Payroll in UK

What is payroll in the UK?

Payroll in the UK encompasses onboarding, payments, benefits like pension and health insurance, deductions, compliance, and taxes for full-time employees and contractors. 

Companies who want to onboard employees in the UK can open an entity and partner with a PEO service, or skip the process of opening an entity and use a global EOR provider like Via. 

Payroll in the United Kingdom can be a difficult process to set up, as you need to perform specific employee payroll deductions, as well as have the right software to record and track payroll taxes.

Here is a guide of everything employers and employees need to know about establishing payroll in the United Kingdom.

UK payroll can either be run monthly or weekly depending on what works best for your business. However, you will need to keep an accurate track record of all payments and deductions, reported monthly for submission either quarterly or annually. Employers have the option of directly depositing employees paychecks into their accounts or giving them hard-copy checks.

Payroll taxes in the UK

Like many European countries, the UK provides many social security benefits through payroll taxes.

Tax year

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

Minimum wage

The minimum wage in the UK depends on the age of the employee:

• 23 and over: $9.50 GBP

• 21-22: $9.18 GBP

• 18-20: $6.83 GBP

• Under 18: $4.81

Social security

All businesses operating in the UK must pay into the National Insurance Contribution (NIC) which is the country’s social security program. These deductions should come directly out of the employer’s payroll.

Employers typically pay around 13.8% on top of employees total compensation, while employees contribute a flat 12%.

Payroll contributions for the NIC vary depending on the employee's income and plan, but these funds are mostly for medical plans, statutory maternity leave, and sick leave.

Corporate tax

In the UK, the corporate income tax rate is a flat 19% for almost all businesses. Employers need to deduct this directly from their payroll.

VAT

The standard value added tax or sales tax on most goods and services including imports and exports is a flat rate of 19%.

However, some goods and services (like domestic fuel) have a reduced VAT rate of 5% on domestic fuel. Some items even have a reduced rate of 0%, such as food and children’s clothes items.

Income tax

Individual income tax rates will range anywhere from 0%-45% and are entirely dependent upon the employee’s salary. The individual tax bands for income tax rates in the UK tell employees how much they can expect to be deducted from their pay.

Employee Income Tax

• 0%: Up to $12,570 GBP

• 20%: $12,571 GBP – $37,700 GBP

• 40%: 37,700GBP – $150,000 GBP 

• 45%: Over $150,000 GBP

Working hours

The standard working hours in the UK are Monday-Friday at 40 hours per week. This cannot exceed an average of 48 hours per week over 17 weeks.

Overtime

Any work over 48 hours must be paid at an overtime wage. The amount of overtime pay should be stipulated in the employment contract.

When an employee is required to work overtime, the employer must make this request in writing.

Paid time off

For full-time employees, the paid time off they receive is 28 days per year. National and bank holidays are included in this leave.

There are 8 public holidays in England, Wales, and Scotland, and 10 in Northern Ireland.

Sick days

Employees may receive up to 28 sick days per year. This is considered Statutory Sick Pay and compensated at $99.35 GBP per week.

Employees must provide a medical certificate for any sick days over 7.

Maternity leave

New mothers are entitled to 52 weeks of maternity leave, split into 26 weeks of ordinary leave and 26 weeks of maternity leave.

Employees are not required to use all of their leave, but they must take at least 2 weeks following the child's birth.

Employees are compensated at 90% of their weekly earning through the Statutory Maternity Fund for up to 39 weeks and $156.66 GBP or 90% of their weekly earnings for the rest of their leave.

Paternity leave

New fathers are entitled to 1 or 2 weeks of paid paternity leave at 90% of the employees average weekly earnings.

Options for setting up payroll in the UK internally vs. externally

Paying UK employees from a foreign country

To pay employees from a foreign country like the United States, there are a few options.

Foreign companies can use a remote payroll system that runs out of the parent company, team up with a third-party outsourced payroll provider or global PEO company, or partner with a global EOR service like Via that handles the entire process.

Setting up internal payroll

For companies that have a commitment to opening an entity or establishing a business presence in the country, running payroll internally makes sense. This option does require setting up an entity, which can take a few months and requires in-depth knowledge about tax laws.

In addition to compliance, you will need to hire an internal HR team and management team. This is a good option for larger companies that have a commitment to expanding in the country.

Setup a PEO/have another company run payroll

Another option is to use a PEO service that handles payroll and hiring, or to use an internal payroll processing company. Both of these services handle all of the payroll and make sure the right deductions are being made.

However, PEO services and internal processing companies do not take full responsibility for legal compliance. So, if anything were to go wrong, the parent company would still be liable. This is also considered a co-employment model, so the parent company will still need to set up an entity within the country.

Fully outsource payroll and benefits with an EOR like Via

Finally, you can hire employees using a global EOR service like Via. EOR services handle payroll, benefits, and hiring in a legally compliant way. An EOR service already has entities in the United Kingdom and puts employees on payroll for your business.