Paying employees correctly is essential. This article explains how to enable Xero payroll, connect to HMRC, import employee data, set up pay calendars, run a test pay run and finalise a live pay run. It also covers automated taxes, pension contributions and the benefits of Single Touch Payroll for real‑time reporting.

Stuart Kerr | Published 04/11/25 | Updated 04/11/25

 

Xero’s payroll module turns a complex process into a straightforward workflow. Whether you have one employee or dozens, the setup is similar. Here’s how to get started.

Enable payroll and connect to HMRC

In Xero, go to Settings → Payroll settings and enable the payroll module. Enter your business’s PAYE reference and Accounts Office reference and authorise Xero to communicate with HMRC. Set up your pay calendars (weekly, fortnightly or monthly) and choose pay period start and end dates. According to Progression Accountancy, connecting to HMRC allows Xero to submit Real Time Information (RTI) reports automaticallyprogressionaccountancy.co.ukprogressionaccountancy.co.uk.

Add employees

You can add employees manually or import them from a CSV file. For each worker, enter personal details, tax codes, National Insurance category and year‑to‑date pay and tax figures if they are joining mid‑year. Set up pay items such as salary, wages, overtime rates and reimbursements. Make sure to record pension status for auto‑enrolment. Xero will calculate student loan deductions and National Insurance contributions automaticallyprogressionaccountancy.co.uk.

Configure pay calendars and leave

Once employees are added, assign them to the appropriate pay calendar. You can create multiple calendars if some staff are paid weekly and others monthly. Set up holiday and sick leave entitlements, and decide whether leave accrues in days or hours. Xero integrates leave requests with payroll so that approved leave appears automatically on payslipssaasant.com.

Run a test pay run

Before processing your first live payroll, do a dummy pay run. Select the pay calendar and employees, enter the pay period, and click Preview. Check calculations for gross pay, tax, National Insurance and pension contributions. Progression Accountancy suggests running a test ensures your settings are correct and gives you confidence before you submit figures to HMRCprogressionaccountancy.co.uk.

Process a live pay run

When you’re ready, create a new pay run with the correct period and review any overtime, bonuses or deductions. Xero automatically calculates statutory sick pay and maternity leave and allows manual adjustments for unpaid leaveprogressionaccountancy.co.uk. After approving the run, Xero files the Full Payment Submission (FPS) with HMRC and creates journals to post wages, taxes and pension contributions to your accountsprogressionaccountancy.co.ukprogressionaccountancy.co.uk. Generate bank payment files to upload to your online banking for easy payment. Employees receive payslips via email or the Xero Me app, and you can publish payslips automaticallysaasant.com.

Embrace automation and STP compliance

Xero handles tax tables and thresholds, ensuring that PAYE and National Insurance calculations stay current. It can also manage auto‑enrolment pension contributions through integrations with pension providers. Single Touch Payroll (STP) reporting sends payroll information to HMRC each time you pay employees, improving accuracy and reducing end‑of‑year reportingsaasant.com.

Setting up payroll in Xero requires some initial configuration, but once it’s running, the software automates calculations, submissions and journal entries. This not only saves time but also helps you stay compliant with HMRC and gives your employees clear, professional payslips.

About the Author

Stuart Kerr, Partner in Bookkeeping Packages. You can contact him on stuart@bookkeepingpackages.co.uk.