How to pay employees in the UK: 2026 Employer Guide

Navigating UK payroll in 2026/27 means more than processing wages on time. From 6 April 2026, the Employment Rights Act 2025 introduced immediate changes to Statutory Sick Pay including a day-one entitlement and the removal of the Lower Earnings Limit, adding to an already complex compliance picture for UK employers.

Getting PAYE, National Insurance, and RTI reporting right is essential to avoid HMRC penalties and protect your business. This guide covers everything employers need to know about paying staff correctly.

What are payroll and payment methods?

Payroll and payment methods are the systems and processes used to calculate and deliver employee compensation in the UK. Employers must ensure employees are paid accurately and on time. The HMRC employer checklist covers the key reporting and payment obligations in one place. This includes choosing the right payment method, calculating wages correctly, and reporting pay through the PAYE system.

What are the different ways to pay employees?

Employers can choose between several payment methods, each with different levels of traceability and convenience:

• Bank transfer (direct deposit): the most common and recommended method. Payments are secure, traceable, and fully compatible with HMRC requirements.

• Payroll cards: prepaid cards where wages are loaded each pay period. Useful for employees without a bank account, but less common in the UK and may involve additional fees.

• Digital payment platforms: platforms such as online wallets or payment apps can be used, especially for freelancers or remote workers. However, employers must ensure payments remain traceable and properly recorded for HMRC.

• Cash payments: legally allowed, but strongly discouraged. Cash payments increase the risk of errors, lack of documentation, and potential non-compliance with PAYE and HMRC reporting obligations.

 How does payroll work in practice?

How to run payroll in practice involves the key steps employers follow to calculate, pay, and report employee earnings in compliance with UK regulations. Here’s an overview on how the process typically works:

• Calculate gross pay: determine each employee’s total earnings before deductions.

• Apply deductions: subtract Income Tax and National Insurance contributions.

• Issue net pay: pay employees the final amount after deductions

• Report to HMRC: submit payment details in real time through a Full Payment Submission (FPS) under the PAYE system.

• Provide payslips: give employees a breakdown of their pay and deductions.

• Maintain records: keep accurate and up-to-date payroll documentation.

• Ensure compliance: check that all submissions to HMRC are correct and on time.

To improve efficiency, most UK businesses use payroll software, which automates PAYE calculations, generates RTI submissions, and reduces the risk of manual errors while ensuring compliance.

⚠️ Warning: late submission of the Full Payment Submission (FPS) can result in HMRC penalties, ranging from £100 to £400 per month, depending on the number of employees. No penalty applies if the FPS is submitted within 3 days of payday or if it’s the first late submission in the tax year. Interest may also be charged on unpaid penalties.

How often should employees be paid?

UK employers can choose how often to pay employees, as long as it is clearly defined in the employment contract:

• Weekly payments: common in industries with variable hours, such as retail, hospitality, or construction.

• Biweekly payments (every two weeks): less common in the UK, but used by some businesses for a balance between frequency and admin workload.

Monthly payments: the standard for salaried employees. Simplifies payroll management and is widely adopted across most sectors.

💡 Good to know: there is no legal requirement for a specific pay frequency in the UK, but it must be clearly stated in the employment contract.

How do you pay employees in a small business?

Paying employees in small businesses may require setting up a simple but compliant payroll structure. Some core steps overlap with general payroll processes already discussed, such as operating PAYE correctly, reporting through RTI, using payroll software, and maintaining accurate records. However, in a small business context, there are additional setup and cost-management considerations that become particularly important:

• Register with HMRC: employers must set up PAYE before paying employees, which is a fundamental first step for any small business.

• Set a regular payment schedule: define whether employees are paid weekly or monthly according to their contract, ensuring consistency in cash flow planning.

• Account for employer costs: beyond employee deductions already covered in the payroll process, employers must also budget for additional costs such as employer National Insurance contributions and potential pension contributions.

How do you pay taxes and contributions?

Accurately handling employee taxes is essential for employers. For the 2026/27 tax year, employers must deduct Income Tax and National Insurance from employee pay under the PAYE system, using the correct thresholds and rates. These deductions directly affect net pay and must be calculated accurately for each pay period. Getting this right helps ensure timely reporting and guarantees employees are taxed correctly.

What taxes do employers need to deduct from employee pay?

UK employers must deduct specific taxes:

• Income Tax: applied based on tax bands, ranging from 20% (basic rate) up to 45% (additional rate), depending on employee earnings.

• Employee National Insurance (Class 1): typically 8% on weekly earnings between the Primary Threshold (£242) and the Upper Earnings Limit (£967), and 2% above this level.

• Employer responsibility: employers must calculate and deduct these amounts accurately for each pay period to ensure correct employee taxation.

📌 Example: if an employee earns above £967 per week, National Insurance is reduced from 8% to 2% on the excess amount.

How does PAYE work for employee payments?

The PAYE system works by using the employee’s tax code and earnings to calculate the Income Tax and National Insurance that must be deducted from wages before payment is made.

• For each pay period, employers carry out these calculations and send the information to HMRC in real time through a Full Payment Submission (FPS).

• The amounts deducted are then paid to HMRC, usually by the 22nd of the following month if paid electronically.

What is National Insurance, and how is it calculated?

National Insurance (NI) is a mandatory employee’s contribution that funds state benefits such as pensions and healthcare.

Employers pay secondary Class 1 contributions at 15% on earnings above the Secondary Threshold of £5,000 per year (£96 per week) — unchanged for 2026/27. NI is calculated for each pay period and automatically deducted through payroll, ensuring compliance with HMRC rules.

How do you meet compliance and legal requirements?

Employers’ salary management requires a clear understanding of compliance and legal requirements. Employers must follow strict HMRC rules, provide accurate documentation, and ensure payments are made on time. This includes understanding how to pay a payslip and issuing payslips that contain all legally required information, such as:

What happens if you pay employees incorrectly or late?

Paying employees incorrectly or late can lead to serious consequences for employers. Understanding how to pay your staff is necessary to avoid these risks:

• HMRC penalties: incorrect payroll reporting or late submissions can result in fines and interest charges.

• Employee claims: workers may raise disputes or take legal action for unlawful deductions or late payment.

• Compliance risks: errors in PAYE or National Insurance can lead to audits and additional liabilities.

• Reputational damage: late or incorrect payments can reduce employee trust and impact retention.

What are the different types of workers?

Salary payments depend on the type of worker companies hire, as different categories follow different tax and payroll rules. For the 2026/27 tax year, understanding these distinctions is crucial to applying the correct payment method. In the following sections, we will look at how payment processes vary depending on the type of worker.

How do you pay part-time or temporary staff?

How to pay employees working part-time or temporarily follows the same PAYE framework as full-time employment, but with pay adjusted to actual hours worked or short-term contracts. This approach also applies to zero-hours workers, who are paid only for the hours actually worked. For the 2026/27 tax year, earnings must still comply with the National Minimum Wage, which varies by age and is updated annually.

How should overtime and bonuses be paid?

Overtime and bonuses should be paid through payroll under the PAYE system, as they are treated as part of the employee’s taxable earnings:

• Bonuses are added to gross pay and taxed in the same pay period in which they are received, with Income Tax and National Insurance applied accordingly. 

• Overtime must be paid at least at the employee’s normal hourly rate and included in total gross earnings for correct calculation.

What are employer costs?

How to pay workers also means understanding the full cost of employment beyond gross salary. For the 2026/27 tax year, employers must account for additional expenses such as National Insurance contributions and pension payments.

How do holiday pay and sick pay work in the UK?

Employees’ compensation also includes managing statutory holiday pay and sick pay:

• Holiday entitlement: employees are entitled to at least 5.6 weeks of paid annual leave per year.

• Holiday pay calculation: holiday pay is based on usual earnings, including regular overtime where applicable.

• Statutory Sick Pay (SSP): from 6 April 2026, SSP is paid at the lower of £123.25/week or 80% of average weekly earnings — for up to 28 weeks. All employees are now eligible from day one of absence, with no qualifying earnings threshold following the abolition of the Lower Earnings Limit (LEL). Employees earning below £154.06/week will receive less than the flat rate.

• Payroll processing: both holiday pay and sick pay must be processed through PAYE, with Income Tax and National Insurance deductions applied.

How do pensions affect employee pay?

Calculating employees’ wages requires considering how pensions impact employer costs and employee net pay. Under the 2026/27 rules, employees are automatically enrolled into a workplace pension if eligible, with minimum contributions of 5% from employees and 3% from employers on qualifying earnings. Employee contributions are deducted from salary, reducing take-home pay, while employer contributions increase total employment costs. Proper setup ensures compliance and accurate payroll processing.

How do specific and international cases affect payroll?

Employees'  payments become more complex when dealing with international or remote scenarios. Employers must consider cross-border tax rules, currency differences, and local compliance requirements. Whether hiring abroad or managing remote teams, understanding these factors helps ensure compliance, accurate payments, and a smoother international payroll process, making it essential to understand global mobility tax implications.