Before hiring employees in the UK, it’s essential to understand the ins and outs of UK payroll systems. This includes staying informed about taxation rules, required setup, and entitlement/termination terms.
Taxation rules in the UK
In the UK, a company must comply with the Real Time Information (RTI) system, which requires it to report all payroll information to His Majesty’s Revenue and Customs (HMRC) based on a Pay As You Earn (PAYE) system. These reports occur in real-time, and companies must communicate information, via HMRC recognized payroll software, such as payments, income taxes, and social contributions whenever it compensate an employee.
Individual income tax rates are usually either 20%, 40%, or 45%, depending on the employee’s salary.
The National Insurance Contribution (NIC) is the country’s national social security program that comes out of payroll. Employers typically contribute 13.8%, on top of the total compensation, and employees contribute 12%. The percentage NIC paid by an employee is 12% up to the upper earnings limit (earnings of GBP 50,270 per annum, or GBP 4,189 per month) and then it is paid at 2% above this amount. Employees still working after their statutory retirement date do not pay any NIC.
UK payroll options for companies
Companies looking to grow and hire employees in the UK can choose from 2 UK payroll options:
You can run the payroll yourself by selecting software that reports relevant information to HMRC. You’ll need to find a software program that records employees’ details, works out overall compensation and deductions, determines how much you owe HMRC, and calculates statutory pay for maternity or sick pay. Another option is engaging a local payroll provider to run payroll on their behalf.
You can also work with a UK Employer of Record, which directly employs individuals on your behalf and is responsible for compliantly running payroll. At G-P, we help you hire employees and begin running payroll in the UK without requiring local entity or branch setup. We ensure you’re compliant with UK labor laws and PAYE expectations.
How to set up a payroll in the UK
If you choose to set up your UK payroll on your own, you first need to register to contribute to the NIC and the PAYE tax. It takes 3 days to complete this process through HMRC.
Every new hire needs a current P45 form that comes from their previous employer where applicable. If they don’t have one, you must complete HMRC’s starter checklist to find the right tax code. In addition to these steps, you’ll need to choose the right software to feed information to HMRC.
Entitlement and termination terms
While considering UK payroll options, a company also need to create an employment contract with clear entitlement and termination terms. In the UK, employers are legally required to give an employee notice prior to terminating the employment relationship.
An employee’s length of service is used to calculate the statutory notice period as follows:
- 1 week’s notice for 1 month and less than 2 years of service
- 1 week’s notice for each year for between 2 and 12 years of service
- 12 weeks’ notice for 12+ years of service
While it is discretionary to provide notice above and beyond the statutory minimum requirements, it is common to include a notice period in the contract of 1 month for regular employees and up to 3 months for senior employees.
An employee who has been working continuously for 2 years or more has the right to the statutory redundancy payment (SRP) in cases where they are made redundant.
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