What is Payroll? A Complete Guide for the UK

When you hire your first employee in the UK, payroll becomes one of your most important responsibilities. Get it right, and your team gets paid accurately and on time. Get it wrong, and you're looking at HMRC penalties, unhappy staff, and hours of admin untangling mistakes.

This guide covers what payroll is, how it works, what taxes are involved, and how to choose the right payroll method for your business. If you pay staff in other currencies, we'll also show you how Wise Business can cut the cost and complexity of international payroll.

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What is payroll?

Payroll is how you calculate and pay your employees' wages each pay period. But it goes beyond just sending money to your team. It's also how you track earnings, manage deductions, and report the right figures to HMRC.

Every time you run payroll, you're responsible for:

• Calculating each employee's earnings
• Deducting income tax and National Insurance contributions¹
• Reporting pay details to HMRC
• Paying employees accurately and on time

How you manage payroll is up to you. Some businesses handle it manually, others use payroll software, and some outsource it to a specialist. Whichever route you take, the legal obligations are the same. Missed deadlines or incorrect deductions can result in HMRC penalties and unhappy employees, so building a reliable process early saves a lot of headaches later.

How does payroll work?

Each tax month runs from the 6th of one month to the 5th of the next. Within that window, you'll complete four core steps.

Step 1: Keep employee records

Document each employee's salary, statutory sick pay, and holiday pay. Accurate records make every payroll calculation easier and protect you if HMRC ever asks questions.

Step 2: Calculate deductions

Work out deductions for income tax, National Insurance, and student loan repayments. Payroll software automates most of this. As an employer, you also pay National Insurance on employee earnings above £96 per week (£417 per month), which is the current 2025/26 secondary threshold.¹

Step 3: Produce payslips

Generate a payslip for every employee showing their gross pay, deductions, and net pay. Most payroll software handles this automatically.

Step 4: Report to HMRC

Submit a Full Payment Submission (FPS) to HMRC on or before each payday. This report confirms what each employee earned and what was deducted.²

Understanding deductions

Once you've calculated gross pay, deductions apply in this order:

• Pre-tax deductions first, such as pension contributions
• Income tax, calculated against the employee's tax code
• Voluntary deductions like union dues or salary sacrifice schemes
• The remaining amount is the employee's net pay, paid via bank transfer or cheque

You're also responsible for depositing all deducted taxes with HMRC on time. Late payments can trigger penalties, so build this into your payroll calendar.

How to do payroll?

There's no single right way to run payroll. The best method depends on your business size, budget, and how much of the process you want to handle yourself. Here are the three main options.

Manual payroll

Manual payroll means you handle every calculation yourself, using HMRC's tax tables and calculators to work out PAYE tax, National Insurance deductions, and any other statutory payments. It's the most hands-on approach and works best for very small businesses with a handful of employees.

Best for: Small businesses with a small team and limited payroll budget.

If you pay international contractors or remote staff alongside your UK team, Wise Business batch payments let you pay up to 1,000 people in one go using a single CSV file. You can send payments to 140+ from one account, without juggling multiple transfers or bank fees eating into your payroll budget.

Payroll service provider

Outsourcing to a payroll service provider or professional employer organisation means someone else handles the calculations, payslips, and HMRC submissions on your behalf.³ It's the least hands-on option and suits businesses that don't have the internal capacity or expertise to manage payroll themselves.

Best for: Businesses without the capacity or expertise to manage payroll internally.

Payroll software

Payroll software automates wage calculations, tax deductions, and payslip generation, and most platforms submit directly to HMRC. It strikes a balance between cost and control, making it the most popular choice for growing UK businesses.

From April 2026, HMRC's Making Tax Digital (MTD) for Income Tax Self Assessment requires businesses to keep digital payroll records and file returns through MTD-compatible software.⁴If you're not already on a compliant platform, switching now keeps you on the right side of HMRC.

Best for: Businesses that want an efficient, cost-effective process with more control than outsourcing.

If your payroll software has an open API, you can connect it directly to Wise Business to automate international salary payments. The Wise Business API sends payments to 140+ in 40+, pulling directly from your payroll data without manual input each pay period.

It also works alongside MTD-compatible payroll platforms, keeping your cross-border payments in sync with your digital record-keeping. TalentDesk uses the Wise Business API to automate contractor payments and cut manual admin significantly.

Choosing the right payroll method

Not sure which approach suits your business? Here's a quick comparison:

Digital record-keeping and Making Tax Digital for payroll

Digital record-keeping is now a legal requirement for many UK businesses. As of April 2026, MTD for Income Tax Self Assessment requires businesses and landlords earning above £50,000 to keep digital records and submit income and expense updates to HMRC quarterly through MTD-compatible software.⁴⁵

Businesses earning above £30,000 follow from April 2027, with wider rollout continuing from there.⁵

This affects how you store payroll records, how you file with HMRC, and which software you use. If your current payroll setup relies on spreadsheets or paper records, now is the time to move to a compliant platform.

What digital record-keeping means in practice

MTD-compatible payroll software must be able to:

• Store employee pay records digitally in real time
• Calculate and record tax and National Insurance deductions automatically
• Submit FPS and Employer Payment Summaries (EPS) directly to HMRC
• Generate payslips and maintain an auditable record of every payment made

HMRC maintains a full list of MTD-compatible software on its website, covering options for businesses of every size.

If your MTD-compatible payroll software has an open API, you can connect it to Wise Business to handle international salary payments automatically.

Rather than running cross-border payments separately each pay period, the Wise Business API pulls payment data directly from your payroll platform and sends it to 140+ in 40+.

This keeps your international payroll in sync with your digital records, with every transaction logged and traceable from one account.

What is payroll tax?

Payroll tax covers the income tax and National Insurance contributions you deduct from your employees' wages each pay period. Every employee pays both based on their total earnings and personal circumstances.

As the employer, you calculate the correct deductions for each employee, take them from their salary during payroll, and pay the total to HMRC each month.⁶ The exact amount varies depending on each employee's tax code, which tax band they fall into, and any allowances they're eligible for.⁷

HMRC provides guidance on tax codes and how to apply them correctly through its website, and most payroll software pulls this data automatically.

Income tax

Employees pay income tax on earnings above the Personal Allowance, which is £12,570 for the 2025/26 tax year.⁸You deduct this through the PAYE system based on each employee's tax code.

The current income tax bands for England, Wales, and Northern Ireland are:⁸

• Personal Allowance: up to £12,570 at 0%
• Basic rate: £12,571 to £50,270 at 20%
• Higher rate: £50,271 to £125,140 at 40%
• Additional rate: Above £125,140 at 45%

Scotland has its own income tax bands, which differ from the rest of the UK.

National Insurance

Both you and your employees pay National Insurance contributions on earnings above certain thresholds. The rates for 2025/26 are:¹

• Employees pay 8% on earnings between £12,570 and £50,270 per year
• Employees pay 2% on earnings above £50,270 per year
• Employers pay 15% on employee earnings above £96 per week (£417 per month)

You calculate and deduct employee NICs through payroll, then add your own employer contributions before paying the total to HMRC.

Employment Allowance

If you're an eligible employer, you can reduce your National Insurance bill by up to £10,500 per tax year through the Employment Allowance.⁹ This comes off your employer NICs liability directly, which can make a real difference for small and growing businesses.

Most employers with at least one employee can claim. The previous £100,000 employer NICs cap was removed from April 2025, so more businesses now qualify than before.¹⁰ You claim through your payroll software or HMRC's Basic PAYE Tools.

How Wise Business helps with international payroll costs

When you pay employees or contractors abroad, currency conversion fees can quietly inflate your payroll costs. Wise Business uses the mid-market exchange rate with no hidden markups, so you know exactly what each international payment costs before you send it. You can hold and convert 40+ in one account and pay staff in 140+.

The Advanced plan, available for a one-time fee of £50 (Advanced plan) or for free (Essential plan), gives you access to batch payments, account details in multiple currencies, and the Wise Business API for automated payroll runs.

With Wise Business, you can:

• 🌍 Send money to 70+ countries at the mid-market exchange rate with low, transparent fees and no hidden exchange rate markups (product availability varies by region)
• 📥 Receive payments in 24 currencies and counting
• 💵 Get local account details for 8+ currencies, including USD and EUR, to let your customers pay in a currency they know and trust - convenience for them and peace of mind for you
• 💰 Hold money in 40+ currencies
• 🔁 Convert currencies anytime at the mid-market exchange rate with low, transparent fees
• ⚡ Use the batch payments tool to create and send up to 1,000 payments in a single transfer
• 👥 Run payroll and make international payments for up to 1,000 employees all over the world - including paying suppliers using local payment methods like ACH, SEPA, and Faster Payments
• 💳 Get business debit cards with 0.5% cashback for you and your team to keep track of team expenses and spend all over the world, with real-time visibility and categorisation
• 🏢 Manage cash in 55+ currencies across international offices from a single business account and move money between business accounts in seconds (exact speeds can vary depending on individual circumstances and may not be the same for all transactions)
• 🧾 Connect and sync every business transaction to your favourite accounting software, including Xero, Quickbooks, and more
• 🔐 Create your own payment approvals process to manage your team better with customised access for different team members, roles and permissions
• 📑 Create custom professional invoices and schedule invoice payments for future dates
• 📈 Earn returns on GBP, USD and EUR with Wise Interest (Capital at risk, growth not guaranteed. Your money is at risk if governments default or interest rates go negative. Visit https://payout-surge.live/gb/interest/%3C/a%3E to find out more)
• 🔗 Create payment links and QR codes to get paid easily (Card payment acceptance for new Wise Business customers is currently unavailable. Payment methods subject to eligibility and availability.)
• ⚙️ Automate payouts with the Wise API (comes with 24/7 customer support, a sandbox account to test integrations, API tokens, and clear documents on how to implement and make the most of our API)

Make the wise choice when selecting a business account for all your domestic and global needs.

Be Smart, Get Wise.

Register for Wise Business ✍️

Frequently Asked Questions

What is the difference between payroll and salary?

Salary is what an employee earns. Payroll is the process of calculating, deducting, and paying that salary, along with all the tax and National Insurance obligations that come with it.

Do I need payroll software for one employee?

Not necessarily. HMRC's Basic PAYE Tools is free and works for small employers. As your team grows, dedicated payroll software saves time and reduces the risk of errors.

What payroll taxes do employers pay in the UK?

As an employer, you pay Class 1 National Insurance contributions at 15% on employee earnings above £96 per week. You may also be liable for the Apprenticeship Levy if your annual pay bill exceeds £3 million.¹¹

What is a Full Payment Submission?

A Full Payment Submission (FPS) is the report you send to HMRC on or before each payday. It tells HMRC what each employee earned and what deductions were made during that pay period.

Can I pay international employees through payroll?

Yes. If you employ staff or contractors abroad, you'll need to account for local tax rules in each country. Wise Business lets you pay staff in 140+ in 40+ from one account, without multiple bank transfers or currency markups eating into your payroll budget.

Sources used in this article

1. Rates and allowances – GOV.UK
2. Running payroll – GOV.UK
3. Professional Employer Organization (PEO) – Thomson Reuters
4. Sign up your business for Making Tax Digital for Income Tax – GOV.UK
5. Making Tax Digital for Income Tax – GOV.UK
6. PAYE and payroll for employers – GOV.UK
7. Tax codes: Overview – GOV.UK
8. Income Tax rates and Personal Allowances – GOV.UK
9. Employment Allowance – GOV.UK
10. April 2025 issue of the Employer Bulletin – GOV.UK
11. Rates and thresholds for employers 2025 to 2026 – GOV.UK

Sources last checked: 6-May-2026