How to pay employees

How to pay employees: an overview

If you’re wondering how to pay your employees when starting a business, you’re in the right place. There are two main boxes you need to tick before you can do anything else.

1. Register as an employer with HMRC

When you take on your first employee, you’ll need to register as an employer with HMRC and get a login for PAYE Online.

Take a look at our guide on how to register for PAYE. We explain the timeframe within which you must register, and when to pay your PAYE bill.

2. Choose payroll software

Next, you’ll need to choose payroll software. You’ll find a handy list of both free and paid-for payroll software on the gov.uk site. One of the key software features to look for is its ability to report PAYE information online to HMRC in real-time (RTI compliant), unless you’re exempt.

What does payroll software do?

Some of the familiar payroll software names you may recognise are Quickbooks and Xero. Payroll software allows you to:

• Record your employees’ details
• Calculate your employees’ pay and deductions
• Report payroll information to HMRC
• Work out how much you must pay HMRC
• Calculate statutory pay, e.g. maternity or sick pay

How to do payroll: step-by-step

In this section, we’ll guide you through how to do payroll yourself (UK) and explain how to use payroll software.

1. How to put employees on the payroll

You will need to pay your employees through PAYE if they earn £123 or more a week (£533 a month or £6,396 a year).

To add a new employee to your payroll, you’ll need certain information. Most of this can be found on their P45, or they can complete a ‘starter checklist‘ if they don’t have a recent P45.

You’ll need:

• Your employee’s date of birth, gender, full name and address, and start date
• Their leaving date from their last employment
• Their total pay and tax paid to date for the current tax year
• Student loan deduction status
• Their National Insurance number
• Their existing tax code

This information must be kept on your payroll software for the current year and the three following tax years. Make sure you’re aware of what other records you must collect and keep for tax purposes.

You’ll then be able to use a free government tool to work out your employee’s tax code and starter declaration.

Student loan repayments

You will also need to ask if your employee has a student loan or a postgraduate loan and determine whether you need to make deductions through payroll.

2. Register your employee with HMRC

The first time you pay your new employee, you’ll need to register them with HMRC by including their details on a Full Payment Submission (FPS).

This includes:

• All the information you’ve collected from them (outlined above)
• Their tax code and starter declaration
• Their pay and deductions since they started working for your company (do not include figures from their previous employment)

You can assign payroll IDs to your employees at this stage too.

3. Report employee’s pay and deductions to HMRC

When you operate payroll as an employer, you need to understand how payroll works. There are certain tasks you must complete by certain dates throughout the tax month. A tax month runs from the 6th of one month to the 5th of the next month.

On or before your employee’s payday you must use your payroll software to:

• Record your employee’s pay (including their salary/wages and any other pay)
• Calculate deductions from their pay (for example tax, National Insurance, CIS payments)
• Calculate the employer’s National Insurance contribution you’ll need to pay on earnings above £242 a week.
• Produce payslips
• Report the employee’s pay and deductions to HMRC in an FPS

If you’ve not paid any employees in a tax month, you must send an Employer Payment Summary (EPS) to HMRC.

If you’re a contractor paying a subcontractor, you need to register for the Construction Industry Scheme (CIS) as you’re required to make deductions ‘at source’ to send to HMRC.

How sick pay works

Employees may be eligible for Statutory Sick Pay (SSP) of £99.35 per week for up to 28 weeks if they are too ill to work.

It is paid by the employer and can start from the fourth day the employee is off sick. Visit the gov.uk site to help calculate the SSP for your employees.

As an employer, you pay this the same way you would’ve paid the employee’s wages. Tax and National Insurance will be deducted.

How to pay bonuses to employees

Bonuses are part of an employee’s income and therefore must be declared as part of their earnings to HMRC.

As an employer, you will need to add bonuses to your employee’s standard pay and deduct tax and NIC through your payroll software.

4. Pay your PAYE bill to HMRC

Now it’s time to outline how to pay payroll taxes to HMRC.

In the next tax month, starting on the 6th, log in to your HMRC Online account (Government Gateway) to view the balance of what tax and contributions you owe.

You must pay your PAYE bill to HMRC by the 22nd of the next tax month (if paying electronically), or the 19th if paying by post.

There is sometimes the option to pay your PAYE bill quarterly if you pay less than £1,500 per month. Contact the HMRC helpline to discuss this.

Ways to pay your PAYE bill to HMRC

There are various ways you can make a payment to HMRC including online banking, telephone banking, CHAPS, Direct Debit, debit card, BACS transfer, or postal cheque.

If you fail to pay on time, you’ll be charged daily interest at the standard rate and you may also be charged a penalty if you do not pay on time or in full.

How to pay employees in cash legally

It’s not illegal to pay employees in cash.

However, it is illegal to pay an employee in cash in order to avoid your obligations under PAYE. That is, to avoid paying income tax and National Insurance Contributions to HMRC.

To pay employees cash legally, you must first deduct the correct amount of income tax and National Insurance Contributions owed under PAYE and pay this to HMRC. You then pay your employee what’s left.

Legally, you must provide your employee with a payslip each time you pay them, whether that’s by bank transfer or by cash.

The payslip can be a paper document or an electronic file. It’ll state how the employee will be paid and include a PAYE reference number. It will outline (for that specific pay period):

• The employee’s pay (before and after deductions)
• The employee’s income tax
• The employee’s National Insurance Contribution
• The number of hours worked, if their pay varies depending on time worked

FAQs

How should you pay an employee?

The easiest way to pay an employee is to register as an employer with HMRC and get a login for PAYE Online. You’ll then need to choose payroll software that meets your needs and use this to report PAYE information online to HMRC in real-time (RTI compliant).

How do I set up payroll?

To set up payroll for new employees you’ll need to gather certain information from their P45 or ‘starter checklist’ and register them as an employee with HMRC via a Full Payment Submission (FPS). This will include their tax code. On or before your employee’s payday, you must record their pay and calculate their deductions on your payroll software and produce a payslip. You have until the 22nd of the next tax month to pay your PAYE bill to HMRC.