Payroll UK: a plain-English guide for business owners and employees in 2026/27
Running payroll in the UK involves more moving parts than most people expect. This guide covers the essentials for the current 2026/27 tax year, from PAYE and National Insurance thresholds to Real Time Information submissions and what your employees should see on their payslip.
Payroll in the UK is one of those areas that looks simple until you’re inside it. If you employ even one person, you’re responsible for calculating PAYE income tax and National Insurance correctly, submitting payroll data to HMRC on or before every pay day, and keeping records that would stand up to inspection. Get it right and it ticks over quietly in the background. Get it wrong and the penalties, back-payments, and time spent untangling it quickly become expensive.
This guide to payroll UK covers the key rates and rules for the 2026/27 tax year. We’ve written it for both sides of the payslip: business owners who need to understand their obligations, and employees who want to know what the figures actually mean. The 2026/27 tax year started on 6 April 2026, so some thresholds have changed since the previous year. We’ve updated all the numbers below to reflect the current position.
How PAYE works for UK employers
PAYE (Pay As You Earn) is the system HMRC uses to collect income tax and National Insurance from employees. As an employer, you deduct tax and NI from your employees’ gross pay each pay period and send the money to HMRC, usually within 14 days of the end of the tax month (or 17 days if you pay electronically).
Every pay run also triggers a Real Time Information (RTI) submission. Before 2013, employers reported payroll annually. RTI changed that: you now submit a Full Payment Submission (FPS) to HMRC on or before each pay date. If you don’t pay anyone in a particular tax month, you submit an Employer Payment Summary (EPS) instead, so HMRC knows the absence of a submission isn’t an error.
You’ll also need to handle year-end tasks. By 31 May after each tax year, every employee must receive a P60 summarising their pay, tax, and NI for the year. If an employee leaves mid-year, a P45 is issued at the point of leaving. Benefits in kind (such as company cars or private medical insurance) are reported separately via P11D, due by 6 July.
Most payroll software handles the calculations and RTI submissions automatically. The responsibility for accuracy and timeliness still sits with you as the employer, though. Using software doesn’t remove the obligation to check the outputs, particularly tax codes, which can change at any point during the year when HMRC updates them.
2026/27 PAYE rates and NI thresholds
The figures below apply from 6 April 2026. These are the numbers your payroll software should be using for the current tax year.
Income tax (England and Northern Ireland)
- Personal allowance: £12,570 (tax-free)
- Basic rate (20%): on taxable income up to £37,700
- Higher rate (40%): on taxable income from £37,701 to £125,140
- Additional rate (45%): on taxable income above £125,140
Scottish and Welsh taxpayers have separate rate structures set by Holyrood and Senedd respectively. If you have employees in Scotland, their tax codes will start with ‘S’ and follow the Scottish rate bands.
Class 1 National Insurance thresholds (2026/27)
- Lower earnings limit: £129 per week (employees earn NI credits but pay no NI below this)
- Primary threshold: £242 per week (employees start paying NI above this)
- Secondary threshold: £96 per week (employers start paying NI above this)
The gap between the secondary threshold (£96/week) and the primary threshold (£242/week) is significant. Employers pay their secondary Class 1 NI on earnings above £96 per week, while employees only pay from £242. This is why the employer NI bill can feel disproportionate at lower wage levels.
The Employment Allowance allows most small employers to reduce their annual employer NI liability by up to £10,500. It cannot be claimed against the NI contributions of a sole director company where the director is the only employee.
Getting payroll right from day one costs a fraction of what it takes to unpick errors later. Most of the problems we see come from incorrect tax codes or late RTI submissions, not from complicated scenarios.
Tax codes and what they mean in practice
A tax code tells your payroll software how much of an employee’s income is tax-free. The most common code is 1257L, which gives a tax-free personal allowance of £12,570 for the year. The ‘L’ suffix means the employee is entitled to the standard personal allowance.
Codes change for various reasons: benefits in kind reduce the tax-free amount, previous underpayments may be collected through the code, and employees with multiple jobs may have a BR (basic rate on all income) or D0 (higher rate on all income) code applied to their secondary employment.
Emergency tax codes
From 6 April 2026, the emergency tax codes are 1257L W1, 1257L M1, and 1257L X. Emergency codes are applied when HMRC doesn’t yet have enough information about a new employee’s tax position. They mean the employee is taxed on a non-cumulative basis, which can result in over-deduction if the person hasn’t been paid for part of the year. As an employer, if someone is on an emergency code for more than a pay period or two, it’s worth prompting them to update their details via HMRC’s Personal Tax Account so the correct code can be issued.
HMRC issues tax code change notices (P9s and P6s) electronically to employers throughout the year. Payroll software should pick these up automatically, but it’s good practice to check that updates are being applied to the right employees, particularly after a payroll system migration or at the start of a new tax year.
What employees should check on their payslip
If you’re an employee rather than an employer, the payslip is your primary window into whether your tax and NI are being calculated correctly. Here’s what to look at.
- Tax code: check that the code on your payslip matches the one on your most recent HMRC coding notice or Personal Tax Account. If it doesn’t, your employer may be using outdated information.
- Gross pay: your total pay before any deductions. Make sure it reflects the correct salary, any overtime, commission, or statutory payments (such as Statutory Sick Pay or Statutory Maternity Pay).
- Tax deducted: if you’re on the standard 1257L code and your gross annual salary is below £50,270, you should be paying 20% on your taxable pay (gross minus the monthly personal allowance slice). If the deduction looks unusually high, an emergency code or incorrect code may be the cause.
- Employee NI: you pay NI at 8% on weekly earnings above the primary threshold of £242, up to the upper earnings limit (£50,270 per year). Above that, the rate drops to 2%.
- Pension contributions: if your employer runs a workplace pension scheme, both your contribution and your employer’s contribution should appear separately. The minimum employer contribution under auto-enrolment is 3% of qualifying earnings.
If something doesn’t look right, the first step is to ask your payroll or HR department. Most discrepancies are straightforward to correct once identified. If your employer isn’t responding, you can query your tax position directly with HMRC via the Personal Tax Account at gov.uk.
The payroll mistakes we see most often
After helping businesses across the UK with their payroll and compliance, the errors we come across most frequently fall into a fairly consistent pattern.
Late or missing RTI submissions
Submitting after the pay date, even by a day, triggers an automatic penalty flag. HMRC’s system is automated, so the penalty can arrive before anyone has had a chance to correct the mistake. If you know a submission will be late (for example, due to a bank holiday or system issue), file as close to the pay date as possible and contact HMRC to explain the circumstances.
Using the wrong tax codes
Payroll software usually updates codes automatically when HMRC issues a P6 or P9. The problem arises when notifications aren’t actioned promptly, or when a new employee starts and the starter declaration is completed incorrectly. A wrong code means either the employee pays too much or too little tax, and reconciling that at year end causes unnecessary work for everyone.
Overlooking auto-enrolment duties
Every employer must assess workers for auto-enrolment, enrol eligible employees into a qualifying pension scheme, and contribute at least 3% of qualifying earnings. Missing the assessment date or failing to re-enrol employees every three years are both common errors that The Pensions Regulator takes seriously.
Misclassifying workers
Treating an employee as self-employed to avoid PAYE is one of the most costly mistakes a business can make. HMRC’s IR35 rules and employment status guidance are clear: it’s the nature of the working relationship, not the contract wording, that determines status. If you’re unsure, it’s worth getting advice before the arrangement begins rather than after an investigation starts.
Our take
Payroll UK is one of the few areas of running a business where the admin consequences of a small error can quickly escalate. HMRC’s RTI system means there’s almost no gap between a mistake happening and it being recorded. The good news is that, with the right setup and current-year figures, payroll doesn’t need to be complicated.
For 2026/27, the key numbers to keep in mind are the personal allowance of £12,570, the employer NI secondary threshold of £96 per week, and the Employment Allowance of up to £10,500 for eligible employers. Beyond that, it’s about consistent processes: running payroll on time, actioning tax code changes promptly, and filing RTI on or before every pay date.
If you’re setting up payroll for the first time, taking on your first employee, or dealing with a payroll problem that’s got out of hand, this is the kind of thing we help clients with regularly. We’re happy to have a straightforward conversation about what you need.
Common questions about payroll UK
When do I need to register as an employer with HMRC?
You need to register as an employer before your first pay date. HMRC recommends doing this at least two weeks before you first pay someone, as it can take time for your PAYE reference to be issued. You can register online at gov.uk. You’ll need the reference number to submit RTI payroll data.
What is the Employment Allowance and can my business claim it?
The Employment Allowance lets eligible employers reduce their annual employer Class 1 NI bill by up to £10,500 in 2026/27. Most small businesses qualify, but the allowance cannot be claimed by sole director companies where the director is the only employee, or by businesses that employ domestic workers. You claim it through your payroll software by ticking the relevant box on your EPS submission.
Do I need to run payroll if I pay myself as a sole director?
Yes. If you pay yourself a salary through your limited company, even a small one below the NI threshold, you still need to register as an employer, set up a payroll scheme, and submit RTI to HMRC on or before each pay date. Many directors take a low salary (around £12,570 or the secondary threshold level) alongside dividends, and the payroll obligations apply regardless of the salary amount.
What happens if I submit an RTI filing late?
Late RTI submissions can result in automatic penalties from HMRC. The penalty amount depends on the number of employees. For small employers with one to nine employees, the penalty is £100 per month of default. HMRC does operate an automated penalty process, so even a one-day-late submission can trigger a notice. It’s worth appealing if you have a reasonable excuse, as HMRC does accept appeals in genuine cases.
How does auto-enrolment work for new employees?
Every new employee must be assessed for auto-enrolment on their first day of work. If they are aged between 22 and State Pension age and earn above £10,000 per year, they must be automatically enrolled into a qualifying pension scheme. You contribute at least 3% of qualifying earnings, and they contribute at least 5% (including tax relief). Employees can opt out, but you must enrol them again every three years under re-enrolment rules.