PAYE – Pay As You Earn – is how HMRC collects income tax and National Insurance from employees before they’re paid. As the employer, you calculate the deductions, pay them to HMRC, and report everything through Real Time Information (RTI). RTI means you submit a Full Payment Submission (FPS) every time you run payroll – on or before the pay date. Not monthly in bulk. Every pay run.

Most payroll software automates FPS submission. But understanding what’s being sent and when it’s due is your responsibility. FPS deadlines are absolute. HMRC’s system flags late submissions automatically. There’s no grace period for “I didn’t know.”

New Employer Checklist – Do This Before Your First Pay Run

• Register as an employer with HMRC and receive your PAYE reference number
• Set up RTI-compliant payroll software
• Collect each employee’s P45, or have them complete a new starter checklist
• Confirm tax codes with HMRC before processing the first payment
• Decide and lock in your pay frequency (weekly or monthly)
• Check employee age and circumstances – under-16s and those past state pension age have different NIC rules

There are two separate calculations per pay period: income tax through PAYE, and National Insurance contributions. Different thresholds, different rates, calculated independently – but usually paid to HMRC in one combined payment.

Understanding Income Tax and the Monthly Personal Allowance

For 2025-26, each employee gets a Personal Allowance of £12,570 per year – £1,047.50 per month. Earnings below this aren’t taxed. Above it, income tax applies at 20% up to £50,270/year, then 40% beyond that.

Monthly Calculation Example (£2,500/month salary)

That’s the income tax you deduct and send to HMRC. The tax code on the payslip – usually 1257L – is how payroll software knows to apply the £12,570 allowance. A different code means a different allowance figure.

Employer NIC UK: The 2026 Rate Changes Are a Structural Shift

National Insurance splits into two parts – what employees pay, and what you as the employer pay on top. Both run through your payroll. Both go to HMRC. But they use different thresholds, and that gap matters for cash flow planning.

Total cost of employment isn’t just salary. For a £2,500/month salary, here’s the real cost:

What’s Changing in April 2026

Two things are happening at the same time, and both hit your payroll costs:

Pakistani founders and NRPs running UK-registered businesses can manage UK payroll entirely from Pakistan. HMRC doesn’t require a physical UK office or your presence in the country – what they require is proper HMRC employer registration, RTI-compliant payroll software, and FPS submissions on or before every UK pay date.

Cloud-based payroll software is the only practical way to stay RTI-compliant without a UK postal address. You need a platform that submits FPS automatically, keeps digital records, and flags issues in real time. Software that relies on physical reminders or desktop-only access won’t work when you’re 5,000 miles away.

Worker Classification: Get This Right Before Onboarding

If you’re paying UK contractors rather than employees, the distinction between employed and self-employed affects your entire payroll setup. Misclassifying a worker means backdated NICs, interest, and potential penalties. It’s one of the most common and costly mistakes remote employers make. Get this right before onboarding anyone.

Every payslip carries a tax code. Most employees will be on 1257L – the “L” signals they get the standard Personal Allowance, and the number multiplied by ten gives the tax-free amount (1257 × 10 = £12,570).

Standard Deductions on a UK Payslip

All of the following need to be correctly set up in your payroll software before the first run:

• Income tax via PAYE – applied using the employee’s tax code
• Employee National Insurance contributions – 8% above £1,047.50/month
• Student loan repayments – Plan 1, 2, 4, or Postgraduate; each has different thresholds
• Workplace pension contributions – auto-enrolment applies once the employee earns above £10,000/year

The monthly PAYE process becomes routine once setup is right – tax codes applied, RTI submissions automated, NIC thresholds built into your payroll software. What doesn’t become routine is the cost impact of the 2026 NIC changes. For any founder with UK headcount, that needs factoring into hiring plans now, not next spring.

If you’re an NRP managing this remotely, the system works as long as you’ve got the right software and a D-1 submission habit in place. The timezone gap and FPS deadline are the most avoidable risks in your entire payroll process.

For the full picture on your legal duties as a UK employer – what HMRC requires you to report, when, and what triggers penalties – read our detailed guide on PAYE obligations. It covers the compliance framework that sits underneath everything in this article.