Payroll and Tax in the U.K.: An Overview for Global Employers

You've expanded to the U.K., congrats! Now comes the less glamorous part: figuring out a brand-new tax code so you can stay compliant. Where do you start? Right here, with everything you need to know to set up payroll in the U.K.

Mandatory payroll taxes and contributions in the U.K.

Employers and employees in the U.K. must pay National Insurance Contributions (NICs), contribute to a pension scheme, and pay taxes on benefits-in-kind (BIKs) if applicable. Also, employers must withhold and remit income tax from their employees' gross pay.

National Insurance Contributions (NICs)

NICs fund state programs that provide income to individuals who are unemployed, ill, retired, on maternity leave, or on bereavement leave.

Employer NIC rates vary based on the employee's national insurance category letter. However, most employees fall under category A, corresponding to a 13.8% employer tax.

Employees in the U.K. who earn more than £242 a week must also pay NICs. While employee NIC rates vary based on the employee's insurance category letter, most employees fall under category A, corresponding to a 12% tax on their weekly earnings between £242 and £967 and 2% on weekly earnings above £967.

Workplace pension

U.K. employers must enroll their employees in a workplace pension scheme, and both parties are subject to contributing to the scheme.

While pension contribution rates vary depending on the employer's chosen pension scheme, employers must pay at least 3% of the 8% minimum tax.

Under rare circumstances, employees may be exempt from contributing to the pension, such as when they are from an EU state and participate in a cross-border pension scheme. However, most employees between 22 and the state pension age who earn at least £10,000 annually in the U.K. must contribute to the workplace pension.

Benefits in kind (BIKs)

BIKs are perks that benefit employees personally without any clear, identifiable business purpose. For instance, private medical insurance, personal phone plans, a company car, and entertainment expenses are all taxable BIKs.

Employers contribute 13.8% of the monetary value of taxable BIKs provided to their employees.

Employees must also pay taxes on BIKs. Employee tax rates vary depending on the value and nature of the benefit. For instance, employers must treat cash bonuses, such as Christmas bonuses, as additional employee earnings and make appropriate deductions on the employee's behalf via PAYE.

Learn more: Guide to Employee Benefits in the U.K.

Employee income taxes

Employers do not contribute to employee income taxes but are responsible for withholding and remitting this tax on behalf of their employees. Income taxes in the U.K. vary according to the employee's income bracket and the region in which they work-England, Wales, Northern Ireland, or Scotland.

Employees across the U.K. receive a personal allowance of £12,570, with few exceptions, meaning they do not pay income tax on the first £12,570 of their annual earnings.

Employee income tax bands in England, Wales, and Northern Ireland differ from those of Scotland, as outlined in the tables below:

Income tax bands in England, Wales, and Northern Ireland

Income tax bands in Scotland

How is payroll tax calculated in the U.K.?

To calculate payroll taxes and contributions in the U.K., first determine your employee's gross pay. Then, calculate employment tax liability for NICs, workplace pension, BIKs if applicable, and employee income tax as specified percentages of the employee's gross pay.

Most employers in the U.K. must calculate and remit payroll taxes via the federal Pay As You Earn (PAYE) system.

Remember to factor payroll taxes into your total employee cost calculations when building a distributed workforce in the U.K. since payroll taxes and contributions amount to per-employee costs on top of base salaries.

Interested in hiring an employee in the U.K.? Use our employee cost calculator below to accurately calculate payroll contributions and annual costs for your talent in the U.K.

Elements of U.K. payroll

As a foreign employer doing business in the U.K. or hiring employees in the U.K. understanding local payroll is critical for maintaining compliance and avoiding fines, litigation, and other penalties.

Here are some things to keep in mind:

• Payroll cycle. The payroll cycle in the U.K. can be daily, weekly, bimonthly, or monthly, depending on the employer's preferences. However, most businesses process payroll on a monthly cycle.
• Minimum wage. As of April 2023, the national minimum wage is £7.49 per hour for 18 to 20-year-olds, £10.18 per hour for 21 to 22-year-olds, and £10.42 for those over 23. Rates change each April, which is the start of the U.K.'s fiscal year.
• Overtime. Employees in the U.K. only have to work overtime if their work contract requires it, and they don't have to work over 48 hours per week without agreeing to it in writing. Employers do not have to pay a higher rate for overtime, but they should specify their overtime rates in their work contracts beforehand.
• Termination. The statutory minimum notice period in the U.K. is from one to 12 weeks, depending on the employee's length of service with the company. However, employers and employees can agree on longer notice periods in their work contracts.
• Severance. Severance pay is not required in the U.K. except in instances of redundancy, in which case employees are entitled to one-half week's pay for each year of employment up to the age of 22, one week's pay for each year after 22, and one and a half week's pay for each year after 41. A week's pay is subject to a statutory cap, which is £643 as of April 2023.
• Annual leave. Employees who work five-day work weeks are entitled to at least 28 days' paid annual leave, although some employers offer more.
• Maternity leave. Mothers are entitled to 52 weeks of paid maternity leave at 90% of their average weekly earnings (AWE) for the first six weeks, and either £172.48 or 90% of their AWE for the following 33 weeks-whichever is lower.
• Paternity leave. Fathers are entitled to two weeks of paid paternity leave at £172.48 per week or 90% of their AWE, whichever is lower.
• Parental leave. Both parents are entitled to 18 weeks of unpaid leave to look after a child's welfare up to the child's 18th birthday, capped at four weeks per year.
• Sick leave. Employees are entitled to 28 weeks of Statutory Sick Pay (SSP) at £109.40 per week, depending on their eligibility.

How to set up payroll in the U.K.

While the exact payroll process varies depending on individual circumstances, this is a general idea of what to expect:

• Register as an employer. Register your business with HM Revenue and Customs (HMRC) and obtain a PAYE login.
• Determine your payroll software. If you run payroll yourself, you must choose suitable payroll software for recording employee details, calculating pay and deductions, and reporting all PAYE information online to HMRC.
• Determine salaries and ensure compliance. Determine appropriate salaries for each role, and determine the accurate withholdings and contributions for NIC, Workplace Pension, BIK, and employee income tax.
• Calculate deductions and pay employees. Calculate and withhold deductions from employee earnings, pay employees according to your established schedule, and provide employees with a payslip indicating their net earnings and with holdings.
• Keep records and report. Keep records of all employee payments, deductions, and payslips and report them to the HMRC in a Full Payment Submission (FPS).
• Report new employees. Establish relevant details for new employees, such as their tax code, and register each new employee with the HMRC using an FPS.

Payroll options for employers in the U.K.

When administering payroll in the U.K., foreign companies generally take one of the following approaches: internal payroll, local payroll outsourcing, and global payroll outsourcing.

Internal payroll

Global companies with established entities in the U.K. may choose to hire local talent to create in-house finance teams that run payroll for their workforce in the country.

Internal payroll requires thorough knowledge of local employment and payroll regulations, leaving the employer fully responsible for compliance. If you choose this route, consider obtaining proper legal counsel to reduce risk exposure.

Local payroll outsourcing

Outsourcing payroll to a local payroll processing firm in the U.K. is another option. These firms handle the entire payroll process, including calculations, payments, and filings, on your behalf.

This may decrease your workload, but it offers limited access and can result in payment errors or delays. If you plan to hire talent in multiple countries, you may work with several local payroll providers with different methods and systems, adding even more complexity and restricting access further.

Global payroll outsourcing

Lastly, global companies with entities in the U.K. may choose to outsource payroll to a global payroll partner. An international payroll partner is well versed in global payroll and tax legislation, including in the U.K., that runs payroll for your international employees.

Typically, a global payroll partner coordinates with local payroll vendors on your behalf and streamlines payroll processes into a single management system to help reduce errors and inefficiencies when paying a distributed workforce.

How to administer payroll in the U.K. without entity establishment

To directly hire and pay U.K. talent, global businesses must establish a legal entity in the country. But some may want to test the market before establishing a permanent presence. Additionally, some businesses may want to employ U.K. talent before the lengthy process of entity establishment is complete.

These scenarios are the perfect time to use an employer of record (EOR). An EOR allows businesses to legally engage and pay employees internationally without establishing a local entity.

Ready to simplify payroll with Pebl?

Now you have a grasp of how payroll taxes work in the U.K. So, you're ready to handle it yourself. Just make sure you don't make any mistakes with the complex (and sometimes shifting) tax laws, or you'll find yourself in legal trouble. Wouldn't it be great if there were an easier way?

Well, with Pebl, there is.

We combine Employer of Record services, payroll, benefits management, and compliance. We have local entities in 185+ countries worldwide and can start hiring immediately. We handle payroll and all related taxes, setting you up with a centralized system that you and your talent can access in near real-time, anywhere in the world. Our local, country-specific experts are second to none.

When you're ready to hire in the U.K. or across the globe, contact us.

Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided "as is," and no representations are made that the content is error-free.

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