How payroll works

How payroll works in simple terms

Payroll is the process of paying employees and reporting the correct information to HMRC.

Each time you pay someone, several things happen behind the scenes:

• Their gross pay is worked out

• Deductions are calculated

• Net pay is confirmed

• Information is reported to HMRC

• You make the required payments

Here is how that works step by step.

Step 1: Gross pay is calculated

Gross pay is the total amount the employee earns before any deductions.

This may include:

• Salary

• Hourly wages

• Overtime

• Bonuses or commission

• Statutory payments such as Statutory Sick Pay

If someone is paid a fixed monthly salary, this step is usually straightforward. If they are paid hourly, you must confirm their hours before payroll is processed.

Step 2: Deductions are calculated

From gross pay, payroll calculates deductions. These may include:

• Income Tax under PAYE

• Employee National Insurance

• Pension contributions

• Student loan repayments

• Other agreed deductions

The amount deducted depends on the employee’s tax code, earnings level and personal circumstances.

Step 3: Net pay is confirmed

Net pay is the amount the employee actually receives after deductions.

This is the figure you pay into their bank account on payday.

Employees receive a payslip showing:

• Gross pay

• Each deduction

• Net pay

Step 4: Information is sent to HMRC

Every time employees are paid, payroll information must be reported to HMRC using Real Time Information. This is done on or before payday.

The main report is called a Full Payment Submission. It tells HMRC:

• Who has been paid

• How much they were paid

• How much tax and National Insurance was deducted

More information about reporting payroll to HMRC is available here:
https://www.gov.uk/running-payroll/reporting-to-hmrc

Step 5: You make payments

As an employer, you are responsible for:

• Paying employees their net pay

• Paying HMRC the tax and National Insurance collected, plus employer National Insurance

• Paying pension contributions to your pension provider

HMRC payments are usually due monthly, although some small employers can pay quarterly.

What Mazuma does and what you do

When Mazuma runs your payroll:

• We calculate pay and deductions

• We prepare payslips

• We submit payroll information to HMRC

You must:

• Provide accurate information on time, such as hours worked or changes to pay

• Approve payroll where required

• Pay employees on time

• Pay HMRC and pension contributions by the deadlines

Payroll is not just about paying wages. It is a legal reporting process with strict deadlines, so timely and accurate information is essential.