When you’re running a business, understanding how payroll calculations work is important, even if you’ve decided to outsource your payroll. You need to know what’s deducted and why to make sure your staff are paid correctly, your business stays compliant with HMRC, and there are no surprises come payday.
Here’s a simple guide on how payroll is calculated in the UK.
Gross Pay vs Net Pay
Let’s kick off with the basics. Gross pay is the total amount an employee earns before any deductions are made. This could include:
- Salary or hourly wages
- Overtime
- Bonuses and commission
- Statutory payments like sick pay, maternity, or paternity pay
Once these have been added up, then the deductions are applied to it so that the final net pay can be calculated. This is the amount that hits your employee’s bank account.
Key Payroll Deductions to Know
- Income Tax (PAYE)
This deduction is collected via HMRC’s Pay As You Earn system. Most employees are entitled to a tax-free personal allowance; anything above that is taxed at 20%, 40%, or 45%, depending on their earnings and location. It is really important that you use the right tax code here, as one wrong digit and you could be overpaying or underpaying tax.
- National Insurance Contributions (NICs)
Next up are the Class 1 NICs, which are taken from employee earnings. Employers also have to pay a separate contribution. It’s calculated based on a series of thresholds, which change most years, so staying up to date is key.
- Pension Contributions
This is another important deduction to consider, because if your staff are enrolled in a workplace pension, a portion of their earnings will be deducted, also as the employer, you will need to chip in. Auto-enrolment rules apply, and contribution rates are set by the government.
- Student Loan Repayments
If your employee has a student loan, deductions will be taken based on their earnings and plan type (Plan 1, 2, 4 or Postgraduate). These kick in when they earn above a certain limit.
- Other Deductions
Other common deductions can include salary sacrifice schemes (this allows employees to give up part of their pre-tax salary in exchange for non-cash benefits such as the cycle to work program, childcare, or even technology purchases.
Still Not Sure? Let Us Handle It
Payroll calculations might seem like a lot to handle, and that’s because they are! Getting it wrong can lead to underpayments, HMRC penalties, or unhappy staff.
That’s why many small businesses across the Highlands and the rest of the UK choose Highland Payroll Services. We take care of the calculations, compliance, and paperwork so you can focus on running your business.
Whether you’ve got one staff member or 50, we’re here to make payroll simple, accurate, and affordable. Let’s talk today about making your life easier.
