UK payroll: PAYE, National Insurance and RTI explained

What PAYE, National Insurance and RTI actually are

Pay As You Earn (PAYE) is the system HMRC uses to collect Income Tax and National Insurance from wages before the employee is paid, which is why most UK workers never file a return for their salary. National Insurance sits alongside it as two separate charges: one deducted from the employee, one paid by the employer on top of gross pay. Real Time Information (RTI) is how you tell HMRC what you did — an electronic submission sent on or before every pay day, not a single return at year end.

If you pay anyone you are inside this system, including paying yourself as the sole director of your own company. The duties are the same at one employee as at fifty: register with HMRC, calculate gross to net correctly, report each pay run under RTI, handle pension contributions, and pay HMRC by the 22nd of the following month.

This guide covers 2026/27 — the rates applying from 6 April 2026 to 5 April 2027.

Registering as an employer with HMRC

Register before the first pay day, not after it. You cannot send an FPS without the PAYE reference and Accounts Office reference that registration produces, it takes several working days, and HMRC lets you register up to two months ahead.

You must register as soon as any of these is true of someone you pay:

• They earn at or above the Lower Earnings Limit, even if no tax or NI is actually due
• They have another job, or draw a pension
• They receive benefits in kind or expenses as part of the job
• You appoint a director — including yourself

A company paying its only director £1,000 a month is above the Secondary Threshold and squarely inside PAYE. "I only pay myself" is not an exemption.

If you pay everyone once a year in the same tax month you can ask HMRC to treat the scheme as annual — but annual schemes lose the concession that excuses a first late filing.

PAYE tax codes explained

A tax code tells payroll how much tax-free pay to give someone each period. Get it wrong and your employee is either overtaxed for months or handed a bill they did not expect. The number is the tax-free amount with the last digit removed; the letter describes the circumstance.

A K code runs in reverse: instead of subtracting tax-free pay it adds a notional amount to taxable pay, so K475 adds roughly £4,750 a year. A regulatory limit stops PAYE taking more than 50% of gross pay in any period.

An emergency code is 1257L on a week 1 / month 1 basis, shown as W1, M1 or X. It gives the full periodic allowance but ignores everything earned earlier in the year, so it never claws back and never refunds. It stays until HMRC issues a cumulative code on a P6 notice.

Prefix S marks a Scottish taxpayer and C a Welsh one, set by HMRC from the employee's address. Suffix M means the employee received Marriage Allowance, N that they transferred it away. Never change a code because an employee asks — only a P6 or P9 notice, or a current-year P45, is authority.

National Insurance rates and thresholds for 2026/27

Employees pay 8% between the Primary Threshold and the Upper Earnings Limit, then 2% above it. Employers pay 15% on all earnings above the Secondary Threshold, with no upper limit.

The Secondary Threshold is what catches new employers out. At £5,000 a year it sits far below the employee's £12,570, so the business pays 15% on a band of earnings that costs the employee nothing. Class 1A on benefits in kind and Class 1B on PAYE Settlement Agreements are both 15%.

Every employee also needs a category letter, which decides whether those rates apply in full. These are the ones a small employer is most likely to meet.

Letters H, M, Z and V reduce or remove employer NI up to the relevant upper threshold; they do not change what the employee pays. Leaving a 20-year-old on letter A instead of M means paying 15% employer NI you never owed.

Employment Allowance, and the sole-director trap

Employment Allowance is £10,500 for 2026/27. It reduces your employer's secondary Class 1 bill until used up — not a cash payment, simply no employer NI to pay until the allowance is exhausted.

Businesses, charities and community amateur sports clubs can claim. The £100,000 previous-year liability restriction was removed from April 2025, so size is no longer a barrier.

The exclusion that still catches people is the sole-director rule. A company cannot claim if the only employee paid above the Secondary Threshold is a director, so a one-person limited company paying itself £30,000 gets nothing. Add a second employee earning above £5,000 and the whole allowance becomes available.

The claim goes on an EPS and must be renewed every tax year. It does not carry forward, and a forgotten renewal is a silent overpayment of up to £10,500. If the salary and dividend mix is what you are weighing, our dividend calculator models the trade-off.

A worked gross-to-net example for 2026/27

Take an employee on £36,000 a year, paid £3,000 monthly, tax code 1257L cumulative, NI category A, a Plan 2 student loan, and enrolled in a workplace pension under a net pay arrangement at the statutory minimum. Work through it in order, because the order changes the answer.

1. 1Pension first. Qualifying earnings are £3,000 less the monthly lower limit of £520, so £2,480. The employee's 5% is £124.00, taken from gross before tax.
2. 2Then Income Tax. Pay for tax purposes is £2,876.00. One twelfth of the personal allowance is £1,047.50, leaving £1,828.50 taxable at 20% — £365.70.
3. 3Then National Insurance, charged on gross pay and not reduced by a net pay pension. £3,000 minus the £1,048 monthly Primary Threshold is £1,952, at 8% — £156.16.
4. 4Then the student loan. The Plan 2 threshold of £29,385 is £2,448.75 a month. £3,000 minus that is £551.25, at 9% is £49.61, rounded down to the whole pound — £49.

The employer's side never appears on the payslip. Employer NI is £3,000 less the £417 monthly Secondary Threshold, so £2,583 at 15% — £387.45. Employer pension is 3% of £2,480 — £74.40. The true cost of this employee is £3,461.85 a month, or £41,542.20 a year against a £36,000 salary.

Employer NI of £387.45 a month is £4,649.40 across the year — comfortably inside the £10,500 Employment Allowance, so a qualifying employer pays none of it.

Real Time Information: what an FPS and an EPS contain

RTI has two returns and they do different jobs.

A Full Payment Submission (FPS) reports a pay run and is due on or before the day you pay, not at month end. Each one carries, per employee: name, National Insurance number, address and date of birth; the tax code and whether it is cumulative; payment date and pay frequency; taxable pay and tax for the period and year to date; the NI category letter and earnings split across the Lower Earnings Limit, Primary Threshold and Upper Earnings Limit bands; employee and employer NI; student loan deductions; pension contributions; statutory payments; starter and leaver indicators; and hours worked.

An Employer Payment Summary (EPS) reports the things that reduce what you owe, or the absence of a pay run altogether. It is due by the 19th of the following tax month and covers statutory payment recovery and compensation; CIS deductions suffered by a limited subcontractor — see our CIS deductions guide; your Employment Allowance claim; a "no payment for period" declaration; and any period of inactivity up to twelve months.

You send an FPS every time you pay someone, and an EPS only when there is something to say. But if you paid nobody in a tax month and send nothing at all, HMRC reads that as a failure to file — a nil EPS is not optional.

Starters, leavers and student loan deductions

When someone joins with a P45 from the current tax year, use the code and year-to-date figures on it. If the P45 is from an earlier year the figures are stale, so use the code on a week 1 / month 1 basis.

With no P45, use HMRC's starter checklist. The employee picks one of three statements, and the statement sets the code:

• Statement A — first job since 6 April, no other income: 1257L cumulative
• Statement B — only job now, but they have had another since 6 April: 1257L week 1 / month 1
• Statement C — they have another job or a pension: BR

No P45 and no checklist means 0T week 1 / month 1, which usually makes the paperwork appear. Report the starter on your first FPS with the start date and declaration; HMRC sends a P6 if it disagrees.

The checklist also captures the student loan plan.

An employee can be on a plan and a postgraduate loan at once, in which case both deductions run. Never guess the plan — take it from the checklist, the P45 or an SL1 notice, and stop only on an SL2.

For a leaver, put the leaving date on the final FPS and produce the P45 from payroll. Do not send it to HMRC separately; the FPS is the report. Anything paid after the P45 is issued goes through on 0T week 1 / month 1, flagged as a payment after leaving.

Statutory payments, and what you can reclaim

Recovery is where employers quietly lose money by not asking. Statutory Sick Pay cannot be reclaimed at all — the Percentage Threshold Scheme was abolished in 2014, and SSP is a straight cost to the business.

Family-related payments are different. Most employers reclaim 92% of statutory maternity, paternity, adoption, shared parental and parental bereavement pay. If your total Class 1 NI for the previous tax year was £45,000 or less, Small Employers' Relief applies and you reclaim 100% plus 9% compensation, so 109%. That compensation rate rose from 3% to 9% on 6 April 2026, so check your payroll settings if they were configured before then.

You claim on an EPS, and it reduces the PAYE you remit that month rather than arriving as a refund.

Automatic enrolment in practice

Pension duties begin the day your first member of staff starts work. There is no waiting period and no minimum headcount.

You must assess every worker, every pay period, because someone's category changes the moment their age or earnings move:

• Eligible jobholder — aged 22 to State Pension age, earning above the £10,000 trigger. Enrol automatically and contribute.
• Non-eligible jobholder — right age but below the trigger, or above it but aged 16 to 21 or over State Pension age. They can opt in, and you must contribute if they do.
• Entitled worker — earning below the £6,240 lower limit. They can ask to join, but you need not contribute.

Postponement delays assessment by up to three months, which helps with short-term staff. It does not remove the duty: you must issue a postponement notice, and if the worker asks to join during it you must enrol them anyway.

Contributions are 8% of qualifying earnings in total, of which the employer must pay at least 3%. Qualifying earnings for 2026/27 are the band between £6,240 and £50,270 — £520 to £4,189 a month. Where the employer pays only the 3% minimum, the employee makes up the remaining 5%, which under a relief-at-source scheme is 4% from net pay plus 1% added by HMRC as tax relief.

Three duties are easy to miss. An enrolled employee can opt out within one month and must get a full refund. You must file a declaration of compliance with The Pensions Regulator within five months of your duties start date. And every three years you must re-enrol everyone who opted out and still qualifies, then re-declare.

Directors' National Insurance

Directors have an annual earnings period however often they are actually paid, so NI is worked out against annual thresholds rather than monthly ones.

Under the annual, or standard, method a director pays no NI until cumulative earnings pass £12,570, then 8% up to £50,270, then 2%. A director on £4,000 a month pays nothing for three months, then takes a large deduction in month four. That is correct, but it surprises people.

The alternative method works NI out on each payment as though the director were an ordinary employee, then recalculates annually in the final pay period to land on the same total. Cash flow is smoother; the year-end figure is identical. You choose per director at the start of the year and cannot switch mid-year.

Employer NI follows the same logic against the annual Secondary Threshold of £5,000, and a director appointed part-way through the year gets a pro-rata threshold based on the tax weeks remaining. A director-only payroll cannot claim Employment Allowance, so that 15% is a real cost — one reason owner-managers weigh salary against dividends and settle the rest through self assessment.

Benefits in kind, P11D and payrolling

Anything of value given to an employee beyond cash pay is likely a taxable benefit: company cars, fuel, private medical cover, interest-free loans above £10,000, gym memberships.

The traditional route is a P11D per employee receiving benefits, plus a P11D(b) declaring the employer's Class 1A liability, both due by 6 July after the tax year ends. Class 1A is 15% for 2026/27, payable by 19 July or 22 July electronically.

Payrolling benefits is better where it is open to you: register with HMRC before the tax year starts, then tax the benefit through payroll each period. The employee pays as they go instead of through a changed code the following year, and you drop the P11D for those benefits — though the P11D(b) still goes in.

Reporting benefits in kind through RTI becomes mandatory from 6 April 2027 in a first phase, with most remaining benefits following in April 2028 and loans and accommodation staying voluntary for now. The original April 2026 start was deferred. If you provide benefits at all, 2026/27 is the year to get payrolling working while it is still optional.

Year end, payment deadlines and penalties

If your average monthly PAYE and NI liability is under £1,500 you can arrange to pay quarterly instead. Our tax deadline calendar sets these dates alongside VAT and Corporation Tax.

Late filing penalties are charged monthly and scale with the size of the scheme:

The first late filing in a tax year is not penalised — unless you registered as an annual scheme, where it is. Penalties are issued quarterly, so a habit that slipped in April surfaces as a bill in July. Late payment of PAYE carries separate penalties that rise with the number of defaults in the year, plus interest.

How Marchant fits into UK payroll

Marchant does not run the pay calculation or file RTI itself. UK payroll works through a BrightPay sync: BrightPay handles the pay run, the gross-to-net calculation and the FPS submission to HMRC, and Marchant takes it from there:

1. 1Payslips and payroll journals flow back into your ledger automatically
2. 2Staff costs land in your P&L without re-keying
3. 3Pension and NI postings stay linked to the pay run that produced them

The result is that payroll and bookkeeping stay reconciled without a monthly export-and-import ritual — you keep a specialist payroll tool for the filing, and your books stay current. The £3,461.85 monthly cost in the example above is one gross figure, one employer NI figure and one employer pension figure, each belonging in a different place in the accounts.

French and German payroll integrations are on the roadmap, and French and German payroll accounting is part of the 2028 launch rather than something Marchant covers today. See our cross-border accounting guide for what one workspace covers, read what the UK product includes, see how Marchant compares to QuickBooks, and start a free trial to connect your books.