The United Kingdom is an attractive option for companies looking to expand their operations overseas, despite the country’s recent challenges.
Although the British government is still navigating various complexities post-Brexit, the United Kingdom currently has the sixth-largest economy in the world. 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 you’re hiring remote employees in the United Kingdom for the first time. Running payroll for your new staff members 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.
Table of Contents
- Step #1: Register as an employer using the HMRC Portal
- Step #2: Pick a global payroll software solution
- Step #3: Determine your workers’ employment status
- Step #4: Collect information from your employees for payroll
- Step #5: Set the employee’s salary in British pounds sterling
- Step #6: Run payroll
- Step #7: File your taxes with the HMRC
- Frequently asked questions about running payroll in the UK
Step #1: Register as an employer using the HMRC Portal
If you decide to set up your own entity in the UK rather than using an EOR—which we’ll discuss below—here are the steps you’ll need to take.
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. The HMRC is the department of the British government that’s responsible for collecting taxes and other revenue from employers 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.
- The HMRC will only process applications for employers who are intending to hire and pay employees within the next two months.
- Similarly, they will disregard registrations that are for future tax years, not the current one.
- Finally, 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.
What exactly is Pay-As-You-Earn?
Simply put, PAYE is how the British government collects taxes from employees’ pay. Through your reference number, the HMRC will keep track of your business and ensure you and your staff are paying the correct amount of tax and National Insurance each payday.
Can I use an EOR instead?
Yes, it’s perfectly okay to use an Employer of Record (EOR) instead of trying to expand an independent branch of your company to the UK yourself. In fact, many businesses who decide to operate in the UK utilize EORs like Rippling to run payroll, issue benefits, and navigate international compliance issues. Navigating the complex tax issues and laws the HMRC imposes on foreign businesses is a significant administrative load, and most smaller companies don’t have the time or resources to spare.
Better still, when you use Rippling, you won’t have to switch your systems as you expand your company. Rippling’s EOR is built on top of our native payroll rails, which means that when the time comes, you can move from our EOR to Global Payroll through your own entities—in minutes.
See Rippling Global EOR
What information do I need if I register myself as an employer with the HMRC?
When you’re getting ready to register with the HMRC for a PAYE reference number, make sure you have the following information on hand:
- 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
What is a National Insurance number, and how do I get one?
Everyone living and working in the UK has a National Insurance number. This number is how the HMRC ensures the taxes and National Insurance contributions you pay are correctly recorded under your personal information, rather than someone else’s.
It’s necessary for at least one high-ranking member of your company, such as a director, to have one in order to register as a business entity in the UK.
If nobody at your organization has a National Insurance number, you’ll need to apply for one on the UK government website. You can find the application link here.
You don’t need a long list of documents or information to apply for a National Insurance number; the most important thing you’ll need to do is prove your identity. For US citizens, a valid passport will suffice. You may want to have your Social Security card or your license on hand (or, if you already have British residency in anticipation of running your business from the UK, your biometric residence permit, or BRP) just in case the application requests more proof of your identity.
With Rippling, you can hire and pay UK employees with either method:
- Rippling offers a native global payroll system, which allows you to pay employees who work in the UK—and around the world—in a single pay run.
- We also have our own native EOR service, which allows you to hire and pay employees in the UK even if you haven’t set up an entity there.
Step #2: Choose a global payroll software solution
First, it’s vital to understand the two kinds of international payroll solutions: global payroll processors and global payroll aggregators. You can learn about both in our guide.
- Global payroll processors, like Rippling, actually process your payroll, transmit funds, and calculate and file taxes in every country through their own software. Put simply: global payroll processors allow you to pay your international employees just as easily as your local employees: together in a single pay run.
- Global payroll aggregators, like Deel and Papaya Global, aggregate 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. You 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, like Rippling, you won’t have to switch systems as you scale. You can move employees from our EOR to your own local entity, without ripping out and replacing systems to accomplish this.
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: This person has signed an employment contract with you and has the rights afforded to somebody who works full time for a company.
- Independent contractor: This individual is self-employed.
- Worker: This individual is not an “employee,” but nor are they an independent contractor. They likely have a temporary written (or even verbal) contract with a company to do work for them for a specified amount of time, but they do not own their own business and cannot be officially referred to as “self-employed.”
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.
UK employment lawmakers designed specific criteria created to help you determine whether a team member is an employee, worker, or an independent contractor. The lists cover issues such as:
- Mutuality of obligation: Whether there is a binding commitment on the company to offer work and on the consultant to provide work.
- Personal service: An employee is required to provide their services personally, and if there is a right to appoint a substitute, this will typically be qualified such at the employer’s discretion.
- Control: The degree of control which the employing entity has over a worker’s hours and place of work.
- Other activities: Whether the worker can undertake other work outside of the employing entity and if so, to what extent.
- Pay and benefits: An employee will be paid a fixed amount on a regular payment date according to their hours worked, and irrespective of performance targets or project completion.
- Integration: How involved a worker is in the company and its management and how they are perceived by third parties.
- Facilities and equipment: An independent contractor will usually provide their own equipment and materials in order to perform the services while an employee will rely on the employer to provide the same.
- Financial risk: Which party has liability for any losses arising from the agreement. An employee will be paid even where there is insufficient work to keep them occupied and will assume no financial risk in working for the employer.
- Taxation: Which party bears the liability for tax arising from the engagement. A self-employed independent contractor will be responsible for the payment of their own income tax and social security contributions whereas the employer will account for these in the case of employees.
The lists are extensive, and their incredible degree of specificity will make it easier for you to avoid running into the kinds of problems that arise when classifications are too vague.
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.
With Rippling, you can pay everyone in GBP, in minutes, without waiting on transfers or conversion.
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 British law.
Time to run payroll! Here’s a preview of how Rippling’s global payroll system works:
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.
On or before payday
The first part takes place either on or before payday. Each time you pay employees, you need to do the following:
- Record their 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
On the first day of the tax month
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.
Rippling can reduce your busy work by automatically calculating and filing your taxes in the UK.
Frequently asked questions about running payroll in the UK
What are payroll taxes in the UK?
Employers in the United Kingdom are responsible for deducting income tax, National Insurance contributions, student loan repayments (where applicable), and pension contributions from their full-time employees’ paychecks.
The amounts you deduct from each employee’s paycheck depend on factors like where they live and what their National Insurance category letter is. Wales and Scotland have different income tax rates from Northern Ireland and England. You can find the rates and thresholds for the 2023/24 tax year here.
What are the late tax filing penalties in the UK?
If you don’t pay your company taxes on time, the HMRC will penalize your company. The amount of the fine is based on exactly how late you are. If you’re a day late, you’ll be fined £100; if it’s three months, you’ll be fined the same amount again. After six months, the HMRC will estimate the amount of taxes you owe and charge you that number plus an additional 10% of the unpaid taxes. The HMRC tacks on another 10% if 12 months pass and you do not file.
The agency also penalizes repeat offenders: The £100 fine increases to £500 if you’re late three times in a row.
What is the average salary for employees in the UK?
According to the Office of National Statistics, as of January 2023, the average regular weekly wage was £589.
What is the National Living Wage in the UK?
The National Living Wage—that is, the national minimum wage that must be paid to all employed persons ages 23 and up—is £10.42 as of April 1, 2023. The rate changes on the first day of April every year, so be sure to check it annually.
How much does it cost to run payroll in the UK?
The exact amount it will cost your company to run UK payroll depends on a variety of factors, including the number of employees you have and whether you need your payroll fully or partially managed. The cost is also affected by features you want the service to have. For instance, if you want the provider to automatically enroll your employees in pension plans and manage them, you need to be prepared to pay more.
The total amount will also be affected by setup costs, fees for generating reports, and whether you want to integrate HR services into the package or not.
Can I manually run payroll for employees in the UK?
Some small business owners decide they’d rather run payroll themselves in an attempt to cut down their overhead costs. However, running payroll is a time-consuming process that will only eat up more of your time as your business grows. If you go 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. Rippling handles your compliance work for you, including enforcing the National Living Wage and removing the correct amount of income and National Insurance tax.
- Security: Processing UK payroll manually can pose security risks, especially if you are using spreadsheets or paper records. This increases the risk of sensitive employee information being lost, stolen, or misused.
Rippling syncs all your business’s HR data with payroll so you never have to use a calculator or manually enter data, like hours and payroll deductions. Rippling also handles your tax and compliance work, from National Insurance and workplace pension contributions to income tax. Plus, we’re an authorized payroll provider by His Majesty’s Revenue and Customs department.
How do you pay independent contractors in the UK?
- First, ensure you’re correctly classifying this individual as an independent contractor (you can use Rippling’s free Worker Classification Analyzer).
- Next, agree on the payment terms with the contractor: the hourly or project rate, the payment cadence, and the method of payment (direct deposit, virtual wallet, etc.).
- Collect their payroll information, including their name, DOB, contact information, and bank account information.
- Use your chosen payroll software to pay the contractor in GBP. With Rippling, you can pay both contractors and employees in British pounds sterling, in a single pay run, without waiting on transfers or conversion.
Remember: When you hire an independent contractor in the UK, you’re not responsible for deducting tax and insurance from their pay—they are. So, you shouldn’t pay independent contractors through the HMRC PAYE system. Just make sure you keep accurate records of their employment and payroll information and that you’ve classified them correctly.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advise. You should consult your own tax, legal and accounting advisors before engaging in any related activities or transactions.