A complete guide to payroll in the UK: Everything employers need to know

Although the British government is still navigating various complexities post-Brexit, the United Kingdom currently has the sixth-largest economy in the world, which makes it an attractive option for companies looking to expand their operations overseas. The UK has a well-educated and highly skilled talent pool. Finally, for Americans—and anyone with English as their first language—it’s relatively straightforward to assimilate British employees.

Of course, there are hurdles to overcome when hiring remote employees in the United Kingdom for the first time. Managing the UK payroll system can be particularly challenging. Laws in the United Kingdom are quite different from those in other countries, like the US—and if you don’t take the proper steps to remain compliant with the nation’s laws, you’ll wind up paying substantial fines.

This comprehensive guide to payroll processing for employees in the UK will walk you through the process and explain everything you need to know to remain legally compliant and ensure the setup goes smoothly.

UK payroll taxes 

Learn about the UK’s payroll taxes below. 

Pay as you earn (PAYE)

Pay As You Earn (PAYE) is how the British government collects taxes from employees’ pay. Through your reference number, His Majesty’s Revenue and Customs (HMRC) will keep track of your business and ensure you and your staff pay the correct amount of tax and National Insurance each payday.

To register with the HMRC for a PAYE reference number, you must provide the following information:

• Your name, address, email address, and phone number
• The type of business you’ll be running in the UK
• The number of employees you intend to hire
• The date you want to be registered and receive a PAYE reference number (usually, employers elect to choose the default, which is “today”)
• The date you’re expecting payday to begin
• A National Insurance number associated with one of the company directors

National insurance contributions (NICs)

NICs (National Insurance contributions) are payments made by employees and employers to state funds supporting the unemployed, retired, ill, or employees on maternity leave or bereavement leave. Contribution rates vary based on an employee’s earnings and category letter, which reflect factors such as employment status, age, and eligibility for certain benefits.   

NICs are deducted from employees' wages. For the tax year 2024-2025, employees earning between £242 and £967 per week (£1,048 to £4,189 per month) contribute 12% of their earnings within this band, and 2% on earnings above £967 per week.

Employer tax rates also depend on employees’ earnings and category letters. For employees under category A, employers contribute 13.8% for National Insurance.

Anyone making contributions needs a National Insurance Number. This number is how the HMRC ensures the taxes and National Insurance contributions are correctly recorded under the contributor's personal information rather than someone else’s.

To register as a business entity in the UK, at least one high-ranking member of a company, such as a director, must have a National Insurance Number, which can be applied for on the UK government website. 

Pension contributions (Auto-enrollment)

In the UK, most employers are required to automatically enroll eligible employees into a workplace pension scheme and make regular contributions on their behalf. These rules, overseen by the Pensions Regulator, ensure that employers meet the mandatory legal requirements for workplace pensions.

Both employees and employers contribute to pension funds in the UK. Currently, employers are required to contribute at least 3% of the employee’s qualifying earnings, while the total minimum contribution (including employee contributions) must reach 8%.

Although some employees may be exempt from contributing to these funds, most of the workforce between the ages of 22 and the State Pension age in the UK must contribute to the workplace pension if their yearly earnings reach at least £10,000. 

Statutory payments 

Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), and Statutory Paternity Pay (SPP) are employer-provided benefits in the UK. While National Insurance contributions don’t directly fund these payments, they have been indirectly connected. 

Employers used to be able to recover a portion of these statutory payments through National Insurance contributions. This is generally no longer allowed, except for the Small Employers’ Relief for Statutory Maternity Pay, which applies in some instances.

Qualifying as a ‘’small’’ employer depends on the employer’s total annual National Insurance contributions. Those who are eligible can recover up to 103% of SMP by reducing their monthly payroll tax payments to HMRC by the recoverable amount. 

Employee Income Tax

Employers do not contribute but are responsible for withholding and remitting income tax on behalf of their employees. Income tax rates vary depending on the region and employees’ income bracket.

With few exceptions, employees across the UK are eligible for a personal allowance, which is an income an employee can earn each tax year without paying income tax. For most employees, this allowance is set at £12,570. 

So, if an employee earns up to  £12,570 annually, they are not required to pay income tax. Once the yearly earnings exceed £12,570, employees are required to pay income tax based on their income bracket, as follows:

• Basic Rate (20%): Applied to earnings above £12,570 and up to £50,270
• Higher Rate (40%): Applied to earnings above £50,270 and up to £125,140
• Additional Rate (45%): Applied to earnings over £125,140

Exceptions:

• High earners: Employees earning over £100,000 experience a tapering of their Personal Allowance, losing £1 for every £2 of income above this threshold. Once earnings exceed £125,140, the allowance is completely removed.
• Non-Residents: Certain non-residents may not qualify for the total allowance, depending on tax treaties and residency rules.

National Minimum and Living Wage in the UK

The National Living Wage (NLW) and National Minimum Wage (NMW) in the UK are statutory minimum pay rates that employers must adhere to, varying by age and employment status.

Current Rates (Effective from April 2024):

• National Living Wage (NLW): £11.44 per hour for workers aged 21 and over.
• National Minimum Wage (NMW):
• Ages 18-20: £8.60 per hour.
• Ages 16-17: £6.40 per hour.
• Apprentices: £6.40 per hour.

Upcoming Rates (Effective from April 2025):

• National Living Wage (NLW): £12.21 per hour for workers aged 21 and over.
• National Minimum Wage (NMW):
• Ages 18-20: £10.00 per hour.
• Ages 16-17: £7.55 per hour.
• Apprentices: £7.55 per hour.

The initiative to implement the NLW was first introduced in 2016 and was intended to cover workers aged 25 and older. Five years later, the age threshold was lowered to 23-year-old workers and over. Lastly, as of April 2024, the National Living Wage applies to workers aged 21 and over.

The NLW rates are reviewed annually and typically increase each April. The purpose of the NL W is to provide workers with a basic income that covers their cost of living needs. The NLW is set to increase to £12.21 per hour from April 2025. This 6.7% rise is part of the UK government’s commitment to ensure that the minimum wage reflects the cost of living.

Employers who fail to pay the National Minimum Wage or the National Living Wage (as applicable) are at risk of facing fines and penalties, and employees can report violations to HM Revenue and Customs (HMRC). 

Some organizations advocate for a Real Living Wage, which is higher than the National Living Wage and reflects the true cost of living in different regions, especially London. While the Real Living Wage is voluntary, many employers choose to adopt it as a commitment to fair pay.

National holidays in the UK

National holidays in the UK cover religious and bank holidays. A bank holiday is a colloquial term for all public holidays In the United Kingdom ‘’be they set out in statute, declared by royal proclamation, or held by convention under common law.’’ 

Banks are typically closed for business on those days, thus the name. Still, whether someone has the day off or receives extra pay depends on their contract. The list of national holidays in the UK includes: 

• New Year’s Day – January 1
• Good Friday – Friday before Easter Sunday
• Easter Monday – Monday following Easter Sunday (not a holiday in Scotland)
• Early May Bank Holiday – First Monday in May
• Spring Bank Holiday – Last Monday in May
• Summer Bank Holiday – Last Monday in August (First Monday in August for Scotland)
• Christmas Day – December 25
• Boxing Day – December 26

Not all holidays are celebrated equally across the county, including region-specific holidays.

7 steps to pay employees in the UK

One of the main questions for anyone considering setting up their own entity is how to pay employees in the UK. Here are the steps you’ll need to take to ensure effective payroll processing.

Step #1: Register as an employer using the HMRC Portal

Before you can hire and pay employees in the UK, you need to register yourself as an employer. You can do this through the portal on the His Majesty’s Revenue and Customs (HMRC) page on the gov.uk website. HMRC is the department of the British government that’s responsible for collecting taxes and other revenue in the United Kingdom.

You need to fill out the application and register yourself as an employer before your employees’ first payday. However, there are some special deadlines to keep in mind:

• HMRC will only process applications for employers who are intending to hire and pay employees within the next two months. 
• They will disregard registrations that are for future tax years, not the current one. 
• It can take anywhere from five to 15 business days to receive the PAYE (Pay-As-You-Earn) reference number and the PAYE Accounts Office Reference you’ll need, so schedule your employees’ payday accordingly so their paychecks aren’t late.

Step #2: Pick a global payroll software solution

There are two kinds of international payroll solutions: global payroll processors and global payroll aggregators. You can learn about both in our guide.

• Global payroll processors process your payroll, transmit funds, and calculate and file taxes across the globe through their own software. Global payroll processors allow you to pay your international employees just as easily as your local employees.
• Global payroll aggregators consolidate local payroll providers in every country and manually transmit your payroll files to them. These come with many limitations: You’re forced to submit payroll up to 30 days in advance and can’t track and automatically sync employees’ time in the same system.

Remember: Payroll aggregators can’t process payroll through companies that use their own entities. But with native global payroll providers, you typically won’t have to switch systems as you scale.

Step #3: Determine your workers’ employment status

Before you onboard new workers and start running payroll, make sure the team members you hire are properly classified as employees, not independent contractors. And be careful of the language you use when filling out documents, putting team members into the system, or issuing payslips. The UK government does not use the words “employee,” “worker,” and “independent contractor” interchangeably.

Here’s a quick rundown of the definitions of each word to help you understand what they mean for employers in the United Kingdom:

• Employee: An individual who has signed an employment contract with you and is entitled to the full range of statutory employment rights, such as sick pay, holiday entitlement, and protection against unfair dismissal. Employees typically work full-time or part-time under your direction and control.
• Independent Contractor: A self-employed individual who provides services to your business under a contract for services. They are responsible for their own taxes and do not have employment rights, as they operate their own business.
• Worker: An individual who falls between an employee and an independent contractor. They have a contract (written or verbal) to perform work or services for your business personally. While they do not own their own business, they are entitled to some statutory rights, such as holiday pay and the national minimum wage, but not the full range of employee protections.

Classifying your team members correctly is crucial to avoid violating tax, wage, and employment laws, and the HMRC is quite serious about the consequences for misclassification. Not only will you be fined for misclassifying a team member, but you could even face legal action.

Step #4: Collect information from your employees for payroll

Once you’ve registered with the HMRC, received your PAYE reference number and other relevant information to establish yourself as an employer in the UK, you’ll need to collect the following information from your employees so you can put them on the payroll:

• Name, date of birth, and start date with your company
• National Insurance number
• The number of hours they’ll be regularly working each week
• How often they’ll be paid
• How much they owe in student loans, if applicable
• National Insurance category
• The employee’s tax code

Team members who previously held jobs where they were classified as an “employee” under UK employment law can check their P45 form if they’re not sure what their National Insurance number is or how much they owe in student loans. 

For information about National Insurance categories, which are letters that help employers determine how much they and the employee need to contribute when running payroll, visit the UK Government’s website.

Step #5: Set the employee’s salary in British pounds sterling

Regardless of where your company is headquartered, when you hire UK employees, you must pay them in British pounds sterling (GBP). Setting the employee’s salary in GBP in their employment contract is the best way to ensure they’re consistently paid the same, correct amount regardless of currency fluctuations.

Step #6: Run payroll

You have an entity (either your own or via an EOR), you’ve set up your global payroll system, and you’ve ensured your employees are correctly classified under UK employment and tax law.

Time to run payroll! Here’s a preview of how Rippling’s global payroll system works: explainer video

Step #7: File your taxes with the HMRC

Once you've hired employees, put them on your payroll, and enrolled in the PAYE scheme, you need to fulfill certain responsibilities during each tax month. In the UK, tax months run from the 6th of one month (for example, May 6th) to the 5th of the following month (so, in this example, June 5th).

There are two parts to this complex tax payment system. We’ll go over them step by step below.

The first part takes place either on or before payday. Each time you pay employees, you need to do the following:

• Record employee salary and any other pay, such as bonuses or commissions, that they’ll receive
• Calculate the deductions that will be taken out of their pay for taxes, National Insurance, student loans (if applicable), and pension contributions
• Figure out how much you–the employer–need to contribute to National Insurance based on their earnings (you must pay National Insurance on any amount they make that’s above £242 per week)
• Generate the correct payslip for each employee that reflects the pay they’ll receive minus the deductions taken out
• Send a Full Payment Submission (FPS) to the HMRC

The second part of your responsibilities begins on the first day of the tax month–the 6th. The HMRC will tell you what you owe in taxes by the 12th of each month; you can find this information through their online portal. 

If you’re eligible for a reduction in the amount you owe the HMRC, you’ll need to send the agency an Employment Payment Summary (EPS) by the 19th. If you’re late, you won’t be able to claim reductions, even if you’re eligible for them.

The HMRC has very tight deadlines for paying taxes. You’ll need to log into your HMRC online account and pay the amount you owe by the 22nd of the month. If you’re late, you’ll receive a notice as well as a fine. 

You can find links to the EPS and other forms, as well as exact deadlines, on the UK Government website.

Manage payroll for employees in the UK effortlessly with Rippling

Navigating payroll legislation in the UK can be daunting, with numerous areas employers must cover to ensure legal compliance. Outsourcing the payroll process and partnering with an EOR (Employer of Record) may be an alternative worth considering, as it frees you from thinking about how to do payroll in the UK. Instead, you can focus on how to grow a business in the UK.

With Rippling, there are fewer steps to worry about—and much less you need to do.

Rippling is certified to calculate and transmit payroll taxes and mandatory benefits at the national, local, and industry-specific level—we’re an authorized payroll provider by His Majesty’s Revenue and Customs department. A simple, intuitive flow, paired with time-saving automation and integrations, makes global pay runs on Rippling faster and reduces errors.

Rippling is the only solution that allows global teams to store their entire payroll in one reliable system. This allows you to lighten your HR admin load, avoid manual errors, and never miss a beat.

FAQs about running payroll in the UK

What are the late tax filing penalties in the UK?

If a company fails to file its tax return on time, HMRC will issue penalties based on how late the submission is:

• 1 day late: £100 penalty 
• 3 days late: An additional  £100 fine
• 6 months late: HMRC will estimate the tax owed and impose a penalty of 10% of the unpaid tax in addition to any fines already applied
• 12 months late: Another 10% penalty is added to the outstanding tax amount
• Continuous negligence:  If a company files its tax return late three times in a row, the initial £100 penalty increases to £500 for each late submission after that

How much does it cost to run payroll in the UK?

The costs of running a payroll in the UK vary based on numerous factors, including:

• Number of employees: The larger the workforce, the higher the payroll costs
• Level of service: Payroll management expenses depend on whether you need a full-service payroll solution or partial support
• Setup costs: Initial setup fees may apply when starting payroll services
• Additional features: Features like automatic employee enrolment and pension plan management may add to costs
• Integration and reporting: Integrating payroll with other HR services or generating regular reports may increase service costs

Companies that take into account these factors are better positioned to estimate payroll expenses and manage them effectively. 

Can I manually run payroll for employees in the UK?

Some small business owners decide they’d rather run payroll themselves to cut down their overhead costs. However, running payroll is time-consuming and will consume more of your time as your business grows. If you do it alone, there are potential risks to keep in mind, such as:

• Compliance: Running payroll manually in the UK, without using native global payroll software, puts you at risk of manual errors and omissions, which can result in hefty penalties. 

• Security: Processing UK payroll manually can pose security risks, especially if you are using spreadsheets or paper records. This increases the risk of losing, stealing, or misusing sensitive employee information.

How do you pay independent contractors in the UK? 

In the UK, the payroll process steps concerning independent contractors include:

Classifying the contractor correctly: First, ensure the individual is accurately classified as an independent contractor, not an employee or a worker. Tools like Rippling’s free Worker Classification Analyzer can assist with this. HMRC also has an online tool called the “Check Employment Status for Tax” tool (CEST).

Agreeing on payment terms: Establish the payment terms, including the hourly or project rate, payment frequency, and preferred payment method (e.g., direct deposit, virtual wallet).

Gathering necessary information: Collect essential payroll details from the contractor, including their full name, date of birth, contact information, and bank account information.

Processing payment in GBP: Use your payroll software to pay the contractor in GBP. With Rippling, you can pay contractors and employees in British pounds sterling in a single pay run, with no need for currency conversions or delays.

Tax and insurance: In the UK, independent contractors are responsible for handling their own tax and National Insurance contributions. You should always take appropriate employment and tax advice, as there are exceptions to this rule, such as that non-executive directors must be paid via the PAYE system, even though they may not strictly be classified as employees.

Record-keeping: For compliance purposes, ensure accurate records of the contractor’s classification, payment details, and any other relevant documentation.

This blog is based on information available to Rippling as of November 18, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.