Even after the negative impact of Brexit, the UK is still a powerful country for international businesses and economic growth. Thanks to its user-friendly payroll and regulatory system, the UK is a popular destination for expanding business for countries like the US and other Western countries. However, one needs to keep in mind that the employment laws are completely different from country to country, and this system is no different.
Businesses expanding their reach in the UK need to know how to manage payroll in the UK. Companies setting up their branch or base in the UK need to comply with the system for payroll in UK set by the national guidelines.
The payroll tax system in the UK is finely constituted, and it has a complete set of rules that every business in the UK should follow for the minimum required wage and social deductions. Furthermore, a real-time online system is entirely governed by the country's council that records all the collected payments from companies. However, there are separate rules for each, which every company needs to comply with and is responsible for the timely calculation of payments.
As per the report in 2020 by the UK Chartered Institute of Personnel and Development, there is an increase in the payroll outsourcing system. More than 39% of small and medium-sized businesses are outsourcing their payroll work to bring down their burden. However, each company has to comply with the UK payroll guidelines, which can invite penalties from the council. Failure to follow the procedure of pension auto-enrolment can result in fines ranging from £400 to £10,000.
Payroll system in UK
The Salary cycle in the UK is paid in 12 instalments every year. Salary workers get their salaries credited into their bank account on the said date of every month. Even in case, there is a single employee under the company, that employee will still get paid through the PAYE & HMRC system in the UK. Upon registering with the council as an employer (business owner), you have the freedom to get outsourcing payroll done or run it yourself.
Even if the payroll management is outsourced, you'll have several responsibilities to follow the set compliance as a PAYE-registered employer. Other PAYE requirements involve recording the employee wages payments and administering national insurance contributions for each employee. Yes, you heard it right! The national insurance contributions are indeed made for every single employee.
With the UK's Real-Time Information (RTI) system, employers need to submit the complete payroll information (payroll data) to HMRC before the payout of employees. Businesses must file this information using a complete payment submission (FPS) — a report from the payroll software generated and submitted by the employer.
About Payroll Legislation in the UK:
There are several laws implemented in the UK governing compensation and salary:
- Employment Rights Act 1996- This establishes the primary legislation designed for employees working in companies set in the United Kingdom. Right from contract types, authorized and unauthorized salary deductions to pay for the work time off are covered by UK payroll legislation.
- National Minimum Wage Act 1998- The United Kingdom has strict minimum wage laws, and this law establishes the regulations and the application for minimum wage.
- Income Tax Act 2003 and Income Tax Act 2007: In the UK, these acts govern the payment of payroll taxes and personal taxes.
- IR35 and contractor employment: IR35 regulations play a vital role in company outsourcing. These regulations prevent disguised employment, which means that such workers must pay additional taxes. The employer will be responsible for determining IR35 status beginning in April 2021.
Taxes on employees:
Employees in the United Kingdom need to pay for their earnings calculated using a progressive tax system, £12,500 of annual revenues is tax-free. Employees’ earnings between £12,501 and £50,000 are taxed at 20%. Also, the one earning around £50,001 or more is taxed at a rate of 40%. Any earning of more than £150,000 is taxed at a rate of 45 percent.
PAYE allows HMRC the collection of National Insurance contributions. The grant is almost 13.8 percent of a worker's gross salary (monthly).
Approx minimum wage in the UK
The minimum wage for employees in the UK is set according to the age group:
- Apprentice worker under 19 ages: £4.15
- Under 18: £4.55
- 18 to 20: £6.45
- 21 to 24: £8.20
- 25 and over: £8.72
Employers in the United Kingdom don't have to pay their employees for overtime. But the hourly pay (average) of an employee shouldn't be lesser than the National Minimum Wage. Furthermore, employees are only required to work overtime if their contract expressly states so, and no one should be forced to work beyond 48 hours per week unless the employee has signed the agreement.
National Insurance: Social Security and Taxes in the UK
In the UK, every employer, as a part of PAYE submission needs to calculate social security and the payroll taxes for every working employee. Some of these are:
Social Security or National Insurance Contributions
All the employees in the UK need to make a payment towards social security contributions, which is referred to as National Insurance. The employer and the employee must pay national insurance contributions collected through the system.
Pension Contributions
All employers in the UK are liable to facilitate workplace pension to employees over 22 who earn more than £10,000. Employees should be enrolled unless they are opt-out by themselves, and payment should be deducted through PAYE.
Individual Income Tax
Every employee working in the UK are taxed on different scales:
- The earning of £12,500 in earnings is tax-free.
- The basic income tax rate is 20% on income between the personal allowance and £50,000.
- Income between £50,001 and £150,000 is subject to a 40% higher tax income tax rate.
- The additional rate is 45 percent for income over £150,000.
FAQs:
Statutory payments: What is Statutory sick pay (SSP), UK?
You receive £96.35 per week Statutory Sick Pay (SSP) from your employer (going up to 28 weeks) if your health issues don't allow you to work. You can get more but not less statutory sick pay if there are such pay schemes in your company. They also have provisions for statutory maternity pay
Conclusion
Any business planning to set its base in the UK needs to comply with the system for international payroll in UK. One (payroll professional or others) can check above mentioned taxations and manage UK payroll (payroll solution).
You can seek assistance by outsourcing payroll management, ensuring it is practised according to UK laws.
I hope this article was able to help you understand more about the UK payroll process, income tax, statutory payments, employee national insurance, and how to pay national insurance contributions, act.
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