Employment payroll tax in the UK explained (2026/27)

Every time an employee is paid in the UK, a series of legally required deductions take place behind the scenes. According to HMRC annual tax receipts data, Income Tax, Capital Gains Tax and National Insurance contributions combined raised £552.8 billion in 2025/26 (18.1% of GDP), making PAYE-related deductions the single largest source of UK tax revenue.

For employers, getting payroll tax right means calculating deductions accurately, applying the correct rates, and reporting everything to HMRC on time. For employees, it determines how much of their gross salary they actually take home.

What is employment payroll tax in the UK?

Employment payroll tax in the UK refers to the taxes deducted from employee wages and paid to HMRC through the PAYE system. It is not a single tax, but a combination of statutory deductions managed and reported through payroll.

What does employment payroll tax include?

The main components are:

• Income Tax: deducted from employee earnings based on tax bands and the employee's tax code.

• Class 1 Primary NICs: employee National Insurance contributions on earnings above the Primary Threshold.

• Class 1 Secondary NICs: employer National Insurance contributions on employee earnings above the Secondary Threshold.

Why is payroll tax collected through PAYE?

PAYE allows HMRC to collect Income Tax and NICs in real time, spread across each pay period rather than as a lump sum at year-end. For employers, this means tax is deducted at source before pay reaches the employee, reducing the risk of underpayment and simplifying the compliance process for both parties.

How does payroll tax work in the UK?

Payroll tax works by deducting taxes from employee pay each pay period and reporting them to HMRC through PAYE. The process follows a defined sequence of steps.

How is payroll tax calculated step by step?

1. Calculate gross pay

Employers determine total earnings, including salary, bonuses and overtime.

2. Apply tax codes and thresholds

The correct tax code determines how much Income Tax is deducted.

3. Deduct Income Tax and NICs

Employers calculate Income Tax based on the applicable tax bands, employee NICs, and employer NICs, applying the rates and thresholds in force for the relevant tax year.

4. Submit RTI reports

Employers must transmit the Full Payment Submission (FPS) via the RTI gateway on or before payday, ensuring the deduction and reporting of tax liabilities is recorded accurately.

5. Pay HMRC

All deducted taxes must reach HMRC by the 22nd of the following tax month for electronic payments, or the 19th if paying by post. Missing these deadlines triggers automatic late payment penalties.

⚠️ Warning: late PAYE/NIC payments attract escalating penalties from 1% to 4% of the unpaid amount depending on how often you default within a tax year (GOV.UK).

What happens if payroll tax is calculated incorrectly?

Errors in payroll tax calculations can result in underpayments or overpayments of Income Tax and NICs. Where HMRC identifies a discrepancy through an RTI submission or compliance check, the employer may be liable for the shortfall, associated interest, and inaccuracy penalties. Overpayments can typically be recovered through the EPS process or adjusted in future submissions.

Inaccuracy penalties scale by behaviour: up to 30% for careless errors, 70% for deliberate, or 100% for deliberate and concealed inaccuracies (GOV.UK).

What taxes are paid on payroll in the UK?

UK payroll tax obligations apply to both employers and employees, but the two are not symmetrical. Employers carry direct cost obligations, most notably employer NICs, while employees have deductions taken from their gross pay before it reaches them. Each liability is calculated against different thresholds and reported through the same PAYE and RTI infrastructure.

What taxes do employers pay?

Beyond deducting and remitting employee taxes, employers are directly liable for two payroll-related costs of their own:

• Class 1 Secondary NICs: paid on employee earnings above the Secondary Threshold of £5,000 per year from April 2026, at a rate of 15%.

• Apprenticeship Levy: charged at 0.5% of the pay bill, with a £15,000 annual allowance that effectively exempts employers with a pay bill below £3 million.

👉 To note: Employer NIC rates and thresholds are set annually and may change at each Autumn Budget or Spring Statement.

What taxes do employees pay?

Employee payroll deductions are calculated each pay period based on individual earnings and the tax code issued by HMRC. The two main deductions are:

• Income Tax: calculated based on the employee's tax code and applicable tax bands for their income level and place of residence.

• Class 1 Primary NICs: deducted on earnings above the Primary Threshold, currently £12,570 per year for 2026/27.

How are Benefits in Kind taxed?

Benefits in Kind (BiK) are subject to Class 1A NICs (employer-only) and are reported via P11D(b) or integrated into payroll through Payrolling Benefits.

👉 To note: Some benefits are taxed through payroll (payrolling benefits), while others are reported via a P11D form and taxed separately.

What are the current payroll tax rates in the UK (2026/27)?

Payroll tax rates vary depending on income levels and thresholds set by HMRC for each tax year. The rates and thresholds for the 2026/27 tax year are largely unchanged, with key limits remaining frozen.

The amount of Income Tax deducted depends on several factors, including an employee’s income level, their Personal allowance (as determined by their tax code), and their place of residence (England, Wales, Northern Ireland or Scotland). Understanding UK Income Tax brackets is important for calculating employment tax correctly.

Below is an overview of Income Tax bands used in payroll. The first table shows tax bands for England, Wales, and Northern Ireland. The second shows the tax bands for Scotland.

What are the Income Tax bands for England, Wales and Northern Ireland (2026/27)?

What are the Income Tax bands for Scotland (2026/27)?

👉To note: National Insurance contributions are not devolved, meaning NIC rates are the same across the UK.

💡Good to know: Personal Allowance is the tax-free amount, not a band.

How does PAYE and RTI reporting work?

PAYE and RTI are the two systems that underpin payroll tax collection and reporting in the UK. Understanding how they interact is essential for meeting employer obligations accurately and on time.

What is PAYE?

PAYE (Pay As You Earn) is the system used by HMRC to collect Income Tax and National Insurance from employees through payroll. Employers must deduct taxes before paying employees, submit RTI reports on or before each payday, and pay liabilities to HMRC by the statutory deadlines.

What is Real Time Information (RTI)?

Real Time Information (RTI) is the system used to report payroll data to HMRC each time employees are paid. The two key submissions are:

• Full Payment Submission (FPS): submitted on or before each payday, detailing employee pay and deductions.

• Employer Payment Summary (EPS): submitted when no employees are paid in a tax month, or to reclaim statutory payments.

What are employers' payroll record and compliance obligations?

Employers have ongoing obligations to maintain accurate payroll records and meet HMRC deadlines throughout the tax year. These obligations are not discretionary; they are statutory requirements that apply regardless of business size or the number of employees on payroll. Failures in record-keeping or late submissions can result in financial penalties even where the underlying tax calculations are entirely correct.

What payroll records must employers keep?

Employers must retain payroll records for at least 3 years from the end of the tax year they relate to, in line with HMRC requirements. Records must cover employee details, gross and net pay, all deductions made (including Income Tax, NICs, and student loan repayments), tax codes applied, and all RTI submissions.

⚠️ Warning: HMRC can request access to these records at any time during a compliance check or investigation. Incomplete or inaccessible records can result in penalties, even where the underlying tax calculations were correct.

How can employers ensure payroll tax compliance?

Employers must keep employee data up to date at all times, apply correct tax codes and rates at the start of each tax year and whenever HMRC issues a coding notice, and submit RTI reports on or before each pay date.

💡 Good to know: All HMRC liabilities must be paid by the 22nd of the following tax month for electronic payments, or the 19th if paying by post. Missing these deadlines triggers automatic late payment penalties, even where the underlying calculations are correct.

Using payroll software that automates calculations, flags threshold changes, and manages RTI submissions significantly reduces the risk of error and ensures the business remains audit-ready throughout the year.