How Do You Calculate Taxes on Payroll? (2025 UK Guide)

Running payroll for your business? It’s not just about paying salaries. It’s about calculating the right taxes for your employees and yourself. From PAYE income tax to National Insurance, this guide explains how to calculate taxes on payroll in the UK, and what you need to get it right in 2025.

Key Takeaways

• Payroll tax calculations start with gross pay and then deduct employee taxes like PAYE and National Insurance.

• Employers must also pay their share, including Employer NI and pension contributions.

Start with Gross Pay

Gross pay is the total amount an employee earns before any deductions like tax, National Insurance, or pensions.

It includes:

• Basic salary or hourly wage

• Overtime

• Bonuses or commissions

• Statutory payments (e.g. sick pay, holiday pay, maternity pay)

This is the starting figure you use to calculate all payroll taxes.

Example: If an employee earns £2,000 in salary and £200 in overtime, their gross pay that month is £2,200.

Calculate Employee Payroll Taxes

After calculating gross pay, the next step is to work out the taxes you need to deduct from your employee’s pay. These are the two main payroll taxes every employer is responsible for:

• Income Tax (PAYE): Based on the employee’s tax code and earnings. You can use HMRC tax calculator or a payroll calculator software to calculate it.

• National Insurance (NI): Employees start paying NI once they earn over £242 per week or £1,048 per month in 2025/26.

Calculate Employer Payroll Taxes 

Payroll taxes don’t just apply to your employees, as an employer, you also have to pay your share. These costs are added on top of gross pay and come out of your business.

Here are the key employer payroll taxes:

• Employer National Insurance (NI): You must pay 15% on most employee earnings over £5,000 per year or £417 per month (new rate from April 2025).

• Apprenticeship Levy (for larger employers only): This tax applies only if your total payroll exceeds £3 million a year. Most small businesses don’t need to worry about it.

Note: While pensions are part of payroll, they’re not classed as a tax but are still legally required if your employee is enrolled. You must contribute at least 3% of qualifying earnings.

Not sure if you’re getting it right? One small payroll mistake can lead to big headaches. If you’d rather focus on running your business, BOOK A QUICK FREE CALL with JAFA today. We’ll make sure the numbers are sorted.

What We Think

Payroll taxes might seem simple, but they’re often confusing, especially for small business owners.

You need to know how tax codes work, when to apply for National Insurance, and how much to pay on top as an employer. The rules change often, and it’s easy to get confused or make a mistake without meaning to.

We think the system puts too much pressure on small businesses to get everything right with little support. Mistakes can lead to fines or unhappy employees just for getting a number wrong.

How JAFA Can Help

At JAFA, we take the pressure off small business owners by handling payroll from start to finish. Our team ensures your tax codes are accurate, National Insurance is calculated correctly, and all deadlines are met, so you don’t have to worry about making costly mistakes.

We stay up to date with changing payroll rules and provide clear, friendly guidance when you need it. 

If payroll has been causing stress or holding you back, let’s fix that. BOOK A FREE CALL today with our expert accountants and find out how JAFA can save you time, reduce risk, and give you peace of mind.