Running a payroll is one of the most important responsibilities for any employer. It’s about far more than simply paying employees on time.
With recent changes introduced in the Employment Rights Act 2025, ongoing updates to tax legislation and the continued importance of the off-payroll working rules (IR35), payroll has become increasingly complex for many businesses.
In this guide, we’ll explain what payroll taxes include, highlight the key payroll changes affecting employers in the 2026/27 tax year and provide an overview of the off-payroll working rules for businesses that engage contractors.
What are payroll taxes?
Payroll taxes are the taxes and statutory deductions that employers calculate, collect, report and pay whenever they process payroll. They are essential to employing staff and ensuring your business complies with HMRC requirements.
For most businesses, payroll includes:
- Income Tax through PAYE.
- Employee and employer National Insurance contributions.
- Workplace pension contributions.
- Statutory payments.
- Student loan deductions where applicable.
- Taxable employee benefits.
- Payroll reporting to HMRC.
What taxes does payroll include?
Income Tax and PAYE
Income Tax is one of the main deductions made through payroll. Under the Pay As You Earn (PAYE) system, employers must deduct Income Tax from employees’ pay before it is paid and send those deductions to HMRC.
Employees receive a Personal Allowance before paying Income Tax, after which their earnings are taxed according to the relevant Income Tax bands.
Employers are responsible for:
- Applying the correct tax code.
- Calculating tax accurately.
- Deducting Income Tax.
- Reporting payroll information to HMRC.
- Making tax payments by the required deadlines.
Errors in PAYE can result in penalties, additional administration and unnecessary disruption for both employers and employees.
National Insurance Contributions
Alongside Income Tax, employers must calculate both employee and employer National Insurance contributions. Employee National Insurance is deducted from pay through payroll, while employer National Insurance represents an additional employment cost paid by the business.
Since 6 April 2025, there have been changes to National Insurance contributions. The employer contribution rate increased from 13.8% to 15%, while the Secondary Threshold reduced from £9,100 to £5,000. In 2026/27, the employer NI rate remains fixed at 15%, with the Secondary Threshold maintained at £5,000 per annum. Both are frozen until at least the 2030/31 tax year.
As National Insurance rates and thresholds continue to evolve, businesses should regularly review staffing costs, recruitment plans and payroll budgets to understand the financial impact.
Workplace pensions
Every employer has a responsibility to operate workplace pensions in accordance with the auto-enrolment rules, with the introduction of unannounced compliance visits by the Pension Regulator, the need to adhere to the regulations are greater than ever. Payroll systems should identify eligible employees, calculate pension contributions accurately and ensure payments are made to the pension provider on time whilst keeping records of all of these for at least six years.
Employer pension contributions are one of the most tax-efficient employee benefits available. By offering workplace pensions, businesses attract and retain talented employees while supporting long-term financial well-being.
Statutory payments
Payroll also includes processing statutory payments where employees meet the qualifying conditions.
These include:
- Statutory Sick Pay – from first day of sickness
- Statutory Maternity Pay
- Statutory Paternity Pay
- Statutory Adoption Pay
- Shared Parental Pay
- Statutory Parental Bereavement Pay
- Statutory Neonatal Care pay
Each payment has its own eligibility criteria and calculation method, making accurate payroll processes essential.
Employee benefits
Many employers provide additional benefits as part of an employee’s remuneration package. These might include private medical insurance, company cars, accommodation or beneficial loans.
Some benefits are taxable, while others may be exempt depending on the circumstances. Employers are responsible for correctly reporting taxable benefits and ensuring that any associated tax liabilities are dealt with appropriately. From April 2027 Cars, Vans, fuel and private medical will be required to be reported in real time through the payroll software.
National Minimum Wage and National Living Wage
To protect low-paid workers, employers must ensure that their staff receive at least the legal minimum hourly rate for their age and employment status. From 1 April 2026, the National Living Wage increased to £12.71 per hour for workers aged 21 and over, while the National Minimum Wage rose to £10.85 for those aged 18 to 20, and £8.00 for workers under 18 and eligible apprentices.
Payroll legislation changes
Payroll legislation changes regularly, making it important for employers to review their payroll processes each year. Some of the most significant payroll changes affecting businesses include changes to National Insurance contributions, updated National Minimum Wage rates, revised statutory payment rates and annual tax threshold updates. Since 6 April 2026 UK employers are legally required to keep detailed annual leave and holiday records for six years. Failure to comply is a criminal offence that can be penalised by the new Fair Work Agency.
Before the beginning of every new tax year, employers should ensure they:
- Update payroll software.
- Review tax codes.
- Check National Insurance thresholds.
- Confirm National Minimum Wage rates.
- Review workplace pension contributions.
- Understand any new rules affecting payroll reporting.
Taking time to review payroll before the start of the financial year can reduce administration, improve accuracy and help businesses remain compliant throughout the year.
Keeping up with payroll legislation can be demanding. If you would like support ensuring your payroll remains compliant, our payroll specialists at Edwards can help.
What are off-payroll taxes?
While most employers focus on paying their employees correctly, businesses that engage contractors also need to understand the off-payroll working rules, commonly known as IR35.
Off-payroll taxes relate to the off-payroll working rules (IR35), which apply when contractors provide their services through their own limited company or another intermediary, rather than being employed directly.
The rules are designed to ensure that individuals working in a similar way to employees pay broadly the same Income Tax and National Insurance Contributions (NIC) as employees. If the rules apply, the organisation responsible for paying the contractor may need to deduct Income Tax and National Insurance before making payment and report these deductions to HMRC.
When do the off-payroll working rules apply?
The off-payroll working rules can apply when a worker provides services through their own limited company, another intermediary or certain umbrella companies, rather than being employed directly.
Whether the rules apply depends on the worker’s employment status, not the contract title or the way invoices are submitted.
The rules can involve several parties, including:
- The worker providing the services.
- The worker’s intermediary, often a personal service company.
- The end client receiving the services.
- An agency, where one forms part of the supply chain.
If an organisation determines that the rules apply, it must issue a Status Determination Statement, setting out the reasons for its decision. The organisation responsible for paying the contractor’s fees may then need to deduct Income Tax and National Insurance contributions before making payment and report those payments to HMRC.
While the rules are most relevant for businesses that regularly engage contractors, they can be complex, so it’s important to assess each engagement individually and seek professional advice where needed.
If you are unsure whether the off-payroll working rules apply to your business, our payroll team at Edwards can help you determine the correct position and understand your obligations.
Common payroll mistakes employers should avoid
Even well-organised businesses can make payroll errors, particularly as tax legislation changes from one tax year to the next.
Some of the most common mistakes include:
- Missing payroll reporting deadlines.
- Applying the wrong tax code.
- Calculating National Insurance contributions incorrectly.
- Forgetting to update payroll software following threshold changes.
- Paying below the National Minimum Wage.
- Failing to enrol eligible employees into a workplace pension.
- Misclassifying contractors under the off-payroll working rules.
- Poor record keeping.
- Not reviewing payroll when new rules are introduced.
These mistakes can lead to additional tax, interest, penalties and unnecessary administration. Carrying out regular payroll reviews and following the latest HMRC guidance can help employers reduce risk and remain compliant.
Benefits of outsourcing payroll
As payroll becomes more complex, more businesses are choosing to outsource it to experienced payroll specialists such as Edwards Accountants. Payroll outsourcing benefits will ensure that:
- Employees are paid accurately and on time.
- HMRC reporting deadlines are met.
- You keep up with upcoming changes and new rules.
- You’ll achieve payroll compliance.
- Administration is reduced.
- Payroll risk is minimised.
- You receive expert payroll support and guidance.
- As your business grows you can scale payroll more easily.
Whether you employ five people or fifty, outsourcing payroll provides reassurance that your payroll responsibilities are being managed accurately and professionally.
How Edwards Chartered Accountants can help
Managing payroll doesn’t have to be complicated. At Edwards Chartered Accountants, we provide reliable payroll services for businesses across Walsall, the West Midlands and beyond. Whether you’re employing your first member of staff or managing an established workforce, we’ll ensure your payroll is accurate, efficient and fully compliant.
Our payroll specialists can help with:
- PAYE and payroll processing.
- Income Tax and National Insurance contributions.
- Workplace pensions and auto-enrolment.
- Statutory payments.
- HMRC payroll reporting.
- Payroll compliance and record keeping.
- Advice on the off-payroll working rules where relevant.
By outsourcing your payroll to Edwards, you’ll reduce administration, gain access to experienced payroll professionals and have confidence that your employees are paid correctly every time.
If you’re looking for trusted payroll accountants who can support your business as it grows, we’d be delighted to help.
Contact Edwards Chartered Accountants today to discuss our payroll services and discover how we can simplify payroll while helping your business remain compliant.
Payroll Frequently Asked Questions
What are payroll taxes?
Payroll taxes are the taxes and deductions employers calculate and report when paying employees. They include Income Tax, National Insurance contributions, workplace pension deductions and certain statutory payments. Employers are responsible for reporting these to HMRC through PAYE.
Who is responsible for applying the off-payroll working rules?
In most private-sector engagements, the end client is responsible for determining whether the rules apply, unless the small company exemption applies. Where the exemption applies, responsibility generally remains with the worker’s intermediary. Different rules apply in the public sector.
What records should employers keep for payroll?
Employers should keep accurate payroll records, including employee details, earnings, payments, tax codes, National Insurance contributions, pension deductions and HMRC submissions. Good record keeping supports compliance and makes responding to HMRC enquiries much easier.
Why do businesses outsource payroll?
Many businesses outsource payroll to save time, reduce administration and ensure payroll remains accurate as tax legislation changes. Professional payroll providers also help employers stay up to date with new rules, minimise compliance risk and avoid costly payroll errors.