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Understanding Payroll in the UK: A Complete Guide

With more than 6.5 million people, the United Kingdom is known for embracing and celebrating its varying cultures. After three years of negotiation, the UK finally left the European Union on 31st January 2020. Since then, the United Kingdom (UK) has undergone significant upheaval. Despite Brexit, it remains an excellent place for many businesses to start international expansion.

The United Kingdom is a highly developed economy – the world’s sixth-largest. It has even become a commercial gateway to top foreign business brands. The financial services sector in the United Kingdom is one of the most well-known globally, accounting for a large portion of the country’s GDP. London, the capital city, is an important financial center for big corporate and e-commerce organizations. The nation remains a key worldwide commercial destination and is a member of the G7 and the World Trade Organization (WTO).

Due to the country’s effective regulatory framework and proximity to other European countries, the UK is often the first choice for business expansion. However, if international companies want to continue investing in UK operations, they must first comprehend the subtleties of the country’s employment laws, UK payroll requirements, and tax obligations.

How is the Payroll Calculated in the UK?

Payroll tax UK is collected through the Pay As You Earn (PAYE) system.

Simply put, it’s your obligation as an employer to figure out how much tax your employees owe, deduct it from their salary, and send it to Her Majesty’s Revenue and Customs (HMRC).

It is done every time you pay your employees, which is usually monthly for most organizations, and the procedure is the same for salaried and hourly staff.

It’s critical that you, as an employer, maintain your accounts up to date. You must send your most recent pay deductions to HMRC by the 19th of every month if you pay by post or by the 22nd if you pay online.

It can be pretty challenging to calculate all of your employees’ deductions. You can use the calculator provided by HMRC for the cause. However, its real purpose is to double-check the payable amount rather than calculate payments from scratch. 

You must submit your final report for the year to HMRC and provide Form 60 to each of your employees. The form summarizes their annual pay and deductions before the end of the payroll tax UK year (5th April). You must also notify HMRC of any expenses or benefits for your year-end filing.

The United Kingdom’s Real Time Information (RTI) system is used to report payroll UK data. Employers must send their payroll data to HMRC online under RTI.

Payroll data must be provided before or during salary payments under RTI. The data cannot be overwritten or re-done once it has been submitted.

Employers must notify HMRC if a new employee is hired or if an employee’s circumstances change as part of payroll reporting.

Important Elements of Salary Structure in the UK

A typical payslip in the UK must include the following information:

Gross Pay: The amount before deducting any tax or National Insurance fee.

Net Pay: The amount the employee takes home after all the deductions.

Variable Deductions: An outline of the deductions which vary every payday and their amount. These include income tax and National Insurance.

Fixed Deductions: These include the fixed monthly deductions like union dues.

Incentives: These are additional payments that the employer credits to the employee in the latter’s gross pay amount. Examples are overtime, tips, and bonus.

Apart from the above elements, there are a few more employee-specific data every employer must include in the payslip:

  • Tax code
  • National Insurance number
  • Annual or hourly pay rate
  • Benefits in kind except for the limited costs of accommodation that you provide as part of the job
  • Allowances other than allowances attributable to the performance of the worker while performing their work
  • Tips, service charges, gratuities, and cover charges
  • Repayments of expenses
  • Loans by the employer, advance wages, and employer pension payments

How to Set Up the UK Payroll Process?

Setting up the payroll process in the UK is a very straightforward process. If you have an internal team managing payroll, they are advised to follow these steps:

  1. Register as an employer in the HMRC portal and get log-in details for PAYE online. PAYE (Pay As You Earn) is HMRC’s method of collecting income tax and National Insurance contributions from employees from the date of employment. It can take up to 5 working days before you receive your employer’s PAYE reference number.
  2. Choose your preferred payroll software for calculating employees’ pay, deductions, and other details.
  3. Report the details to HMRC before the first payday.
  4. Pay the tax and National Insurance to the HMRC

You may either set up and run payroll UK yourself using payroll software or hire a payroll service for it once you’ve registered as an employer. Partnering with an external team like Multiplier will help streamline a lot of the payroll processing tasks, saving you time and resources.

A Step-by-step Process of Payroll Processing in the UK

Payroll processing is a complicated step in managing the payroll of your UK team. There are multiple steps in the UK payroll process to ensure that the pay is computed, recorded, and distributed correctly. Payroll UK is generally managed and overseen by a payroll specialist, but it may also come within the purview of human resources.

Payroll processing in the UK comprises the following steps:

  1. Precalculation: You begin with establishing state or local tax IDs, collecting employee tax and payment information, setting up the right payroll schedule for your business, and establishing tax payment dates.
  2. Manually processing: This step involves reviewing hourly employee schedules, determining overtime pay, calculating gross pay, determining deductions, and calculating net pay. Eventually, you can issue payments to employees through their preferred payment delivery method, including paper checks, direct deposit, etc.
  3. Maintain records: UK laws demand employers to maintain payroll records and report new hires to the HMRC.

Payroll Contributions

Employer Contribution:

National Insurance contributions (NIC) are based on the following category letters:

  • Category A: Most employees, excluding those in the categories mentioned below
  • Category B: Married women or widows, must pay reduced NIC
  • Category C: Employees who fall under the State pension age
  • Category J: Employees who can defer NIC adhering to it being deducted from any other job
  • Category H: Apprentices aged below 25 years
  • Category M: Employees who are below the age of 21 years 
  • Category Z: Employees who are below the age of 21 years old can defer NIC

Employee Contribution:

Employees contribute a fee towards the NIC according to the following table:

Rate of contributionIncome per month
12%£797 – £4,189
2%More than £4,189

‍Payroll Cycle

Payroll is usually done once a month in the United Kingdom. Salaries are generally credited between the 25th and 30th of each month. There are no statutory provisions for 13th-month wage payments in the United Kingdom.

UK Payroll Options for Companies

The three fundamental payroll UK systems:

  • You can process the payroll manually, on paper, or on a spreadsheet.
  • You can contact a third party to handle your payroll, taxes, and more in outsourcing a payroll system.
  • You can also use payroll software. Payroll software can differ depending on the plan or package. Most payroll software provides extensive options from simple payroll help to more advanced HR payroll UK services.

It would help if you considered factors like business growth, employee perks, and the intricacy of your state’s payroll taxes and requirements before committing to one system over another. Choosing payroll software or outsourcing payroll tasks to third parties is wise when you have to deal with complicated calculations and tax laws.

Entitlement and Termination Terms

While examining UK payroll solutions, you should also draft an employee contract with specific entitlement and termination provisions. Employers in the United Kingdom are obligated by law to provide a termination notice to their employees.

There are two types of notice to consider: statutory notice, which is required by law, and the notice period you specify in your employee’s contract. The decision is yours to make. However, the contract normally stipulates a one-month notice period for regular employees and up to three months for senior staff.

Employers can lay off employees, but there are no legal obligations for severance pay. Employees who have worked consistently for two years or more are entitled to the statutory redundancy payment (SRP).

The termination procedure varies depending on the type of contract, the reason for termination, the employment agreement, and the collective bargaining agreement.

UK Payroll Processing Company

Multiplier can assist you with hiring personnel and setting up payroll in the UK before starting or expanding a business. Our extensive knowledge and expertise ensure you’re in line with UK labor laws and PAYE requirements. As your global partner for PEO and EOR, Multiplier can relieve you of payroll and employee management burdens.

How Multiplier Can Help With Global Payroll?

Payroll UK is a difficult subject for many international organizations planning on doing business in the country. Although the HMRC’s web platform speeds up submitting payroll UK reports, compiling data for foreign employees remains a barrier.

Also, you must be familiar with a wide range of payroll rules and regulations in the UK to manage them effectively. 

This is where Multiplier can help you overcome all such payroll-related challenges and issues.

Frequently Asked Questions

Payroll in the United Kingdom now has a National Living Wage and a National Minimum Wage. National Living Wage is for employees who are above 25 years of age.

In the UK, the first £12,500 of income is considered a personal allowance in the UK. Employees are not taxed on this amount. Income is taxed progressively higher after £12,500, depending on earnings. It is important to note that the tax slabs in Scotland are different from those in the rest of the UK.

Employees pay National Insurance to avail benefits, including the state pension, jobseeker’s allowance, etc. Employees in the UK who are above the age of 16 and earn more than £166 a week, or employees who are self-employed and earn a profit of £6,365 annually, must pay National Insurance.

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