Payroll in the UK is a subject complicated for many foreign managers and companies that want to carry out business activities in the country.
For many companies, the UK has long been a popular ‘first stop’ on international expansion plans, due largely to the country’s efficient regulatory environment, and its vicinity with other European countries.
Sooner or later after you start a business in the UK, you will need to hire employees to work for your company. And to manage them efficiently, you have to understand many aspects related to payroll and the employment regulations.
That is why we prepared this guide to payroll in the UK, so to give you all the information to manage your employees’ taxes, social security, and more.
Proper financial management and recording keeping is essential for every company. Payroll is responsible for this and for making the appropriate payments to employees and tax authorities.
The payroll and payroll tax system in the UK is efficient and well developed. The legislation sets rules for the minimum wage and required tax and social security deductions. And there is a government-provided real-time online system for recording and collecting all payments from companies. The rules differ between workers and contracts, and companies are responsible for the accurate and timely calculation and payment.
Outsourcing payroll in the UK is popular. According to a 2020 report from the UK Chartered Institute of Personnel and Development (CIPD), payroll is the most commonly outsourced HR function, with around 39% of small businesses choosing to outsource in the UK.
Whether payroll is carried out in-house or outsourced, it remains the company’s legal responsibility to comply with UK payroll legislation. There are strict penalties for non-compliance or incorrect submissions. For example, not following the correct pension auto-enrolment procedures can lead to fines of between £400 and £10,000.
Several laws govern UK payroll and employee compensation. The main ones are:
- Employment Rights Act 1996. This sets out the primary legislation for all employees in the UK. Regarding UK payroll legislation, this includes contract types, authorized and unauthorized salary deductions, and entitlement to paid time off work.
- National Minimum Wage Act 1998. The UK has strong minimum wage legislation. This law sets out the regulations and application for minimum wage in the UK, but rates vary.
- Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000 and Agency Workers Regulations 2010. These two laws help to ensure equal and fair treatment (and pay) for these categories of workers.
- Income Tax (Earnings and Pension) Act 2003 and Income Tax Act 2007. These acts govern the payment of personal and payroll tax in the UK.
- National Insurance Contributions Act of 2015. This includes legislation for social security in the UK and payments and penalties for companies.
- Pensions Act 2008. UK employers are required to set up and contribute to a pension fund for staff, unless they opt-out.
These laws together govern payment of employment and the deductions that need to be made to this. Some additional specifics about payroll legislation in the UK that companies need to be aware of include:
- IR35 and contractor employment. The so-called IR35 regulations are essential for any company employing freelancers or contractors. These regulations are designed to prevent disguised employment, meaning additional taxes must be paid for such workers. From April 2021, the responsibility for assessing IR35 status will be with the employer (not the worker).
- Payroll legislation and the European Union. The UK is currently in the process of leaving the European Union. Many payroll and taxation laws in the UK are based on European regulations. Going forward, there could be changes to payroll legislation, or working time regulations. Employers in the UK are also likely to face changes if they operate payroll across Europe, as these regulations will change.
There is well-defined minimum wage legislation in the UK. Rules for minimum wage in the UK were first introduced in 1909, but only for specific industries and with plenty of exceptions. It was not until 1998 with the National Minimum Wage Act that there was legislation covering all workers and industries (this was initially set at £3.60, but has, of course, changed since then).
The minimum wage applies to all workers in the UK, whether they are paid hourly or on a fixed salary (it is then based on contracted hours). For the 2020/2021 tax year, the UK minimum wage applies as follows for different age groups:
- Apprentice worker (age under 19 or any age in the first year of the scheme): £4.15
- Under 18: £4.55
- 18 to 20: £6.45
- 21 to 24: £8.20
- 25 and over: £8.72
PAYE (Pay As You Earn) is the UK government’s scheme for collecting tax and national insurance from employees. Any company employing one or more employees needs to register for this, keep records, and submit full payment details through the PAYE system. It is administered by UK HMRC (HM Revenue and Customs).
Any employee taken on will have a tax code, required to register them as a new employee. This is either a new one dependant on their circumstances or an existing one from previous employment, (this is detailed on an employee’s P45 form).
Employers must submit all payroll information on or before the day staff are paid (through a system called Real Time Information). This is known as a Full Payment Submission (FPS). This is usually done monthly but can be done weekly. All payments due to HMRC through the PAYE system need to be paid by the 22nd of the month following the payroll date.
As well as standard salary, any other statutory payments to employees are also made through PAYE. This includes sick pay, maternity pay, paternity pay, and redundancy payments.
As part of PAYE submission, employers must calculate all social security and payroll taxes in the UK for each employee. These are then withheld from the payment to the employee and paid directly to HMRC through PAYE.
This includes the following main items.
Individual Income Tax (IIT)
All employees are taxed on a progressive scale as follows (these levels are correct for the 2020/2021 tax year but can change):
- The first £12,500 of income is tax-free (This is the personal allowance and can vary depending on individual circumstances)
- Basic rate tax for income between the personal allowance and £50,000 at 20%
- Higher rate tax for income between £50,001 and £150,000 at 40%
- Additional rate for income over £150,000 at 45%
If an individual has additional income other than the main salary, they will need to complete a personal tax return (usually a Self Assessment tax return) to declare any additional tax requirements. This is the individual’s responsibility.
IIT in Scotland. Companies operating in Scotland should also be aware that the Scottish government has the power to set different income tax bands and rates (although it has to keep the same personal allowance level). In the year 2020-2021, it adds two additional bands to tax levels, with the following rates:
- Starter rate for income between personal allowance and £14,585 of 19%
- Basic rate for income between £14.586 and £25,158 of 20%
- Intermediate rate for income between £25,159 and £43,430 of 21%
- Higher rate for income between £43.431 and £150,000 of 41%
- Top rate for income over £150,000 of 46%
Social Security Contributions
All employees must make social security payments in the UK. This is known as National Insurance. Contributions must be paid by both the employer and the employee. Both are collected through UK payroll.
- Employer National Insurance. This is set at 13.8% of all earnings above £732 per month. It is paid by the employer directly, not taken from wages.
- Employee National Insurance. This is deducted from employee salary through payroll. It is set as:
- No payment on income below £792 per month
- 12% for income between £792 and £4167 per month
- 2% for income over £4167 per month
Certain categories of employees are entitled to reduced National Insurance contributions. This includes (full details can be found on the government website):
- Employees under 21 – no employer contribution below £4167 per month
- Employees over state pension age – no employee contribution
- For employees who are already paying contributions in another job, employers only need to make contributions over £4,167 per month
All employers should offer a workplace pension for employees aged over 22 with a salary of over £10,000. Staff should be automatically enrolled in this unless they opt-out, and payment deducted through PAYE.
This is a contributory pension, where both employee and employer make payments. From April 2019, the minimum contribution is 3% from the employer and 5% from the employee. Various pension schemes can be chosen by the company (both government-backed and private), but these must meet specific requirements.
Student Loan Repayments
UK university graduates often have government loan repayments to make, and these are collected through UK payroll. The amount to pay depends on employee salary and the repayment plan the employee is on. The plan is based on nationality and when the course was started (see rules on the government website). This is:
- 9% of income over £19,390 on Plan 1
- 9% of income over £26,575 on Plan 2
- 6% of income over £21,000 for postgraduate loans
How NNRoad can help you with Payroll in the UK
As we saw in this article, payroll in the UK includes many aspects to consider and that can definitely impact your operations.
For companies expanding in the country, it is not easy to understand and manage payroll in the most efficient way. And the incomplete knowledge of the law can bring to mistakes and compliance problems.
We can support your company with full payroll outsourcing in the UK. We work in full compliance with local laws and practices and design a payroll package specifically based on your needs and requirements.