Global PayrollSeptember 11, 2023Getting Started with UK Payroll: A Beginner’s Guide

Whether you’re a contractor, recruiter, or just starting your business journey, understanding the essentials of UK payroll is vital. But navigating the UK payroll landscape is a challenging task with regulatory obligations, financial considerations, and statutory compliance, and it can seem like a daunting task.

Choosing to outsource payroll has become a prevalent trend in the UK. The blog serves as an exhaustive guide, meticulously detailing every aspect of the UK payroll to assist new contractors and recruiters by providing them with the knowledge needed to make informed decisions when it comes to payroll.

A 2020 report from the UK’s Chartered Institute of Personnel and Development (CIPD) highlights this, revealing that payroll stands as the top outsourced HR function. Notably, about 39% of small businesses in the UK have embraced this approach.

Setting up the UK payroll process doesn’t have to be daunting, especially with PamGro by your side. Whether you’re a new employer or looking to streamline your payroll operations, we’ve got you covered. Here’s a simple guide to get you started:

1. Register with HMRC: The first step is to register as an employer on the HMRC portal and obtain your PAYE reference number.
   PAYE, or Pay As You Earn, is the UK’s method for collecting tax and national insurance from employees. Administered by the UK’s HM Revenue and Customs (HMRC), any company with employees must enroll new employee in this system. As part of their payroll process, employers deduct income tax from wages and submit it to HMRC via PAYE.
   An employee’s tax code, which is typically a combination of numbers and letters like 1257L or K396, determines the amount of tax deducted. This system allows the income tax to be spread across the tax year (from April 6 of one year to April 5 of the next) rather than in a single payment.
2. Choose a Payroll System: Deciding whether to hire a payroll service or accountant or use the right payroll software is crucial for accurate calculations and compliance with HMRC regulations.
3. Report to HMRC: Before your first payday, ensure that you report employee details, earnings, and deductions to HMRC using your chosen payroll software or payroll service provider. This step ensures compliance with PAYE regulations.
4. Pay Taxes and National Insurance: On payday, make timely payments of taxes and National Insurance contributions to HMRC. Our team can assist you in navigating the complexities of tax calculations and submissions.

Alternatively, you can opt for our comprehensive payroll services. With PamGro, you gain access to a dedicated team of payroll experts who handle everything from setup to processing, leaving you free to focus on growing your business.

In the UK, employers use His Majesty’s Revenue and Customs (HMRC) and the Pay-As-You-Earn (PAYE) system to pay their employees. The companies do have the option of employing people and managing payroll internally or outsourcing it to other EOR Service providers. Registered employers are responsible for recording wages, providing payslips, and handling national insurance for all employees.

IR35 rules play a crucial role for companies that hire freelancers or contractors. The intent of these rules is to prevent the incorrect categorization of workers as a means of avoiding tax obligations.

Starting in April 2021, the responsibility for determining whether IR35 rules apply to freelancers or contractors shifts from the workers themselves to the companies that hire them.

When a worker is classified as “inside IR35,” it means that they are considered, for tax purposes, to be an employee of the company.

Therefore, the company is obligated to deduct income tax and National Insurance contributions from the worker’s payments, just as they would collect income tax due for a regular employee.

On the other hand, if a worker is “outside IR35,” they are regarded as genuinely self-employed. In this case, the company isn’t required to make these tax deductions, and the worker is responsible for their own tax and National Insurance contributions.

Essentially, the IR35 rules aim to ensure that companies accurately classify their workers to uphold tax compliance.

Read More: What is IR35? Implications for Contractors and Businesses

In the UK, every worker is entitled to the minimum wage, regardless of whether they are paid by the hour or on a set salary (calculated based on contract hours).

For the year 2023, the minimum wage varies by age:

•  Apprentices (under 19 or in their first apprenticeship year, regardless of age): £5.28
• Under 18 years: £5.28
• 18 years  to 20 years : £7.49
• 21 years to 22 years: £10.18
• The National Living wage to workers aged 23 years and above is £10.42 an hour.

An employee’s average pay for the total hours worked must never fall below the National Minimum Wage.

According to the Working Time Directive of the United Kingdom, employees are prohibited from working for more than 48hrs per week over a 17 week span. Employees who opt to work longer hours may choose not to work longer hours. A typical UK working day is 9:00am-5:00pm. It varies according to work day. Usually, working days are usually eight hours long.

In the UK, income tax depends on an employee’s tax code and their earnings. The tax codes and rates differ based on income brackets for the year 2023:

• The initial £12,500 earned annually is tax-free.
• For earnings from £12,501 to £50,000, the tax rate is 20%.
• Earnings between £50,001 and £150,000 are taxed at 40%.
• Any income over £125,140 is subject to a 45% tax rate.

The exact amount how much tax is deducted also depends on whether an individual is a basic, higher, or additional rate taxpayer.

National Insurance contributions (NICs) are calculated based on a person’s earnings and are generally deducted automatically from wages if you’re an employee. For self-employed individuals, contributions are typically made through self-assessment tax returns.

There are different ‘classes’ of National Insurance contributions that depend on the employee’s employment status and how much they earn.

Here is a basic breakdown:

• Class 1: Paid by employees earning above a certain threshold. Both the employee and employer make contributions.
• Class 2: Paid by self-employed people with profits above a certain level. It’s a flat weekly rate.
•  Class 3: Voluntary contributions that can be made to fill gaps in your National Insurance record, typically to ensure you qualify for certain benefits like the State Pension.
•  Class 4: Paid by self-employed people in addition to Class 2 contributions, but only if their profits are above a certain higher level. These are calculated as a percentage of profits.

If a worker is classified as “inside IR35,” their hiring company is responsible for deducting Class 1 National Insurance contributions along with income tax. If the worker is “outside IR35,” they would typically be responsible for Class 2 or Class 4 contributions, as they are considered self-employed for tax purposes.

When disbursing salaries through your company’s payroll, you’re responsible for not only providing your employees with their due wages, but also for making necessary deductions under the PAYE (Pay As You Earn) system. The employer must make sure they stay in compliance with tax and employment laws.

Payments to Employees:

• Disburse the total amount owed, encompassing their base salary or hourly wages, as well as any additional earnings like tips or bonuses.
•  Other legally mandated payments, such as statutory sick pay or maternity leave allowances.

Deductions for Employees Salary:

• For the majority of employees, employer will withhold both National Insurance contributions and income tax.
• Additional deductions may include contributions to pension plans or repayments toward student loans.

In the United Kingdom, statutory payments—such as Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), and Statutory Adoption Pay (SAP)—are administered through an organization’s payroll system.

These are legally mandated forms of financial support designed to provide income replacement in various circumstances like illness, childbirth, or adoption.

Employers possess the capability to recover a portion of these statutory payments, although the precise amount eligible for recovery is contingent upon the total National Insurance contributions paid by the company within a given fiscal year.

To reclaim these amounts, employers can adjust their monthly payroll tax remittances to HM Revenue and Customs (HMRC) downward by the corresponding recoverable sum.

It is essential for organizations to maintain scrupulous records related to payroll taxes, statutory payments and National Insurance contributions. Inaccurate payroll records could result in compliance issues, including fines and penalties.

Payroll companies such as PamGro will assist the companies and contractors in doing payroll reports and maintaining records for the statutory payments.

In the United Kingdom, a umbrella company or EOR service provider is a specialized firm that handles the various payroll functions for other businesses and contractors.These services often extend beyond merely processing employee wages and can include tax deductions, National Insurance Contribution, Salary sacrifice, Pension Contributions, Statutory Payments, Employee Benefits and Expenses, Real-Time Information (RTI) Reporting, Year-End Reporting, Record-Keeping, and payroll compliance.