The system for calculating and distributing employee compensation.
Payroll is the process of calculating each employee's earnings for a pay period, deducting income tax, National Insurance and other authorised amounts, paying the net figure and reporting the run to HMRC. The reporting and the payslip are outputs of the run itself, not administration that follows it.
A payroll run is a sequence, and the order is not negotiable: each stage consumes the output of the one before it. A run can balance internally and still be wrong because two steps were swapped.
The step most often mishandled is the third. Salary sacrifice and pension contributions taken under a net pay arrangement reduce the figure that tax is calculated on, so applying them after the statutory deductions silently overtaxes the employee and leaves the payslip internally inconsistent. Inputs matter just as much: a tax code notice that arrives after the cut-off is not a small variance, it changes every subsequent figure in the run.
The run's outputs are also plural. A payroll run does not end when the bank file goes out — it ends when the employee has a payslip and HMRC has the submission for that pay period.
| Stage | What it produces |
|---|---|
| 1. Collect inputs | Hours, overtime, commission, unpaid absence, starters and leavers, tax code changes |
| 2. Build gross pay | What the employee has earned for the period |
| 3. Apply pre-tax adjustments | The taxable figure (salary sacrifice, net pay arrangement pension) |
| 4. Calculate statutory deductions | Income tax and employee National Insurance |
| 5. Apply post-tax deductions | Net pay |
| 6. Report and pay | FPS to HMRC, payslip to the employee, payment instruction to the bank |
The figures below are illustrative arithmetic, not rates. The income tax an employee pays depends on their tax code and the thresholds in force for the tax year; National Insurance depends on their category letter. Both must be taken from current HMRC guidance for the year being run, never carried over from a previous payslip.
Take a monthly-paid employee on gross pay of £3,000. A salary sacrifice pension contribution of £150 comes off first, leaving £2,850 as the taxable figure. Suppose the run then calculates £300 of income tax and £150 of employee National Insurance on that figure, and the employee also has a £50 post-tax deduction. Net pay is £2,850 − £300 − £150 − £50 = £2,350.
The misleading number is the £3,000. It is neither what the employee receives nor what the employer spends. The employee sees £2,350. The employer pays the £3,000 plus employer National Insurance and its own pension contribution — costs that never appear on the employee's payslip. A headcount budget built from salary figures alone understates the real cost of the team, which is why 'payroll cost' and 'total salaries' are not interchangeable.
Net pay = Gross pay − pre-tax adjustments − income tax − employee National Insurance − post-tax deductions
Payroll in the UK is a reporting duty, not just a payment. Employers must report their pay and deductions to HMRC in a Full Payment Submission (FPS), which GOV.UK lists among the steps to take on or before employees' payday. The submission belongs to the run, not to a tidy-up afterwards.
The payslip carries the same timing. Payslips must be provided on or before payday, and must show earnings before and after any deductions, the amount of any deduction that may change each time — tax and National Insurance being the obvious examples — and, where pay varies depending on time worked, the number of hours worked. Deductions that are fixed in amount must be explained on the payslip or in a separate written statement.
That hours requirement is the one organisations with shift, hourly or zero-hours staff most often miss. If pay varies with time worked, a payslip showing only a total fails the requirement even when the total is arithmetically correct.
Treating payroll as data entry with a deadline is the distinction that causes the damage. A late finance report is a late report. A late or wrong payroll run underpays a worker, misstates a statutory submission and breaches the pay statement rules at once, from a single mistake.
Corrections behave differently from the rest of finance, too. An error found after payday cannot simply be netted off next month: the period it belongs to has already been reported, so the record held for that period has to be corrected alongside the employee's money. Fixing the cash and not the report leaves the two out of step, and the gap usually surfaces at year end, when it is slowest to unpick.
This is why ownership matters more than tooling. A controlled run has a published cut-off for inputs, a named approver who signs off the gross-to-net output before it is committed, and a record of what changed between the draft and the final version. Where that approval step is missing, the organisation learns about its errors from the employee.
Gross pay is what an employee has earned in the pay period before anything is taken off. Net pay is what reaches their bank account after income tax, National Insurance and any other authorised deductions. A payslip must show both — earnings before and after any deductions — because the two figures answer different questions, and neither one is the employer's actual cost, which also includes employer National Insurance and employer pension contributions.
Employers must report their pay and deductions to HMRC in a Full Payment Submission (FPS), which GOV.UK lists among the steps to take on or before employees' payday. The same on-or-before rule applies to payslips: they must be provided on or before payday. Neither obligation can be deferred to a month-end catch-up after the money has already gone out.
Earnings before and after any deductions; the amount of any deduction that may change each time the employee is paid, such as tax and National Insurance; and, where pay varies depending on time worked, the number of hours worked. Deductions that are fixed in amount must be explained either on the payslip itself or in a separate written statement.
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