How to set up payroll in the UK: Everything employers need to know

Setting up payroll is one of the most critical steps when hiring employees in the United Kingdom. Whether you’re opening a UK branch or hiring remote talent from abroad, managing payroll goes far beyond paying salaries – it includes registering with tax authorities, handling deductions, and staying compliant with evolving employment laws.

For international businesses, this can be a complex and time-consuming process. The UK has strict payroll compliance requirements, including real-time reporting to HMRC (His Majesty’s Revenue & Customs), National Insurance contributions, and pension auto-enrolment obligations.

In this guide, we’ll walk you through how to set up payroll in the UK, your obligations as an employer, and how a British Employer of Record can simplify the process if you don’t have a legal entity in the country.

Registering as an employer with HMRC

Before you can pay employees in the UK, you must register as an employer with HMRC. This applies to UK-based companies as well as international firms hiring UK-based employees.

Step-by-step registration procedure:

1. Apply online through HMRC: Visit the HMRC website and complete the registration form.

2. Receive a PAYE reference number: After registering, you’ll be issued a PAYE reference number, which you’ll need to process payroll and report taxes.

3. Allow 5–10 working days: Though delays can occur, most registrations are processed within this time.

4. Use HMRC online services: Once registered, you can access online tools to submit employee information and payroll reports.

Note: Registration is mandatory before the first payday if you plan to hire through a UK legal entity. If you’re not setting up a UK company, using an Employer of Record in the UK is an effective alternative.

Understanding the PAYE system

Understanding the PAYE system is essential for any employer operating in the UK. Under this system, short for Pay As You Earn, employers are responsible for calculating and deducting both income tax and National Insurance contributions (NICs) directly from their employees’ wages. These amounts must then be paid to HMRC on behalf of the employee.

Each time payroll is processed, employers must submit what’s known as Real Time Information (RTI) to HMRC. This report includes details such as the employee’s gross pay, the income tax and NICs that have been withheld, the employer’s own NIC contributions, and any deductions for pensions or statutory payments like sick or parental leave.

Submissions must be sent to HMRC before the employee is paid, and delays or inaccuracies can result in financial penalties for the business.

National insurance and pension auto-enrolment

In the UK, employers are legally responsible for contributing to their employees’ social security and retirement savings. This includes paying National Insurance contributions (NICs) and complying with automatic pension enrolment rules.

These obligations are central to supporting the country’s healthcare, unemployment, and pension systems, and they apply even if the employer is based outside the UK but hires UK-based staff. Understanding how these contributions work is crucial for ensuring full payroll compliance.

National insurance contributions (NICs)

NICs fund UK social benefits such as healthcare and state pensions. Both employers and employees are required to contribute.

As of 2024:

• Employees contribute 8%–12% of their gross earnings (above a certain threshold)
• Employers contribute 13.8% of earnings above £9,100 per year

These deductions are calculated during payroll processing and must be reported to HMRC with each RTI submission.

Workplace pensions and auto-enrolment

All UK employers must automatically enrol eligible employees into a workplace pension scheme. You must:

• Enrol staff aged between 22 and the state pension age
• Pay at least 3% of qualifying earnings into the pension (employees contribute 5%)
• Provide opt-out options and manage re-enrolment every three years

Failure to comply can result in fines from The Pensions Regulator.

Meeting National Insurance and pension auto-enrolment requirements is not just a legal obligation; it also demonstrates that you offer fair and secure employment conditions.

Getting these contributions right from the start helps you avoid regulatory issues and supports your employees’ long-term financial well-being. Whether you handle payroll in-house or through an Employer of Record, these elements must be factored into your payroll setup and ongoing processes.

The role of payroll software in deductions

One of the key decisions employers must make when setting up payroll in the UK is whether to manage the process in-house or work with an external payroll provider. Both approaches have their advantages, and the best choice depends on the size of your team, internal expertise, and how much control you want to retain over payroll processes.

Running payroll internally gives businesses complete visibility and control over employee payments, deductions, and reporting. However, it requires a solid understanding of UK payroll regulations, access to qualified personnel, and reliable payroll software. This can be a challenge for international companies unfamiliar with the UK system, especially when handling complexities like RTI submissions, pension deductions, and statutory payments.

Outsourcing payroll to a third-party provider offers a more hands-off solution. It reduces administrative burden, ensures compliance with the latest legislation, and allows your team to focus on other business areas. This approach is particularly useful for companies expanding into the UK without an existing HR or finance function on the ground.

Regardless of your chosen route, your payroll system must meet essential requirements. It must support real-time submissions to HMRC, generate compliant employee payslips, and automatically handle various deductions.

Integration with your existing accounting and HR platforms can further streamline operations, ensuring data accuracy and reducing duplication of work. For many businesses, choosing the right system or partner early on can make a significant difference in maintaining payroll accuracy and compliance in the long term.

Staying compliant with UK payroll laws

Compliance is ongoing – not a one-time task. UK payroll laws include strict requirements around tax filings, employee documentation, and data protection.

Filing deadlines and penalties:

• RTI reports must be submitted on or before payday
• Full Payment Submission (FPS) is due each pay period
• Employer Payment Summary (EPS) may be needed for adjustments or statutory pay

Failure to file correctly or on time may result in penalties and interest charges.

Recordkeeping requirements

Employers must keep:

• Payroll records for at least three years
• Payslips and tax documents for all employees
• Records of pension contributions and auto-enrolment communications

Data protection and GDPR

UK payroll data includes sensitive personal and financial information, meaning you must comply with GDPR regulations. This includes:

• Secure storage and access controls
• Written consent where applicable
• Transparent data policies

Staying compliant with UK payroll laws is essential to avoid penalties, maintain employee trust, and meet HMRC expectations. By keeping accurate records, submitting reports on time, and protecting employee data, businesses can ensure their payroll operations run smoothly and within the legal framework.

How a British Employer of Record can simplify payroll in the UK

For international companies, setting up payroll can be burdensome, especially if you don’t have a UK legal entity or local HR team. That’s where an Employer of Record (EOR) comes in.

A British Employer of Record is a third-party provider that acts as the legal employer for your UK-based staff, while you continue to oversee their daily tasks and responsibilities.

The EOR takes care of all the essential legal and administrative aspects of employment, including issuing compliant employment contracts, registering with HMRC for payroll, managing income tax and National Insurance contributions, overseeing pension enrolment, and ensuring that leave entitlements and employee benefits are provided in line with UK law.

What the EOR takes care of:

• Registering with HMRC and obtaining PAYE reference numbers
• Running payroll and submitting RTI reports
• Deducting and paying NICs and taxes
• Managing pension auto-enrolment
• Issuing compliant payslips
• Ensuring GDPR-compliant data handling

This solution is ideal for businesses that want to test the UK market, hire quickly, or avoid the time and cost of setting up a local company.

For example, a fast-growing tech startup based in San Francisco wanted to hire a sales team in London to support its expansion into the European market. However, the company had no legal entity in the UK and was unfamiliar with local payroll laws, tax obligations, and pension requirements. Setting up a UK subsidiary to employ several team members was expensive and time-consuming.

The company partnered with a British Employer of Record to solve this. The EOR became the legal employer of the UK-based team, taking care of everything from HMRC payroll registration to pension auto-enrolment and National Insurance contributions. Contracts were drafted in full compliance with UK labour law, and payroll was processed accurately from day one, including Real Time Information (RTI) submissions to HMRC and holiday allowance tracking.

The partnership allowed the US company to start operations in the UK within days, without worrying about payroll compliance or legal risks. As a result, the business scaled its UK presence smoothly while focusing its internal resources on sales and growth.

Benefits of using an EOR

• Fast onboarding: Hire UK talent in days, not months
• Local compliance: All payroll laws, benefits, and pensions handled for you
• No legal entity required: The EOR acts as your UK employer of record
• Reduced admin burden: Focus on your team, not paperwork

Set up payroll in UK

Setting up payroll in the UK involves more than just paying salaries. Employers must register with HMRC, understand the PAYE system, comply with National Insurance and pension rules, and meet strict reporting and recordkeeping standards.

While managing payroll internally is possible, it can be time-consuming and risky, especially for international businesses unfamiliar with UK laws. That’s why many companies turn to British Employer of Record services to manage payroll efficiently and compliantly.

Talk to our team about simplifying payroll in the UK – we’ll help you manage every step of the process, from registration to payroll to full compliance.