How Does Payroll Work?

Posted on Wednesday, 8th Jun '22

Duane Jackson by Duane Jackson

Understanding how payroll works is a vital part of doing business. All company owners should have some understanding, regardless of whether they will be involved with the payroll process itself. From knowing what employee information is needed to carry out payroll, understanding the law regarding how much you should pay them, and how many shy away from the broad subject of payroll. But this need not be the case. To ensure your company operates well within the UK pay legislation, read our guide to payroll basics.

UK Payroll Law

Aside from ensuring you have happy employees who get paid correctly, the essential aspect of payroll is to make sure your business abides by all UK payroll laws – everything from paying minimum wage to accurately filing pay information with HMRC.

UK Minimum Wage

In 1999, The 1998 National Minimum Wage Act came into force and is designed to protect workers from pay exploitation and is updated – and usually increased – with each new tax year. For the 2021/22 tax year, the following rates apply:

Apprentices£4.30 per hour
Under 18£4.62 per hour
Aged 18-20£6.56 per hour
Aged 21-22£8.36 per hour
Aged 23 +£8.91 per hour

The minimum wages for the 2022/23 tax year that comes into effect from 1st April 2022 are as follows:

Apprentices£4.81 per hour
Under 18£4.81 per hour
Aged 18-20£6.83 per hour
Aged 21-22£9.18 per hour
Aged 23 +£9.50 per hour

These are the minimum amounts that all employers must pay their employees.

Statutory Pay

Another aspect of UK payroll law to be aware of is statutory pay. All employees are entitled to this but, in some cases, only after they have worked for the company for a certain period. Types of statutory pay in the UK are:

  • Parental leave (maternity, paternity, adoption, shared parental leave)
  • Sick pay
  • Parental bereavement pay
  • Redundancy pay

Again, the statutory pay rates are updated and usually increased with each tax year.

Workplace Pensions

Following The Pension Act, passed in 2008, all employees in the UK should also have access to a workplace pension. Employers are obliged to automatically enrol their employees into a pension scheme as long as they are between 22 and the state pension age and earn more than £10,000 annually. Both parties pay into the pension account unless the employee(s) opts out. However, any employee who chooses to opt out should have the option to enrol every three years.

What Employee Information do you Need for Payroll?

As well as signing contracts and carrying out an induction, payroll is one of the first things that needs sorting when a company hires a new employee.

Regarding what employee information is required, make sure you ask for their P45 – unless it is their first job.

P45 for Payroll

When they have left their previous job, an individual should soon receive a P45 form from their old employer containing all the information needed for the new employer to process their pay.
HMRC use the information on a P45 to find the individual’s tax code and National Insurance band, which then reveals how much you should deduct from the employee and the employer.

Sometimes employees have difficulties in receiving their P45 from their old employer. IIn this case, or perhaps it is the employee’s first job, the new employer must find and supply all the required information to HMRC. It can be sent either online or via post. See the new starter checklist for the entire list of information needed

How Does Payroll Work?

When stripped down to the nuts and bolts, payroll works when employers supply the pay information of their staff to HMRC through payroll software. The software then processes the individual’s pay details, including deductions for tax, National Insurance, pension contributions, and anything else. After calculations are complete, employees are paid their wages/salary from the company after taking all necessary deductions.

Processing Payroll

To accurately process payroll, you must enter all the required information into software compatible with HMRC’s PAYE (Pay As You Earn) system.


The PAYE system first was put in place in the 1940s. However, it is only in recent years that software options have been made available to process all the required information. HMRC provides a list of software compatible with PAYE – some of which you pay for, and some are free.

The reason companies need to use PAYE-compatible software is because this collates and provides all the required data in ‘real time’, known as RTI (Real Time Information).

Finding the Right Payroll Software

Choosing payroll software can be a minefield for new businesses not familiar with payroll, with over 100 to choose from, all of which will have a slightly different offering.

One thing to consider when finding the right payroll software is scalability. Ideally, software should be able to grow with your business, so if, in the future, you foresee expansion and the hiring of more employees, your software should be able to cope with this.

At Staffology, we design our software. We carefully built it to integrate with other accounting software, such as Sage, Xero, and nest. Our API makes it easier for employers to keep track of all their financial and payroll information.

Switching to a New Payroll Software

Well-established businesses that have already been carrying out payroll for employees may at some point feel the need to change their software. Maybe because the company has grown, and the existing software used cannot cope with the increasing number of staff, or it could be if the current software presents problems.

Often, business leaders find switching payroll software daunting because they believe it will be complex and time-consuming. The experience of moving to a new option does not need to be so.

At Staffology, we make it as easy as possible to move across. Our seamless API technology means that we can offer inter-app communication with other accounting software, and it takes no time to get started.

One customer said:

“We need to send data from our own systems to you. It was a breeze to set up and maintain”.

Once you decide to use Staffology, we will usually be able to transfer all your employee information from your existing software to our software. Therefore, we will have all the payroll data needed to offer automated payroll whenever needed. There is no need to enter information again and again with each payment run.

How Staffology Helps

Understanding how payroll works can help any business leader. With some knowledge of payroll, it’s possible to ensure you adhere to all UK payroll laws. Whether you’re a small business and the owner carries out your payroll or a large one with a dedicated payroll team, scalable software like Staffology will make all the difference. Find out more about the features of our service to see how we will support your business.

Duane Jackson, June 8th, 2022

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