Your guide to payroll in the United Kingdom

The United Kingdom’s labor market is backed by a broad talent pool across industries. 

With this consistently high employment rate among the working-age population, the country adheres to a well-defined regulatory framework. Employment conditions and payments in the United Kingdom are governed by national regulations and statutory laws.

Businesses that pay employees in the United Kingdom should adhere to strict payroll requirements, with authorities likeHM Revenue and Customs (HMRC) overseeing tax reporting and regulatory obligations.

Navigating the stringent employment and payment rules can be complex, especially for companies that hire from overseas. 

Such companies often partner with Employer-of-Record (EOR) providers, like Payoneer Workforce Management, which help simplify the process of payroll management.

This article throws light on the essentials of how to pay employees in the United Kingdom while maintaining the legal obligations.

United Kingdom payroll: Wages and other payments

The payroll framework in the United Kingdom is governed by statutory wage regulations and structured payment practices designed to uphold fair employee compensation and compliance by employers.

Payroll cycle in the United Kingdom 

In the United Kingdom, salaries are usually paid once a month. These are often paid at the end of the month. 

If you run payroll under PAYE, you have specific tasks to complete every tax month. A tax month runs from the 6th of one month to the 5th of the following month.

Minimum wage

According to the rules for minimum wage in the United Kingdom, employees belonging to different age groups are entitled to a mandatory statutory hourly rate. 

• National Living Wage – The hourly rate for workers over the age of 21
• National Minimum wage – The hourly rate for workers who are aged under 21, as well as apprentices. 

The rates, enforced by the government, change annually, as shown in the comparison below.

Overtime pay

No law in the United Kingdom mandates statutory pay for employees working overtime. However, no employer can pay an employee anything less than the minimum wage.

The typical overtime pay rates are as follows:

Sick pay

If employees working in the United Kingdom are unable to attend work due to illness, they are entitled to statutory sick pay of £118.75 per week, for up to 28 weeks. 

The first five days of an employee’s absenteeism are usually unpaid and are treated as “waiting days,” and SSP starts from the sixth day, with a doctor’s note.

Maternity pay 

In the United Kingdom, employees receive statutory maternity pay (SMP) for up to 39 weeks. For the first 6 weeks, they receive 90% of their average weekly earnings, and for the next 33 weeks, they receive £156.66 or 90% of their average weekly earnings, whichever is lower. This amount is paid in the same way as an employee’s wages and is taxable.

Severance pay

When you decide to let go of an employee, you have to pay the employee’s severance pay, which is as follows:

Payroll in the United Kingdom: Contributions and deductions

The payroll cycle in the United Kingdom varies depending on employment type. 

• Salaried employees are usually paid on a monthly basis. 
• Hourly workers, however, may be paid weekly, fortnightly, monthly, or through 4-weekly cycles. 

The tax months run from the 6th of a month to the 5th of the next month, shaping how deductions and reporting are processed.

Employee payroll in the United Kingdom includes statutory contributions and deductions that employers must calculate and report accurately to meet HMRC requirements. Here’s a list of things you need to know about:

The Pay As You Earn (PAYE) System

The Pay As You Earn (PAYE) system is an integral part of the payroll management in the United Kingdom. It is used to collect Income Tax and National Insurance Contributions (NICs) from employees’ wages or pensions before they are paid. 

You can make these deductions using your payroll system and send a Full Payment Submission (FPS) to HMRC on or before each payday. This submission reports employee payments and the deductions made. 

While PAYE is the collection method and not a contribution itself, National Insurance contributions collected through PAYE form an important part of the social security contributions in the United Kingdom.

Income tax

Income tax in the United Kingdom is deducted from employees’ earnings through PAYE. The amount of tax an employee pays depends on how much they earn above the personal allowance and how much income falls within each tax band.

The bands for income tax in the United Kingdom are as follows:

National Insurance Contributions

National Insurance is a statutory deduction within the United Kingdom payroll system. Employees who are 16 and older, and who earn more than the threshold per week from one job, or self-employed professionals earning a profit of more than the annual threshold, are entitled to pay National Insurance.

Other payroll deductions

Certain other deductions may be applied where required by law or individual arrangements. For example, employers in the United Kingdom may be required to deduct benefit overpayments from employees as part of DWP debt management when asked. This is known as Direct Earnings Attachment (DEA). 

Other employee benefits

Employees working in the United Kingdom are entitled to certain other benefits:

• Annual leave entitlement: Employees who work for 5 days per week are entitled to at least 28 days of paid annual leave each year. This is equivalent to 5.6 weeks of holiday every year for which employees are entitled to get paid.
• Statutory parental leave: Mothers get 26 to 52 weeks of maternity leave, and fathers are entitled to 1 or 2 weeks of leave.

United Kingdom payroll compliance best practices

Navigating payroll and wage compliance and adhering to payslip requirements in the United Kingdom calls for a thorough understanding of the wage structure, tax deductions, payment cycles, and much more. 

From complying with the National Minimum Wage regulations to timely PAYE submissions, you need to maintain compliance and accuracy at every stage of the United Kingdom payroll processing.

When you pay employees in the United Kingdom, there are some best practices that you need to follow:

• You have to submit full payment submissions on or before every payday, reporting employee pay and deductions. This helps maintain transparency. 
• You must apply all tax codes, calculate the National Insurance, PAYE, and other deductions precisely.
• To make sure that employees meet the minimum contribution thresholds, employers should enrol eligible employees into an automated workplace pension. 
• You should make sure that all employees are paid the minimum wage. 
• You should safeguard employee payroll data in compliance with the UK data privacy regulations. 
• You should use a compliant payroll software that can automate calculations and statutory reporting. 

Your options for payroll services in the United Kingdom

Entities looking forward to streamlining the employee payment processes can opt for the following methods:

• Employers can set up a local entity: You should register your company in the United Kingdom and identify yourself as a direct recruiter. You should register with HMRC, which will make it easy to pay employees in the United Kingdom after deducting PAYE and other deductions. Registering with HMRC makes it easier to maintain payroll compliance in the United Kingdom, including statutory pays, minimum wage, workplace pensions, and so on.
• Employers can partner with an Employer of Record: You can partner with third-party organizations known as Employer of Record (EOR), which can act as the legal employer and engage and pay employees in the United Kingdom on behalf of employers while complying with applicable laws.
• Employers can hire independent contractors: Self-employed independent contractors manage their own National Insurance and tax deductions, which reduces the payroll obligations on the employer’s end. However, you should make sure that the engagement complies with the employment status rules. Any sort of misclassification may lead to penalties.

For organizations looking to streamline the payment process in the United Kingdom, Payoneer Workforce Management offers a reliable solution for easy cross-border payments.

Payoneer Workforce Management allows you to legally employ teams without having to set up a local entity. The experts at Payoneer Workforce Management help you stay compliant and support with local regulations regarding wages, deductions, and payroll cycles. 

Payoneer Workforce Management helps your business to manage international payroll efficiently. 

Book a demo today!

FAQs

1. Are contractors included in standard payroll in the United Kingdom?

Independent contractors are generally not included in the standard United Kingdom payroll processing system and are usually paid through accounts payable. They manage their own taxes and National Insurance, subject to employment status and IR35 rules.

2. What are the employment costs in the United Kingdombesides salary?

Alongside salary, employers must pay National Insurance contributions, workplace pension contributions, statutory leave payments for sickness or maternity, statutory holiday pay, etc.

3. Is it mandatory to provide payslips to employees?

Employers must provide itemized payslips to employees that have all the details of their gross pay, deductions, and net pay after the deductions are made.