Running payroll in the United Kingdom

Despite the uncertainties and complications that persist in the aftermath of Brexit, the United Kingdom remains a popular hiring destination for international employers. However, having UK employees working for you also means having to deal with local payroll complexities. There are several ongoing compliance requirements with regard to filing and paying payroll taxes and fines for missed deadlines can be quite hefty.

There is no formal requirement to set up a local legal entity in order to hire someone in the UK. However, employers need to complete a registration for the national PAYE (Pay- As-You-Earn) system. This can usually be done via the HMRC (Her Majesty’s Revenue and Customs) website - that is if the employer has local partners in the UK which can provide the necessary reference numbers. Employers need to register before the first payday - possible up to 2 months before the intended first payment. Processing times can be up to 5 working days. 

After the registration, the HMRC issues an employer PAYE reference number / tax code as well as an online access to the PAYE system for electronic filing purposes. It is also necessary to inform the HMRC about new hires - usually employees will have the P45 form from their previous employer which contains the necessary tax code and further payroll-related information. For new hires without previous employment, the HMRC provides a starter checklist. 

Employers who intend to hire workers aged between 22 and state pension age who will earn more than GPB 833 per month (GBP 192 per week) further need to register with a pension scheme to which they must add eligible employees (“automatic enrollment”). Another legal requirement for employers is to take out an Employers Liability Insurance. 

There is no legal requirement to set up a local bank account as any payroll-related payments can be issued from an overseas account.

The UK’s National Insurance system is funded by contributions made by both employees and employers. In addition, certain employees need to be registered with a separate pension fund. The tax system is progressive with a 45% top rate. 

Tax considerations

UK tax residents are taxed on their worldwide income while non-residents only have to pay tax on income sourced in the UK. The tax system is progressive. The basic rate is 20%, the higher rate is 40% and then there is an additional rate of 45%. There is a standard personal tax allowance of GBP 12,570 (valid for the 2021/2022 and the 2022/2023 tax year). 

The tax year in the UK runs from 6 April to 5 April of the following year.

* Please note: Different tax bands and rates apply to employees in Scotland. 

Tax withholding and reporting

Employers are responsible for deducting and withholding their employees’ income tax at source and submit it to the HMRC via the PAYE system. There are several ongoing filing requirements linked to this process which employers need to fulfill during each tax month. 

On the actual payday (or even before if payroll is processed earlier), employers need to submit the Full Payment Submission (FPS) to the HMRC which lists all the payments made to employees as well as the deductions that have been made. The total amount that needs to be submitted (income tax as well as national insurance contributions - see next section) will show in the employer’s online account on the HMRC website from the 12th of the following month. 

To claim any possible reductions of the amount they owe, employers have to submit an Employer Payment Summary (EPS). This includes reimbursement for paid maternity or paternity benefits and more. The deadline for the EPS is the 19th of the following month. The amount owed to the HMRC should be updated within 2 days. 

As a last step, employers make the payments to the HMRC. This can be done until the 22nd of the month following the payday via a local or a foreign bank account, online transactions and more. Penalties arise in case of late payment - or in case of missed filing deadlines. Depending on the amount that needs to be paid to the HMRC, employers may be eligible for quarterly payments. 

For employees who receive benefits or have expenses paid by the company, employers also need to file an end-of-year report to HMRC (P11d form). The deadline for the P11d is 6 July. 

Social security contributions

Employers and employees both contribute to the National Insurance scheme. The National Insurance Contribution (NIC) rates are currently set at 13.8% for employers and at 12% (with an additional 2% surcharge - see table below) for employees. Those are the general rates which apply to the majority of the employees. However, there are different National Insurance classes which are attributed to employees depending on their employment status and earnings. It is worth noting that employers also pay NIC on their employees’ expenses and benefits. National Insurance payments are made together with the PAYE payments for income tax.  

As mentioned before, employers also need to register their employees with an additional pension fund if they fulfill the necessary criteria (see section “Setting up payroll in the United Kingdom”). The minimum contribution for employers is 3%. Employees have to contribute at a rate of 5% of their income - unless they decide to opt out. The payment and filing requirements will depend on the chosen pension scheme. 

The table below shows an overview of the different contributions (rates valid as of January 2022).

* Please note: The UK government has announced a temporary 1.25% increase of the NICs for the tax year running from 6 April 2022 to 5 April 2023. 

Employees in the United Kingdom are entitled to various benefits. These include:

• Annual leave and public holidays: 28 days of paid annual leave - public holidays may be included in an employee’s annual leave entitlement

• Maternity leave: up to 52 weeks

• Paternity leave: up to 2 weeks

• Parental leave: up to 50 weeks - of which a maximum of 37 weeks are paid

• Sick leave: up to 28 weeks starting with the 5th sick day

For more information on employee benefits and other employment requirements in the United Kingdom (including severance pay and termination procedures), check out our Global Hiring Guide.

The minimum wage which must be paid depends on the employee’s age and on whether they are serving an apprenticeship or are fully-qualified employees. From April 2022, the minimum wage rates will be as follows:

• Apprentices and employees under 18: GBP 4.81 per hour

• Employees aged 18 to 20: GBP 6.83 per hour

• Employees aged 21 to 22: GBP 9.18 per hour

• Employees aged 23 or older: GBP 9.50 per hour
  

Please note that minimum wage rates are adjusted every year (new rates enter into force on 1 April). There is no legal obligation for employers to provide overtime pay. However, an employee’s average hourly compensation (taking into account any additional hours) must not be lower than the national minimum wage. It’s not mandatory to pay a 13th salary.

Payroll frequencies in the UK vary and can be daily, weekly, fortnightly or monthly. The most popular option is to process payroll once a month. At the end of the pay period, employers have to provide employees with a payslip showing: 

• Earnings before and after any deductions

• Detailed overview of the deductions

• Working hours - only for employees with hourly wages 

Payslips can either be provided in electronic or paper form. In addition, the employer also has to compose an income tax statement for each employee (P60 form). The statement has to be provided to every employee by 31 May (either in paper form or digital). 

Payments to employees can be made using several payment methods. Bank transfers can also be issued from an overseas bank account. Payroll records must be kept for 3 years. Employers failing to do so risk fines of up to GBP 3,000.