitled to a minimum of 5.6 weeks of paid holiday per year. For someone who works a five-day week, that’s 28 days. This includes bank holidays, although there’s no legal requirement to give bank holidays as paid leave—this is up to the employer.
For employees with variable hours or pay, holiday compensation is calculated using the average pay over the preceding 52 weeks. Employers must account for holiday pay accurately and ensure it is paid on time.
Deductions from Pay
Payroll laws in the UK strictly control what deductions employers can make from employees’ pay. Some deductions are required by law — such as tax, National Insurance, student loan repayments, and pension contributions. Others may be contractually agreed in writing.
The Employment Rights Act 1996 protects workers against unlawful deductions. Any unauthorised deduction may lead to legal action and an employment tribunal.
Auto-Enrolment and Pensions
Auto-enrolment ensures eligible employees are automatically included in a workplace pension scheme. Employers must contribute at least 3% of qualifying earnings, and employees contribute 5%, totalling 8%.
Eligibility includes:
- Age between 22 and State Pension age
- Earning at least £10,000/year
- Working in the UK
Employers must also declare compliance with The Pensions Regulator and inform staff about their rights.
Real Time Information (RTI)
RTI is an HMRC system requiring employers to submit payroll data every time they pay employees, rather than once a year.
This improves accuracy, reduces fraud, and ensures HMRC has up-to-date information on income, tax, and NI contributions.
Employers must submit FPS on each payday, and EPS where adjustments are needed. Failing to comply may result in penalties.
Keeping Payroll Records
UK payroll laws require employers to keep records for at least three years. These include:
- Pay, tax, NI contributions
- Hours worked
- Sick leave, holidays, maternity/paternity/adoption leave
- Benefits or deductions
Good recordkeeping protects businesses and employees, especially during audits, disputes, or HMRC investigations.
Dealing with Leavers and Starters
For new employees, employers must collect a P45 or starter checklist. For leavers, a final payslip and P45 must be issued.
Final pay should include compensation for any unused holiday. The leaver must be marked in the next FPS submission to notify HMRC.
Penalties for Non-Compliance
Not following payroll laws can lead to:
- Penalties for late/inaccurate FPS submissions
- PAYE or NI contribution errors
- Underpaying minimum wage
- Failing auto-enrolment requirements
Consequences may include fines, legal action, or public naming by HMRC. Prompt correction is key to minimising damage.
Using Payroll Software or Services
Many businesses use payroll software or hire payroll providers to manage complexity. HMRC lists recognised software that helps with deductions and RTI reporting.
Even when outsourcing, employers remain legally responsible for payroll compliance.
Conclusion
Navigating payroll laws in the UK doesn’t have to be overwhelming. With the right support, you can ensure compliance, protect your business from penalties, and build stronger relationships with employees.
At EOR Services UK, we handle every aspect of payroll for you — from PAYE to pensions — so you can focus on growing your business.
✅ Let EOR Services UK Handle Your Payroll Compliance
Struggling with payroll regulations? We make it simple.
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📌 PAYE, RTI, auto-enrolment, and HMRC reporting
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🌐 Visit us at EORServices.co.uk
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