Oliver Bennett
Getting to grips with the payslip
When you take on your first employee, one of the first things you will need to do is produce a payslip. It is not just a nicety — it has been a legal requirement to give every employee and worker an itemised payslip since April 2019, and it must be issued on or before the day they are paid. A compliant payslip shows the pay period, the employee's name and National Insurance number, gross pay, any variable hours worked, and every deduction listed separately with the amount taken.
The good news is that once you understand what sits behind each line, payslips stop feeling like a mystery. What follows is a plain-English walkthrough of the main deductions, so you can run payroll with confidence and explain it clearly when your team asks questions.
Income tax and PAYE
Most employees pay income tax through PAYE (Pay As You Earn), which means you deduct it from their wages and send it to HMRC on their behalf. Each employee has a tax code, and the most common one is 1257L. That code represents the standard Personal Allowance of £12,570 for the 2025/26 tax year — the amount they can earn before paying any income tax.
Above that, the rates are:
- Basic rate 20% on earnings up to £50,270
- Higher rate 40% on earnings between £50,271 and £125,140
- Additional rate 45% on anything above that
The code matters enormously. If you use the wrong one, your employee will pay too much or too little. When someone starts, ask for a P45 from their previous job, or use HMRC's starter checklist if they do not have one. Emergency codes such as BR (all income taxed at basic rate) or a W1/M1 suffix mean the tax is worked out week by week rather than cumulatively, which can cause a nasty shock later. Always check a new starter's code before running your first payroll.
National Insurance contributions
National Insurance is separate from income tax and is worked out on each pay period. For 2025/26, employees pay 8% on earnings between £12,570 and £50,270, and 2% on anything above that.
As an employer, you also pay National Insurance on top of your employee's wages. The rate is 15% on earnings above the secondary threshold of £5,000 a year, and it is a genuine cost of employment, not something you can deduct from pay. Many small employers can offset some or all of this with the Employment Allowance, currently worth up to £10,500 a year, provided you are eligible. It is well worth checking, because for a small team it can wipe out the employer NIC bill entirely.
Do not forget you must report payroll information to HMRC through Real Time Information (RTI) on or before each payday, even if no tax is actually due.
Workplace pensions
Auto-enrolment means you must put eligible staff into a workplace pension and contribute towards it. An employee is generally eligible if they are aged between 22 and State Pension age and earn more than £10,000 a year. Minimum contributions are 8% of qualifying earnings, of which at least 3% must come from you as the employer, with the employee making up the rest. Qualifying earnings for 2025/26 sit between £6,240 and £50,270.
You can choose to base contributions on full salary rather than qualifying earnings, and some employers do this as a recruitment perk. Whatever you decide, the pension deduction must be shown on the payslip, and staff can opt out — but you must not encourage them to.
Student loans and other deductions
Other deductions appear less often but need handling carefully. Student loan repayments are collected through payroll once earnings pass the relevant annual threshold, and there are different plans depending on when and where the employee studied. You must also deduct repayments for Postgraduate Loans where applicable.
Beyond that, deductions might include:
- Statutory sick pay, maternity, paternity or shared parental pay — these are payments, not deductions, but they change the gross figure
- Salary sacrifice arrangements, such as a cycle-to-work scheme or extra pension contributions
- Voluntary deductions like childcare vouchers, union subs or a staff loan repayment
One firm rule: you cannot make a deduction from wages unless it is required by law, allowed by the employee's contract, or agreed in writing beforehand. Getting that wrong can lead to tribunal claims, so keep a written record of anything you agree.
Explaining it all to your team
Take-home pay is rarely the number an employee expects on day one, and that gap causes most payroll queries. A short conversation at the start prevents a lot of grief later. Walk them through their gross pay, then each deduction in turn, and finish on the net figure that lands in their bank account.
If someone's pay varies — because of overtime, tips, commission or variable hours — explain that tax is calculated cumulatively across the tax year, so a big month does not necessarily mean a permanently higher tax bill. Encourage staff to check their payslip each month and come to you with questions before going to HMRC directly. A little transparency goes a long way towards building trust, and it makes your payroll run smoother too.
