How to calculate monthly payroll in the UK?

Accuracy in payroll is the backbone of trust between an employer and their team. For growing SMEs in the United Kingdom, understanding the mechanics of pay calculations is critical, not merely for ensuring HMRC compliance, but also for financial planning in today’s landscape of rising costs and regulatory shifts.

How do I determine gross pay?

The first step in calculating the total due to an employee is establishing the gross pay amount for the reference pay period, before any tax or deductions are applied.

This gross figure depends heavily on the employment contract type and gathering all the accurate employee information you will need.

How is monthly pay calculated for salaried staff?

For staff on an annual salary, you will typically divide the total yearly amount by the number of pay periods. For a standard calendar schedule, you will therefore divide by the 12 calendar months in the year.

Example: An employee on an annual salary of £30,000 would have gross monthly pay of £2,500.

However, if the employee has unpaid days or joined midway through a month, you will need to calculate the pay using the pro-rata method.

To do this, you can work out a daily rate based on working days (usually 260 days a year for full-time work), and multiply it by the actual days worked.

How do I calculate wages for hourly workers?

For employees paid by the hour, you will have to multiply the total hours worked in the period by their hourly wage.

Accurate time tracking is essential here, whether you are processing weekly or monthly pay. You must ensure the resulting wage meets the National Living Wage, which rose to £12.21 for those aged 21 and over in April 2025.

What statutory deductions do I need to make?

Once the gross salary has been worked out, you will need to subtract mandatory government levies. This is often where mistakes happen when calculating manually, rather than if you use dedicated payroll software to automate the maths.

How do tax codes work?

It is important to understand how the tax code system works for every employee. The vast majority of employees in the UK will have a tax code, often 1257L, which indicates their tax-free Personal Allowance (£12,570).

Any income above this threshold is taxed at 20%, 40%, or 45%, depending on which earnings band they are in.

You will generally calculate tax on a cumulative basis, looking at the total year-to-date earnings to ensure the correct tax is paid by the end of the tax year.

Year-to-date earnings are, in turn, included on every subsequent payslip.

How much are National Insurance contributions?

National Insurance (NI) is more complex, especially following recent reforms:

• Employees pay 8% on earnings between the Primary Threshold (£12,570) and the Upper Earnings Limit (£50,270)

• Employers now face a higher burden. From April 2025, the employer rate increased to 15%, and the threshold at which you start paying was lowered to £5,000 per year.

Understanding these National Insurance classes is vital for budgeting, as they represent a significant cost on top of wages and salaries.

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How do I handle pensions and student loans?

What are the rules for auto-enrolment pensions?

You must check the pension auto-enrolment eligibility status of your workforce every pay period. Eligible jobholders, i.e. those aged 22 to the State Pension age and earning over £10,000 a year, must be enrolled.

The minimum contribution is 8% total, with at least 3% coming from the employer. This is not usually 8% of the full gross salary. Instead, it is calculated on qualifying earnings.

Qualifying earnings are earnings in a specific band of income - between £6,240 and £50,270 for the 2025/26 tax year.

You will therefore only calculate contributions on the earnings that fall within these earnings thresholds. Of course, automated payroll software will calculate all of this for you.

When do I deduct student loan repayments?

If HMRC issues a notice for certain employees, you will need to make deductions for student loans.

These are calculated as a percentage (usually 9%, or 6% for postgraduate loans) of their income above specific thresholds. You should check the latest student loan thresholds to ensure you are using the correct plan type (Plan 1, 2, 4, 5, or Plan 3 for postgraduates) when processing your payroll.

How do I manage complex payroll scenarios?

Not every month’s payroll run is straightforward. Real-world scenarios involve starters, leavers, and varying work schedules.

How do I calculate pay for starters and leavers?

If someone starts work or decides to leave halfway through a month like November, you will not pay them a full month’s wage. Rather, you will have to calculate the days they were essentially employed during that time.

1. Calculate the gross annual salary.

2. Divide by 260, or the number of working days in the year, to get the daily rate.

3. Multiply this daily rate by the number of working days they were employed in that specific month.

How do I calculate holiday pay for irregular hours?

Calculating holiday pay for staff with irregular hours changed in 2024 and 2025. You can now legally use the 12.07% accrual method, applying it to the hours worked in the pay period.

However, to remain compliant with the latest gov.uk guidance, you must strictly limit this to workers classified as ‘irregular hours’ or ‘part-year’. Furthermore, if you choose to rolled-up holiday pay, it must be clearly itemised separately on the payslip.

It is also worth checking historic records. While schemes like furlough are no longer active, ensuring historic average pay data is accurate is essential for compliance when calculating holiday entitlement for long-standing staff.

Indeed, when calculating holiday pay for irregular hours using the 52-week reference period, you can go back up to 2 years (or 104 weeks) to find weeks with pay in them.

Detailed calculation examples

To help you get a better overview of the whole process, here are three concrete examples of common scenarios you might face when processing payroll for your business.

Example 1: Partial month calculation for a starter

Imagine a new employee with a £30,000 annual salary who started work on the 17th of November 2025. You will need to calculate their pay for the days they actually worked in the month.

1. Determine the daily rate: Divide the gross annual salary (£30,000) by the number of working days in the year (typically 260). £30,000 ÷ 260 = £115.38 per day.

2. Count the actual days worked: Count the working days (Monday to Friday) from the 17th to the 30th of November. Let’s assume, for this example, that this is 10 days.

3. Calculate the gross pay: Multiply the daily rate by the days actually worked. £115.38 × 10 = £1,153.80.

This will give you the total gross income for that period, their first month in this case.

Example 2: Employer National Insurance calculation

With the rate increase in April 2025, calculating your employer costs accurately is vital. Let’s say you have an employee earning £2,500 gross monthly.

1. Identify the threshold: The secondary threshold (where employers start paying) is roughly £417 per month (£5,000 per year).

2. Calculate liable earnings: Subtract the threshold from the gross pay. £2,500 - £417 = £2,083.

3. Apply the rate: Multiply the liable earnings by the 15% employer’s rate. £2,083 × 0.15 = £312.45.

This represents the payment you must make to HMRC on top of the employee’s salary.

Example 3: Basic Income Tax calculation

Calculating tax manually is complex because it is usually cumulative, based on year-to-date earnings. But we’ll consider here a simplified snapshot for a standard month. Let’s assume an employee earns £2,500 gross, and has the standard 1257L tax code.

1. Determine the tax-free allowance: The personal allowance is £12,570 per year. We divide this by 12 to get the monthly tax-free amount. £12,570 ÷ 12 = £1,047.50.

2. Calculate taxable pay: Subtract the tax-free allowance from the gross salary. £2,500 - £1,047.50 = £1,452.50.

3. Calculate the tax due: Apply the Basic Rate of 20% to the taxable pay. £1,452.50 × 0.20 = £290.50.

So, the total income tax deduction for this month would be £290.50.

What are the key payroll rates for 2025/2026?

Keeping track of the numbers is easier with a quick and handy reference:

What future payroll changes should I prepare for?

Looking ahead is crucial for cash flow reasons. The Employment Rights Bill introduced new ‘day-one rights’ for employees, impacting both the data you’ll need to manage for the payroll year end and new hires.

Furthermore, projections for 2026 suggest the National Living Wage could rise to approximately £12.71 per hour.

While historic schemes like furlough are behind us, the government continues to tweak the safety net, meaning your automatic data processing systems need to be agile enough to handle rapid updates.

Using comprehensive payroll and HR software to automate the calculation of net payroll correctly will help you keep your business compliant and your workforce motivated.