How do I calculate net payroll for my UK business?

As your business grows, processing salaries becomes a complex function. For HR, finance, and business leaders, getting it right is a must. Your people and HMRC are counting on it.

But, to calculate net payroll correctly in the 2026 tax year, you must navigate a minefield of taxes, contributions, and changing UK legislation.

This guide cuts right through the complexity. We’ll walk you through all the essential steps, explain the critical deductions, and point you to the tools that can help you ensure compliance.

What is the difference between gross and net pay?

Understanding the difference between gross vs net payroll is the first step.

Gross pay (or gross wage) is an employee’s total remuneration before any subtractions. This includes their basic salary or hourly wage, plus any overtime, bonuses, or commission.

Net pay is the final amount the employee actually takes home. It’s the ‘bottom-line’ figure on their payslip after all subtractions are made from the gross figure. Accurately processing the gap between these two figures is the core challenge.

What are the steps to calculate take-home pay?

Working out the final take-home amount is a sequential process. You must follow these steps for every staff member, every pay period.

Step 1: Determine gross pay

First, establish the gross figure for the period.

• Salaried staff: Divide their annual salary by the number of pay periods (e.g., 12 for monthly).

• Hourly staff: Multiply hours worked by their hourly rate. You must ensure this meets the National Minimum Wage (NMW) for every week they work.

• Other remuneration: Add any bonuses, overtime or commission, to get the total gross figure.

Step 2: Calculate statutory deductions (including ‘The Big Three’)

These are mandatory, and make up the most complex part of the calculations.

1. PAYE Income Tax

You will need to subtract this on behalf of HMRC. You need your employees’ tax codes (e.g., 1257L) to know their tax-free personal allowance (£12,570 for 2025-2026). You must use the right code for each and every individual. You will then have to apply the correct rates to their taxable income.

For England, Wales and Northern Ireland (2025-2026):

• Basic rate: 20% on taxable income from £1 to £37,700

• Higher rate : 40% on taxable income from £37,701 to £125,140

• Additional rate: 45% on taxable income over £125,140

Note that Scotland has different income tax rates. You can find the current rates on the GOV.UK website on Income Tax.

2. Employee National Insurance (NI) contributions

This funds state benefits, like the State Pension. For 2025-2026, in the main Category A, individuals will contribute:

• 8% on income between £12,570 and £50,270 per year.

• 2% on all income above £50,270.

3. Workplace pension scheme contributions

Auto-enrolment rules require you to provide a pension scheme for all eligible staff. For 2025-2026, minimum contributions on qualifying income are 5% from the employee and 3% from the employer. This usually reduces their taxable income.

Step 3: Calculate other common subtractions

After ‘The Big Three’, you will have to process:

• Student Loan Repayments: HMRC will issue a notice for you to deduct this. The amount is a percentage of income above a specific threshold, based on a loan plan.

• Other deductions: These may include voluntary items such as charity giving, salary sacrifice schemes, court orders (Attachments of Earnings), or repayments of a company loan.

Step 4: Arrive at the final amount

This is the final step.

Gross Pay - (Income Tax + Employee NI + Employee Pension + Student Loan + Other Subtractions) = Final Take-Home Amount

This final figure is what you transfer to the employee, and what must be detailed on their payslip. The results must be perfectly accurate.

Why is accuracy so important when you process pay?

Getting this process wrong is costly for any company.

1. Compliance: HMRC issues steep penalties for errors in PAYE, NI, and Real Time Information (RTI) submissions. All your reported taxes must be correct.

2. Employee trust: Errors can cause immediate stress and break trust. It’s the fastest way to lose good people.

3. Financial planning: You must budget for the total employee cost, including employer NI and pension contributions. Bad data leads to bad financial forecasts.

What legislation affects UK pay in 2026?

The 2026 tax year brings significant change. You cannot rely on last year’s figures.

• Employer NI cost increase: The employer NI rate is now 15%, and the threshold at which it’s paid has been lowered to £5,000. This is a major new cost.

• Employment Allowance: To help small businesses, the Employment Allowance to reduce NI liability is now £10,500.

• National Minimum Wage (NMW): This is updated every April. You must ensure all hourly paid staff meet the new thresholds. Check the current figures on the GOV.UK NMW page.

• Upcoming Employment Rights Bill: Be aware of updates rolling out in 2026. These include changes to Statutory Sick Pay (SSP) from Day 1, and new Day 1 rights for Paternity Leave. Staying on top of these changes is essential for finance teams.

What are the main methods and tools for calculating pay?

You have three main options to work out the final amounts.

The manual method (spreadsheets)

This involves manually working it out for each and every employee. This seems free, but is the riskiest. A single formula error or missed legislative update can create a systemic, costly problem. To enter data manually every week or month is a huge drain on time. You must enter every single variable correctly. Using a free online calculator is fine for a quick check, but such a simple calculator cannot be relied upon for your business’s core financial functions.

Outsourcing (payroll bureaus)

This offloads the calculation to an accountant, but can be slow and expensive. You lose direct control, and simple data changes (like a bonus, or a new job hire) can be delayed.

Using payroll software

This is the modern, scalable, and safest solution. You can use the software to automate every calculation for tax, NI, and pensions. A good online platform will stay updated with legislation, generate compliant payslips, and submit reports automatically to HMRC.

Software like PayFit’s integrates these functions seamlessly, from generating clear, compliant payslips to managing complex leave. This automation frees up your team from manual data entry. 

For many, switching your payroll provider is a first step to better efficiency.