.png)
In the United Kingdom, payroll is a fundamental responsibility for businesses, ensuring employees are paid accurately and on time in compliance with regulations. Payroll in the UK includes automatically enrolling employees, deducting income tax and national insurance contributions, maintaining payroll records, processing payments, and reporting to HMRC.
Payroll Cycle, Minimum Wages, and Working Hours
Payroll usually happens monthly, with salaries paid in the last five days, though there can be variations. The UK has fair minimum wage policies, including the National Living Wage for those 23 and older.
Current National Minimum Wage Rates (from April 1, 2023):
- Age 23 or over (National Living Wage): £10.42 per hour
- Age 21 to 22: £10.18 per hour
- Age 18 to 20: £7.49 per hour
- Under 18: £5.28 per hour
- Apprentice: £5.28 per hour
Moreover, standard working hours in the UK amount to 40 per week or 8 hours per day, with an average weekly limit of 48 hours over a 17-week period. While a 13th-month salary is not mandatory, the UK upholds the practice of fair compensation and adherence to progressive national minimum wage standards.
On this page:
- How to Setup Payroll in the UK
- Register as an employer in HMRC
- Decide How to Run the Payroll - Payroll Provider or Self Serve Payroll Software
- Document and Save Payroll Records
- Register New Employees with HMRC
- PAYE Payroll Tasks: A Monthly Guide for Employers
- Paying HMRC: A Monthly Obligation
- Payroll Taxes in the UK
How to Setup Payroll in the UK
Register as an employer in HMRC
To handle your new staff's taxes, register as an employer with HMRC anytime between 4 weeks before and 2 months before their first payday. Expect up to 15 working days for your PAYE reference number, but register before payday to avoid fines for late registration. Don't worry if you can't register that early, you just have to register by 4 weeks after their first payday. Easy!
A PAYE reference number (also known as an Employer Reference Number) is a unique identifier assigned by HM Revenue and Customs (HMRC) to businesses that operate Pay As You Earn (PAYE) schemes for their employees. HMRC uses this number to identify your business and track its PAYE tax payments and National Insurance contributions. It ensures accurate record-keeping and efficient processing of taxes.
PAYE stands for "Pay As You Earn" and it refers to a system in the UK where income tax and National Insurance contributions (NICs) are automatically deducted from wages or salaries as they are earned, rather than being paid as a lump sum at the end of the year.
Decide How to Run the Payroll - Payroll Provider or Self Serve Payroll Software
Deciding between payroll software and a payroll provider in the UK depends on your priorities and needs. Here's a breakdown of the key differences and pros and cons to help you choose:
Payroll Software
|
Pros |
Cons |
|
|
Payroll Provider
|
Pros |
Cons |
|
|
Which is right for you? - Here are some general recommendations:
- Payroll software: Ideal for small businesses with basic payroll needs, comfortable managing software and compliance, and budget-conscious.
- Payroll provider: Best for larger businesses with complex payroll needs, no time or resources for internal management, and prioritizing hands-off convenience.
Ultimately, the best choice depends on your specific circumstances and preferences. Consider factors like your business size, payroll complexity, budget, technical skills, and desired level of control and support.
Must-Have Payroll Software Features in the UK
Choosing the right payroll software in the UK depends on your specific needs, but some key features are essential for most businesses:
Core Payroll Functions:
- Accurate salary and wage calculations: Handles regular, overtime, bonus, and other pay types.
- Tax and National Insurance (NI) deductions: Automatically calculates and deducts PAYE tax and NI contributions.
- Payslip generation: Creates clear and detailed payslips for employees.
- Statutory payments: Manages sick pay, maternity/paternity pay, and other statutory payments.
- Pension scheme integration: Automatically enrolls employees in workplace pension schemes.
Compliance and Reporting:
- HMRC integration: Seamlessly submits Real Time Information (RTI) reports to HMRC.
- Automatic P60 and P11D forms: Generates year-end tax forms for employees and HMRC.
- Audit logs and reporting: Tracks payroll activity and generates reports for analysis and record-keeping.
- Compliance updates: Ensures software stays up-to-date with changing UK payroll regulations.
Additional Features:
- Employee self-service: Allows employees to view payslips, update details, and request leave online.
- Time and attendance tracking: Integrates with time clocks or employee apps for accurate pay calculations.
- Multi-currency support: Useful for businesses with international employees or operations.
- Multiple pay schedules: Accommodates weekly, bi-weekly, or monthly pay cycles.
- Cloud-based access: Access your payroll data from anywhere with an internet connection.
- Integrations: Connects with accounting software, HR systems, and other business tools.
Document and Save Payroll Records
In the United Kingdom, employers are obligated to diligently maintain payroll records to ensure compliance with regulatory requirements and facilitate smooth business operations. These records serve as a comprehensive repository of crucial information, ranging from employee pay and deductions to reports submitted to HM Revenue and Customs (HMRC). To meet these obligations effectively, employers must keep meticulous records, encompassing various facets such as employee leave, sickness absences, and essential HMRC submissions. It is paramount to retain these records for at least three years from the end of the relevant tax year to prepare for potential HMRC audits. Employers are encouraged to leverage secure and easily accessible systems for efficient storage, ensuring seamless retrieval when needed.
- Employee pay and deductions: This includes salaries, wages, overtime, bonuses, and any taxes or contributions withheld from their pay.
- HMRC reports: These are documents submitted to HMRC electronically on a regular basis, such as Real Time Information (RTI) reports and End of Year Returns (P35/P14). Real Time Information (RTI) reports include both FPS and EPS submissions, ensuring real-time updates on employee tax and National Insurance.
- Full Payment Submissions (FPS): These electronic reports, submitted on or before each payday, detail individual employee payments and deductions.
- Employer Payment Summaries (EPS): These monthly summaries of FPS reports provide HMRC with an overall picture of your payroll activity.
- End of Year Returns (P35/P14): These annual reports summarize your payroll data for the entire tax year.
- HMRC payments: This includes your monthly PAYE tax and National Insurance contributions payments to HMRC.
- Employee leave and sickness absences: Track the dates and types of leave employees take, as well as any sick days they accrue.
- Tax code notices: Keep copies of any tax code notices issued to employees, indicating their income tax band and tax deductions.
- Taxable expenses or benefits: Record any business-related expenses employees claim or any taxable benefits they receive (e.g., company car, health insurance).
- Payroll Giving Scheme documents: This applies if you offer a Payroll Giving Scheme, where employees donate directly to charities through their salaries. These documents include the agency contract with the chosen charity and employee authorization forms.
Register New Employees with HMRC
Upon hiring a new employee, it is imperative to inform HM Revenue and Customs (HMRC) and ensure your official registration as an employer. This crucial step involves:
- Notification Requirement: Notify HMRC promptly about the addition of a new team member to your workforce.
- Employer Registration: Ensure your formal registration as an employer is up to date and accurate.
When welcoming a new team member aboard, it's crucial to comply with HM Revenue and Customs (HMRC) regulations. Here's a step-by-step guide:
- PAYE Eligibility: Confirm if your new hire falls under the PAYE system, ensuring compliance with tax and National Insurance contributions.
- Employee Information: Collect necessary details for tax code calculation. If a P45 is unavailable, utilize HMRC's 'starter checklist' as the replacement for the obsolete P46.
- Student Loan Verification: Determine if the new employee has a student loan to facilitate accurate deductions.
- Payroll Software Setup: Utilize gathered information to configure your new employee in your payroll software.
- HMRC Registration: Complete the onboarding process by registering your employee with HMRC through a Full Payment Submission (FPS).
By following these steps diligently, you not only adhere to legal requirements but also streamline the integration of new hires into your payroll system.
PAYE Payroll Tasks: A Monthly Guide for Employers
Operating PAYE as part of your payroll involves specific tasks each tax month, running from the 6th to the 5th. Key responsibilities include:
-
Before Employees’ Payday:
- EPS Submission: Send an Employer Payment Summary (EPS) to HMRC if no employees were paid in a tax month.
-
On Payday:
- Record Pay: Log employees' pay, covering salary, wages, and additional earnings.
- Deductions Calculation: Calculate deductions such as tax and National Insurance.
- Employer's NI Contribution: Compute the employer's National Insurance contribution for earnings exceeding £242 a week.
- Payslip Generation: Produce payslips for each employee.
- FPS Submission: Report pay and deductions to HMRC using a Full Payment Submission (FPS).
-
Following Tax Month (from the 6th):
- Online View: Check what you owe from your FPS online by the 10th.
- EPS Submission (by the 19th): Send an EPS to claim reductions on HMRC payments.
- View Balance: Check the balance owed in your HMRC online account.
- Payment: Pay HMRC by the 22nd (19th for postal payments), potentially facing penalties for late payments.
-
Late Reporting Consequences:
- Penalties: HMRC issues penalties for late or missing FPS submissions.
- Impact on Benefits: Late, missing, or incorrect reports can affect employees' income-related benefits like Universal Credit.
-
New Employers Alert:
- Scheme Closure: HMRC may close your PAYE scheme if, as a new employer, you fail to report or pay within 120 days.
Paying HMRC: A Monthly Obligation
Each month, you are required to settle payments with HM Revenue and Customs (HMRC), comprising:
- Tax and NI Payments: Submit the tax, National Insurance, and any other deductions owed, as reported in your Full Payment Submission (FPS) for the prior tax month.
- Reductions Consideration: Deduct reductions mentioned in any Employer Payment Summary (EPS) submitted before the 19th of the current tax month.
- Payment Deadline: Remit the total amount owed by the 22nd of the month (or the 19th for postal payments). Failure to meet this deadline may result in penalties.
- Quarterly Payment Option: If your average monthly payment is below £1,500, explore the possibility of paying quarterly by contacting the payment helpline for guidance.
Payroll Taxes in the UK
When it comes to payroll taxes in the UK, employers have two main responsibilities:
1. Deducting and paying employee deductions:
- Pay As You Earn (PAYE): This system automatically deducts Income Tax and National Insurance contributions (NICs) from employees' salaries and pays them to HMRC (HM Revenue & Customs).
- Income Tax:
- Basic rate: 20% on income between £12,571 and £50,270.
- Higher rate: 40% on income above £50,270.
- Additional rate: 45% on income above £150,000 (introduced April 6, 2023).
- National Insurance contributions (NICs):
- Employers pay 13.8% on employee earnings above £758 per month.
- Employees pay 12% on earnings between £12,571 and £50,270 and 2% on earnings above that.
2. Paying employer contributions:
- NICs for employees: As mentioned above, employers pay 13.8% on employee earnings above £758 per month.
- Workplace pension contributions: Since April 2019, employers have a minimum legal obligation to contribute to their employees' workplace pensions. The minimum contribution is 3%, with the employee contributing 5% and the government providing 1% tax relief. This total reaches 8%.
In conclusion, managing payroll in the UK is a critical function for businesses, ensuring accurate compensation for employees while adhering to legal obligations. The intricate process involves navigating tax regulations, deductions, and reporting requirements to HM Revenue and Customs (HMRC). Whether opting for in-house payroll software or outsourcing to a provider, employers must prioritize accuracy and compliance. The UK's progressive approach to national minimum wages reflects a commitment to fair compensation, while considerations such as working hours and the 13th-month salary add layers to the complexity. Successfully navigating these aspects not only fulfills legal obligations but also contributes to the financial well-being of both employees and businesses.
