How to pay employees: Simple steps for UK small businesses

Published Friday 30 January 2026

Table of contents

• Understanding your legal obligations when paying employees
• Setting up PAYE with HMRC
• Payment methods for your employees
• How often you need to pay employees
• Essential deductions from employee pay
• Choosing the right payroll system
• Step-by-step guide to paying employees
• Reporting requirements and record-keeping
• Simplifying payroll with the right tools
• FAQs on paying employees

Key takeaways

• Register for PAYE with HMRC before paying your first employee to avoid penalties of up to £3,000, and ensure you comply with minimum wage requirements of £11.44 per hour for workers aged 21 and over.
• Choose bank transfers (BACS) as your primary payment method since they're secure, cost-effective, and create clear digital records for both you and your employees.
• Implement cloud-based payroll software to automate tax calculations, National Insurance deductions, and Real Time Information submissions to HMRC, especially if you have 3-50 employees.
• Maintain detailed payroll records for at least three years, including employee pay, deductions made, HMRC reports, and payments, as these are legal requirements for UK employers.

Understanding your legal obligations when paying employees

Legal obligations for paying employees include registering for Pay As You Earn (PAYE), making correct deductions, and meeting minimum wage requirements. UK employers must comply with specific payment frequencies and reporting standards to avoid penalties.

Key legal requirements include:

• Minimum wage compliance: Pay at least £11.44 per hour for workers aged 21 and over
• PAYE registration: Register with HMRC before your first employee starts, although if your staff earns £120 a week or less, HMRC may not require you to set up a PAYE scheme.
• Tax and National Insurance: Deduct correct amounts from employee pay
• Pension auto-enrolment: Contribute to workplace pensions for eligible employees; if a scheme isn't set up within six weeks of your duties start date, you must backdate any contributions you've missed.
• Payment timing: Pay employees at agreed intervals, typically monthly or weekly

Setting up PAYE with HMRC

PAYE (Pay As You Earn) is the system for collecting income tax and National Insurance from employee wages. You must register before paying your first employee or face penalties of up to £3,000. Additionally, failure to comply with a statutory notice can lead to an escalating penalty notice with daily fines from £50 to £10,000, depending on staff numbers.

Follow these steps to register:

1. Gather required information: Company details, director information, and expected payroll start date
2. Register online: Use HMRC's online service or call the employer helpline
3. Receive your accounts office reference: HMRC will send your unique reference number
4. Set up payroll software: Choose a system that handles RTI (Real Time Information) submissions
5. Prepare for first payment: Ensure deductions and reporting are ready before payday

Payment methods for your employees

Employee payment methods include bank transfers, cheques, and cash payments. Bank transfers are the most common and secure option for UK businesses.

Available payment options:

• Bank transfer (Bankers' Automated Clearing Services, or BACS): most popular method, takes one to three working days, low cost
• Faster payments: Same-day transfers, higher fees, good for urgent payments
• Cheques: Declining use, can take 3-6 days to clear, higher administrative cost
• Cash payments: Limited to specific circumstances, requires careful record-keeping
• Prepaid cards: Useful for employees without bank accounts, involves card fees

Most small businesses choose bank transfers for their reliability and cost-effectiveness.

How often you need to pay employees

Payment frequency depends on your employment contract, but UK law requires payment at least monthly. Most businesses pay weekly, fortnightly, or monthly.

Common payment schedules:

• Weekly: Popular in retail and hospitality, higher administrative cost
• Fortnightly: Balances cash flow with admin efficiency
• Monthly: Most common for salaried employees, easier payroll management
• Four-weekly: 13 payments per year instead of 12, affects annual calculations

You can change payment frequency with employee agreement and proper notice. Always specify payment dates clearly in employment contracts.

Essential deductions from employee pay

Payroll deductions include income tax, National Insurance, and pension contributions. These are mandatory deductions that you must calculate and submit to HMRC.

Required deductions:

• Income tax: Varies by tax code, typically 20% basic rate, 40% higher rate
• Employee National Insurance: 12% on earnings between £12,570–£50,270 a year
• Pension contributions: Minimum 5% employee contribution (8% total with employer)
• Student loan repayments: 9% on earnings above £27,295 (Plan 2 loans)

Calculate deductions using HMRC's tax tables or payroll software. Submit deductions to HMRC by the 22 of each month.

Choosing the right payroll system

Payroll systems automate salary calculations, tax deductions, and HMRC reporting. Choose between manual calculations, payroll software, or outsourced services based on your business size and complexity.

System options:

• Manual payroll: Suitable for 1-2 employees, uses HMRC calculators, time-intensive
• Payroll software: Ideal for 3-50 employees, automates calculations and submissions
• Outsourced payroll: Best for complex requirements, full-service provider handles everything
• Accountant services: Combines payroll with broader financial management

Most small businesses benefit from cloud-based payroll software that integrates with accounting systems and handles RTI submissions automatically.

Step-by-step guide to paying employees

Once you're set up, running payroll follows a regular cycle. Following a clear process each pay period helps you stay organised and compliant.

1. Collect timesheets or confirm hours worked for each employee.
2. Calculate gross pay, including any overtime or bonuses.
3. Calculate the necessary deductions for tax, National Insurance, and pensions.
4. Generate payslips for each employee, using the Xero payslip template, and show their pay and deductions.
5. Make the net payment to your employees on the agreed payday.
6. Report your payroll information to HMRC on or before each payday.

Reporting requirements and record-keeping

As an employer, you have ongoing reporting and record-keeping duties. You must report your employees' pay and deductions to HMRC on or before each payday using a Full Payment Submission (FPS).

You also need to keep payroll records for at least three years from the end of the tax year they relate to. These records should include:

• What you've paid your employees and the deductions you've made.
• Reports you've made to HMRC.
• Payments made to HMRC.
• Employee leave and sickness absences.

Simplifying payroll with the right tools

Getting payroll right protects your business from penalties and keeps employees happy. Modern payroll software automates calculations, handles deductions, and ensures compliance with UK regulations.

With the right tools, you can run payroll in just a few clicks, giving you more time to focus on what you do best, running your business. Try Xero for free to streamline your employee payment process and focus on growing your business.

FAQs on paying employees

Here are answers to some common questions about paying employees.

What is the best way to pay employees?

For most small businesses, the best way to pay employees is through a direct bank transfer (BACS). It's secure, efficient, and creates a clear digital record of payments for both you and your employee.

What are the main types of payroll systems?

The main types of payroll systems are manual systems using HMRC tools, in-house payroll software, and outsourced services provided by an accountant or payroll bureau. Most small businesses find in-house payroll software offers the best balance of control, cost, and convenience.

Do I need to give my employees a payslip?

Yes, you must provide all employees with a payslip on or before their payday. The payslip must show their gross pay and a detailed breakdown of all deductions.