UK: Key Payroll Considerations when Employing in the Country

The United Kingdom (UK) has been and continues to be a critical business epi-center for multinationals operating globally. The UK is ranked number 9 amount 190 economies according to the World Bank’s annual ratings.  It is critical that employer’s looking to set up operations in the UK understand and navigate the key components to operating a payroll.

Preparing to Run Payroll

The actual legal process of getting a business set up in the UK is relatively short and registration is relatively quick depending on the type of business and entity you are registering.  In many cases companies will also need to register for VAT.

Regardless of the type of entity a business is registering, all employers must also register to contribute to National Insurance (NI) and the Pay As You Earn (PAYE) tax. This is managed through the HMRC (Her Majesty´s Revenue and Customs) and can be done online. Registration must be completed prior to the first pay-date and usually takes up to 5 days to obtain the employer PAYE reference number.

Upon obtaining a PAYE reference number, many employers chose to outsource the payroll calculations to a payroll provider as the outsourcing market is very mature in the UK.

Hiring Considerations

When you hire a new employee, he or she will need to provide you with a current form called a P45 from their previous employer. The P45 is an important document that details the employees YTD earnings and taxes.  If the employee does not have a P45 they will need to fill out what is called a ‘Starter Checklist.’

All employees have an employment contract with their employer.  In some cases, Collective agreements need to be considered if there are trade unions or staff associations.  An employer must give employees a ‘written statement of employment particulars’ if their employment contract lasts at least a month or more. This isn’t an employment contract but will include the main conditions of employment.  The employer must provide the written statement within 2 months of the start of employment.

Payroll Compensation

The minimum wage is regulated by the National Minimum Wage (NMW), which depends on the age of the employee.

There is no concept of 13/14^th month payments in the UK.  Employees are generally paid monthly  based on 12 pay periods.

Bonuses based on contractual agreement are common but there are no statutory bonuses provided.  Aside from unpaid benefits (e.g. accrued minimum leave entitlement in lieu) there are no statutory requirements for severance pay except for redundancies.

Tax & Withholding

In 2014 the UK became a leader in streamlining and centralizing payroll reporting with the roll out of Real Time Information (RTI).  RTI system requires that all payroll data from payments, deductions, income taxes and social contributions, is reported to HMRC on a pay-as-you-earn (PAYE) basis in real time whenever an employee is compensated.  Payroll systems in the UK underwent a huge overhaul in order to be able to connect to the government gateway that links with the HMRC.

RTI requirements have made it a lot more difficult for employers to rerun payroll and manage off cycles.  However, employers do not have to submit a year’s worth of information at the end of the tax year – avoiding a significant administrative burden. As part of the RTI, employers also have to advise HMRC if a new employee joins or leaves, or if an employee’s professional and personal circumstances change such as if they become a director.

The rate of income tax is depended upon the employee tax code assigned by the HMRC. The numbers in atax code tell the employer or pension provider how much tax-free income an employee will get in that tax year.  The letters in a tax code refer to the employee situation and how it affects their personal allowance.  The actual tax rate may range from 0% to 45%.

The United Kingdom’s National Insurance (NI) covers a wide range of social benefits from pension, to maternity leave, to unemployment,with varying contributions for employers and employees depending on a workers employment status and salary.

Leave

Most workers are legally entitled to 5.6 weeks, or 28 days, ofpaid holiday time.  Bank or public holidays do not have to be given as paid leave, though the employer can choose to include bank holidays as part of a worker’s statutory annual leave.  An employer can choose to offer more leave than the legal minimum.

Employees can take time off work if they are sick.  They are required to provide their employer proof if they are sick for more than 7 days. Qualified employees can get £94.25 per week of Statutory Sick Pay (SSP) and it can be paid for up to 28 weeks.

Qualifying mothers are eligible for Statutory Maternity Leave of 52 weeks. The 52 weeks of maternity leave are divided into two parts. The first 26 weeks are considered “ordinary maternity leave” and the last 26 weeks are classified as “additional maternity leave”. Statutory Maternity Pay (SMP) is paid for up to 39 weeks.

The British  government recently rolled out Parental Leave (SPL) and Statutory Shared Parental Pay (ShPP) for qualifying couples that are having a baby or adopting a child.  Qualifying couples may share up to 50 weeks of leave and up to 37 weeks of pay between the two of them.

All information contained in this publication is up to date on 2019. This content has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this chart without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this content, and, to the extent permitted by law, AUXADI does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this chart or for any decision based on it.