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 £12.71 from 6 April 2026 for workers aged 21 and over. Youth rates also increase significantly for 2026/27:

• 18-20 years: £10.85/hour

• Under 18 & Apprentices: £8.00/hour.

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 both the 2025/26 and 2026/27 tax years (these thresholds remain frozen).

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, with reforms effective for leave years starting on or after 1 April 2024. 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 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. Note that from 6 April 2026, employers have a legal duty to keep records of annual leave and holiday pay for a minimum of 6 years.

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, excluding weeks where the worker was off sick on SSP, on statutory leave, or received no pay.

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 4: Statutory Sick Pay calculation (2026 reforms)

Under the reforms effective from 6 April 2026, SSP is now payable from day one and calculated differently. Let's say an employee earning £300 per week becomes sick on 10 April 2026.

1. Calculate Average Weekly Earnings (AWE): Review the 8 weeks before the sickness period. For this example, the employee's AWE is £300.

2. Calculate 80% of AWE: Multiply the AWE by 0.80. £300 × 0.80 = £240.

3. Compare with the statutory rate: The statutory SSP rate for 2026/27 is £123.25 per week.

4. Pay the lower amount: Since £123.25 is lower than £240, you pay £123.25 per week.

This calculation applies from day one of the qualifying sickness period, with no waiting days under the new rules.

What are the key payroll rates for 2026/2027?

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

What future payroll changes should I prepare for?

April 2026 marked a significant shift in UK payroll compliance. Key reforms now in effect include major changes to Statutory Sick Pay: SSP is now payable from day one of sickness absence, with the three-day waiting period removed and the Lower Earnings Limit no longer applying. This means all employees qualify for SSP regardless of earnings, paid at £123.25 per week or 80% of their average weekly earnings, whichever is lower.

Wage rates also increased from 1 April 2026, with the National Living Wage rising to £12.71 per hour for workers aged 21+, and significant uplifts for younger workers: £10.85 for 18-20 year-olds and £8.00 for under-18s and apprentices.

Looking ahead to 2027, businesses should prepare for mandatory payrolling of benefits in kind from April 2027, while the Employment Rights Act 2025 continues to be implemented, introducing new 'day-one rights' that impact payroll year end processes and new hire management.

Ensuring your automatic data processing systems can adapt to these ongoing regulatory updates is essential for maintaining compliance.