As one of the world’s primary financial and investment centers, the U.K. is a top location for global companies looking to expand or hire abroad.
Global companies can enjoy the high ease of doing business in the country, engage a diversely skilled workforce, and gain quick entry to new markets—among other benefits.
Still, understanding the ins and outs of payroll in the U.K. is critical for success.
Read on for an overview of payroll tax in the U.K., learn your options for setting up payroll for local talent, and discover how to mitigate risk along the way.
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.
We outline each of these payroll taxes and contributions in detail below.
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 a European Union (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
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | over £125,140 | 45% |
Income tax bands in Scotland
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Starter | £12,571 to £14,732 | 19% |
| Basic rate | £14,733 to £25,688 | 20% |
| Intermediate rate | £25,689 to £43,662 | 21% |
| Higher rate | £46,663 to £125,140 | 42% |
| Additional rate | over £125,140 | 47% |
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.
Key elements of United Kingdom payroll
As a foreign employer doing business in the U.K. or hiring employees in the U.K. understanding the key aspects of local payroll is critical for maintaining compliance and avoiding fines, extensive litigation, and other penalties.
Key aspects of local payroll in the U.K. include but are not limited to the following:
- 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.
- Parental leave. For the birth, adoption, and care of a new child, employees in the U.K. receive the following leave entitlements as of April 2023:
- 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 outline gives you a general idea of what the payroll procedures in the U.K. entail:
- 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 withholdings.
- 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
Global companies with entities in the U.K. may also consider outsourcing payroll to a local payroll processing firm in the U.K. instead. These firms handle the entire payroll process, including calculations, payments, and filings, on your behalf.
This option may decrease your workload, but it offers limited visibility into the payroll process and can result in payment errors or delays. Plus, if you plan to hire talent in multiple countries, you may work with several local payroll providers with different processes and software systems, siloing your payroll information and decreasing visibility even more.
Global payroll outsourcing
Lastly, global companies with entities in the U.K. may choose to outsource payroll to a global payroll partner. A global payroll partner is well versed in international 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. before entity establishment
To directly hire and pay U.K. talent, global businesses must establish a legal entity in the country. But businesses have various global expansion goals, and some may want to test the market before establishing a permanent presence there. Additionally, some businesses may want to employ U.K. talent while undergoing the lengthy process of entity establishment.
In cases like these, global businesses can partner with an employer of record (EOR) to hire and pay local talent without first establishing an entity. An EOR allows businesses to legally engage and pay employees internationally without entities or fear of violating local labor and tax laws.
Think of an EOR as your global HR team who has expertise in international employment laws and payroll regulations and handles compliant onboarding and payroll administration on your behalf—all while you maintain the day-to-day management responsibilities of your team.
An EOR partner not only runs compliant global payroll but also handles HR tasks like benefits administration, talent relocation, and ongoing support to provide an ideal solution for businesses building distributed teams or eyeing expansion into multiple markets.
Learn more: What Is an Employer of Record (EOR)?
Simplify payroll and taxes in the U.K. with Velocity Global
Don’t let the challenges of entity establishment or U.K. payroll regulations prevent you from testing the market or hiring top local talent. With the right partner, expanding into the U.K. is simple.
Velocity Global’s Employer of Record (EOR) solution enables global businesses to hire and pay U.K. talent without first establishing an entity. Our solution also reduces the complexities of running payroll for supported employees in the U.K. and beyond by consolidating payroll into one workforce management platform—facilitating quick, accurate, and compliant payroll and reporting for distributed teams in more than 185 countries.
Shed the burden of engaging, paying, and managing remote employees in the U.K. by turning the heavy lifting and compliance risk over to us.
Contact Velocity Global today to learn how to quickly and compliantly hire and pay talent in the U.K. and beyond with ease.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is," and Velocity Global makes no representations or warranties concerning this information.
