• Home
  • >
  • Blogs
  • >
  • A Complete Guide to UK Payroll Taxes and Deductions for Employers

A Complete Guide to UK Payroll Taxes and Deductions for Employers

Published by Alisha Shrestha
Published Date: July 11, 2023 , Updated Date: June 25, 2024
Categories: Payroll & CIS

Running a business in the UK and hiring employees to work for you is a significant undertaking. Managing payroll, to navigating employment regulations can feel overwhelming at times. Therefore, you need a thorough understanding of the UK payroll system to manage your workforce effectively.

In this comprehensive guide, we’ve covered everything you need to know about running payroll in the UK, and thus helping you to streamline your payroll process.

Basics of UK Payroll History

The UK payroll system has undergone significant changes over time, including the introduction of PAYE in 1944 and the adoption of Real Time Information (RTI) in 2013. And now, with the introduction of Making Tax Digital and the expansion of workplace pensions, there are even more changes on the horizon.

As an employer in the UK, understanding payroll taxes, deductions, and relevant legislation is key to smooth business operations. Moreover, with constantly changing payroll regulations, staying updated with the latest developments is even more important in today’s context.

UK Payroll Taxes & Deductions

Payroll taxes refer to income tax and national insurance contributions concerning employment. Notably, UK employers must implement the Pay as You Earn (PAYE) system in their workplace payroll. This PAYE system serves as a route for HM Revenue Customs (HMRC) to collect all taxes due on the UK employment income.

In addition to payroll taxes, the employer must make other deductions from employee’s gross salary such as Pension Contribution, Student Loan Repayment, Payroll Giving donations and Child Maintenance Payments.

In the following segment of this blog, we will delve into a comprehensive explanation of payroll taxes and deductions, providing detailed information on each.

Employment Income tax calculation 

Every UK-employed individual should pay an income tax to the UK government. It is the employer’s responsibility to deduct accurate income taxes from their employee’s earnings and transfer these taxes to the government. Consequently, when paying salaries to their staff, employers must calculate the tax and remit the net amount only.

Factors affecting employment tax 

The employee’s income tax calculation is mainly affected by two factors. These factors are the level of the employee’s income and the amount of eligible personal allowance.

  • Employee's Income level

  • Eligible Personal Allowance

The level of employee’s income decides the tax brackets and tax rates applicable to them. The higher income level is subject to higher tax rates. Here is a summary of the different tax brackets, along with taxable income and tax rates for tax year 2023/24.

Tax Brackets

Employment Income

Tax Rate

Personal Allowance

Up to £12,570

0%

Basic Rate

£12,571 to £50,270

20%

Higher Rate

£50,271 to £ 125,140

40%

Additional Rate

Above £ 125,140

45%

How Tax Code affects payroll tax calculation

Employees’ tax code depends on various factors like their personal allowance, taxable benefits, or any tax credits they may be eligible for. So, each employee may have a different tax code.

The tax code is usually expressed as a series of numbers followed by a few letters.

Let’s say an employee’s tax code is 1257L. The ‘1257’ part of the code suggests that the employee entitles to a personal allowance amount of £12,570. While ‘L’ indicates that there isn’t any tax situation that affects his personal allowance; therefore, he is eligible for the full personal allowance.

What if, the employee’s tax code is BR? This code implies that the employee has multiple jobs or has fully used up his personal allowance. So, any income needs to be taxed at a basic rate of 20%.

It is crucial to note that tax codes are not permanent and can change over time. Therefore, employers must exercise caution and regularly review the tax codes for each employee. It is their responsibility to promptly update any new tax codes in their payroll software to ensure compliance and accuracy.

Example: Employment Income tax calculation,

Let's consider a scenario where an individual has an annual employment income of £40,000 and has a tax code of 1257L.

He will have a monthly income tax deduction of £457.

Given, his first £12,570 will be tax-free income, the remaining £27,430 be taxed at the basic rate. This results in an annual income tax of £5,486 and a monthly tax deduction of £457.17.


Employment National Insurance Contributions (NICs)

National Insurance Contributions

NICs, short for National Insurance Contributions, are payments that employers and employees make in the United Kingdom. These contributions serve as a form of tax and are used to finance a range of state benefits and services, like the National Health Service (NHS), State Pension, and various social security benefits.

National Insurance Contributions are categorized into different classes primarily based on an individual’s employment or self-employment status as mentioned below table.

Work Status

Type of NICs

Self-employed Individuals

Class 2 NIC and Class 4 NIC

Employed Individuals

Class 1 NIC and Class 1A NIC

In this division, we will discuss the NIC related to employment, their rates, threshold and how they are calculated.

Employee's Class 1 NIC

Employee’s Class1 NIC are known as ‘Primary Class 1 NIC’. These are contributions that employers make by directly deducting from employee’s earnings. However, primary class 1 NIC must deduct only when a minimum income threshold is reached.

For tax year 2023/24, the minimum income threshold is £242 per week, or £1,048 per month, or £12,570 per year.

Employer's Class 1 NIC

Employer’s Class1 NIC are referred to as ‘Secondary Class 1 NIC’. Employers must make this contribution in addition to the employee’s class 1 NIC.

Unlike the primary class 1 NIC, these are not deducted from an employee’s earnings. Instead, they are paid by employers on behalf of their employees. Therefore, these contributions are taken as part of the overall employment costs for the company.

The minimum income threshold for secondary class 1 NIC is £175 per week, £758 per month, and £9,100 per year for the tax year 2023 to 2024.

The rate of Class 1 NIC (both employers’ and employees’ NIC) is based on the level of the employee’s earnings and NIC category letter. You can explore the detailed NIC threshold and rates in our article Understanding National Insurance Contribution (NICs) in the UK.

Class 1 NIC example, 

Let’s say an employee earns £2,500 monthly and has a NIC letter A. His employer should pay a secondary class 1 NIC of £240.40 and he should pay a primary class 1 NIC of £174.24.

Employment Class 1 National Insurance Calculator

Experience a hassle-free staff payroll setup with our exclusive National Insurance Calculator, streamlining your workload effectively.

c. Class 1 A NIC

UK employer needs to pay Class 1A NICs when they provide taxable benefits or expenses such as a company car, fuel, private medical insurance, and interest-free loan to their employees. Such benefits are known as ‘Benefits in Kind’ and this contribution is referred to as "Class 1A NICs on Benefits in Kind."

Class 1A NIC is calculated by multiplying the cash equivalents value of benefits by the rate of NIC.

For the tax year 2023/24, the rate of Class 1A NIC is 13.8%.

Class 1 A NIC example, 

Suppose you provide a company car to one of your employees with a cash equivalent value of £20,000. The Class 1A NIC rate is 13.8% for current tax year.

To calculate the Class 1A NICs, you multiply the cash equivalent value (£10,000) by the Class 1A NIC rate (13.8%):

Class 1A NIC = £10,000 x 13.8% = £1,380

In addition to paying class 1A NIC, the employer is also liable to report HMRC about the benefits in kind that they have provided to employees. For this, the employer must submit a P11D form. You can discover more about P11D in a later section of this article.

Pension Contributions

Pension Contributions

All UK employers must automatically enrol their employees into a workplace pension if they meet qualifying criteria. Further, employers and employees make regular contributions to a pension scheme as part of their workplace pension.

A workplace pension serves as a savings pot that the employee can rely on upon their retirement. The workplace pension is also known as ‘Occupational Pension’, ‘Company Pension’, or ‘Work-based Pension’.

Let’s understand some important aspects of pension contribution in the UK:

Conditions for Automatic Pension Enrolment

Previously, the decision to join an employer's pension scheme was under employees’ discretion. However, starting from 2012, UK employers have been progressively mandated to automatically enrol eligible employees and make contributions to their workplace pension scheme.

The employees meeting the following criteria are eligible for automatic enrolment:

  • Aged between 22 and State Pension age
  • Earning £10,000 per year at a minimum
  • Classed as a ‘worker’
  • Ordinarily works in the UK

Tips: UK employers can postpone the automatic enrolment of eligible employees by 3 months. However, the respective employee must be informed about his postponement.

Rate of Pension Contributions

The UK government has established a minimum contribution rate for the workplace pensions. Currently, the rates set for employers and employees are as follows:

  • Employers: 3% of total earnings
  • Employees: 5% of total earnings

Total earnings include various components such as salary, bonus, overtime, statutory sick pay, commission, statutory maternity pay, and statutory paternity pay.

These contributions can exceed 3% and 5% depending on the employers’ chosen pension scheme rules. Alternatively, arrangements can be made where employees contribute less than 5% and their employer contribute remaining percentage, resulting in a combined total of 8%.

On the other hand, if the employees join voluntarily (opted in) the pension scheme, the employee must contribute to their pension scheme only if their monthly earning is above £520. The contribution rates for these employees are the same as specified above.

Employer's Responsibilities : Pension Opt in, Opt out & Re-enrolment

  • Opted In

  • Opted Out

  • Re-enrolment

Employees who do not meet the automatic enrolment criteria but still want to voluntarily join pension scheme are referred to as ‘Right to Opt in’. For voluntarily opted-in employees, the employer must make regular pension contribution similar to automatically enrolled staffs.

Student Loan Repayments

Employers in UK must deduct payments from employee’s pay for student loans or postgraduate loans if the employees are repaying such loans. The repayment amount must be deducted based on the employee's earnings level and chosen repayment plan.

The employer must then report these deductions to HMRC, and the amounts are transferred through the PAYE system.

Furthermore, upon hiring a new employee, the employer must review their P45 or starter checklist to determine if the employee has any outstanding loans. If such loans exist, the employer is required to make deductions to ensure continuity in loan repayments.

How to Make Loan Repayment Deductions

The employer needs to ask with the employee about their chosen repayment plan. Once the employer has this information, they can input the details into their payroll software, which will automatically calculate the deduction amount.

Terminate Loan repayments deductions

Employers should not cease loan repayment deductions solely based on the employee's request. However, if HMRC notifies the employer that deductions are no longer required for a specific employee, they may consider stopping the deductions.

HMRC issues different forms based on the loan held by the employee.

Type of Loan

HMRC's Notice

Student Loans

SL2 Form

Postgraduate Loans

PGL2 Form

PAYE Registration

PAYE, which stands for Pay as You Earn, is a system in the UK that employers must register for, before hiring staff. The PAYE registration establishes your business as an employer in the UK. You must register for PAYE even if there is only one employee or single director.

The PAYE registration must be done before first pay date. The registration process usually takes around 15 working days.

Once registered, the business will be assigned an employer PAYE reference number such as 123/AA65430, which serves as a unique identifier. Each employer in UK has a distinct PAYE reference number.

As stated in above section of this blog, HMRC uses the PAYE system to collect all employment-related tax & contributions. So now, whenever you pay your staff, you must deduct the necessary tax and other contributions and transfer them to HMRC.

After registering for PAYE, businesses can choose whether to handle payroll internally or outsource to a third-party service provider.

No PAYE Registration:

If all of your employees earn less than £123 a week, you do not need to register for PAYE.

Note: However, you must keep payroll records.

Payroll Software and Reporting

Payroll Software and Reporting

Another important aspect of running payroll in the UK is ensuring a strong understanding of payroll software and reporting obligations.

In the subsequent section of this blog, we have explored into these topics in detail, offering valuable information and insights.

Considerations for Selecting Payroll Software

Employers have the option to either handle the payroll in-house or outsource the entire payroll function, each having its own pros and cons.
If the employer chooses to manage the payroll internally, it is crucial to select suitable payroll software carefully. The chosen payroll software should be capable of fulfilling essential payroll requirements, including:

  • Recording employee information
  • Calculating employee pay and deductions
  • Reporting real-time payroll information to HMRC
  • Calculating payment to be made to HMRC
  • Calculating statutory payments like sick pay, maternity pay
  • Producing payslips, necessary reports like P60, P32, P45
  • Recording pension deductions

Since some payroll software may offer certain features while lacking others, it is important for employers to carefully evaluate and select software that aligns with their specific business requirements.

It is highly recommended that the employers select HMRC-recognized payroll software. This ensures that the employer can meet the payroll reporting obligations to HMRC.

A list of HMRC-recognized payroll software, including both free and paid options, is available for employers to choose from.

Payroll Reporting in UK

Employers in the UK have two separate reporting obligations: to HM Revenue and Customs and to employees.

Both are crucial parts of complying with payroll regulations with each one having its own importance.

Let’s delve more into the type of reports, their purpose, and deadlines in detail for each of the reporting requirements.

Reporting to HMRC

With the implementation of the Real Time Information (RTI) system, it is now mandatory for employers to electronically report payroll data to HMRC each time they pay their employees. This real-time exchange of information ensures that HMRC has immediate access to up-to-date data.

Full Payment Summary (FPS) and Employment Payment Summary (EPS) are two important payroll reports, that are sent to HMRC using RTI system.

In addition to RTI submission, the employers are also required to submit an annual P11D form if any of their employees have received benefits in kind during that particular year. The benefit in kind refers to non-cash benefits like company cars, private medical insurance, and accommodation.

We have presented below a table providing a summary of reports along with their corresponding details, and deadlines.

Types of Report

When Relevant

Deadlines

Full Payment Summary (FPS)

  • Every time employee is paid,
  • when employee joins or leaves
  •   to correct any errors

On or before the 19th of the following month


E.g., FPS for April must be submitted by 19th of May.

Employment Payment Summary (EPS)

  • Period of inactivity
  • No payment periods
  • To claim employment allowance
  •  To recover statutory payments

On or before the 19th of the following month.


E.g., EPS for April must be submitted by 19th of May.

P11D

  • Any employee in receipt of benefits in kind

6th July after the end of the tax year


E.g., P11D for 2023/24 must be sent to HMRC by 6th July 2024.

Reporting to Employee

Similar to HMRC, employers are obligated to provide specific records and reports to their employees. These mainly include payslips, P60, and P45.

Below is a summarized table of the payroll reports that need to be issued to employees:

Type of Report

When relevent

Deadlines

Payslips

Every time employee is paid

On or before payday

P60

On annual basis including summary of employee's total earnings, tax and NIC deductions for the tax year

On or before the 31st May of the following tax year


E.g., P60 for 2023/24 must be sent to HMRC by 31st May 2024.

P45

When employee leaves job

On or before last working day  

For more detailed information on UK Payroll Reporting Requirements, we recommend referring to our comprehensive article that elaborates these payroll reports and their specifics.

Additional Payroll Considerations

In addition to reporting requirements and tax calculations, there are other factors that employers need to be mindful while managing payroll functions.

In this section, we have mentioned few crucial aspects of payroll processing in UK: payroll year-end, common payroll mistakes and significance of payroll outsourcing. Understanding and addressing these factors can greatly contribute to the smooth payroll operations for UK employers.

Payroll Year End Checklist

The payroll year-end aligns with the tax year-end, for the current year it is on 5 April 2024.

This marks an important milestone for employers as they need to ensure that all their paperwork and tasks are completed within the respective deadlines. It is important to meet these deadlines to fulfil obligations as UK employer and maintain compliance with relevant regulations.

Here's a quick checklist to help the UK employer to stay organized:

To do list

By when

Send Final Report to HMRC

On or before payday

Update employee payroll records

Before 6 April

Report expenses and benefits

6th July

Provide P60s to all employee

31st May

Start new year payroll

6th April

Send Final Report to HMRC:

The employer is required to submit the final Full Payment Summary (FPS) on or before the last payday of the tax year. It is important to select 'Final submission for year' as ‘Yes’ when submitting the FPS.

In the event that this option is not available in the employer's payroll software or if it was unintentionally missed, the Employer Payment Summary (EPS) must be submitted instead.

If the employer identifies any errors or mistakes after submitting the final FPS, they can make corrections by submitting an additional FPS. For more information, refer to the HMRC guidance on sending additional FPS to rectify previous errors.

Update employee payroll records:

Employers should ensure that they have arranged payroll records for all employees who worked for them during that particular tax year. They should also verify if any changes have been made to employees' tax codes and update their payroll software accordingly. It is important to mention that HMRC notifies employers about any employees who require a new tax code.

Report expenses and benefits:

As mentioned earlier, employers are required to submit a P11D form to HMRC for each employee receiving taxable expenses or benefits. The employer must pay any class 1A NIC owed on these taxable expenses and benefits by the 22nd of April (online payment). However, the deadline for submitting the P11D report to HMRC is July 6th.  

Provide P60s to all employees:

Employers must provide a P60 to all employees on their payroll who are working for them until April 5th, the last day of the tax year. A P60 summarizes an employee's total earnings and deductions for the tax year. Employees should receive their P60 by May 31st after the tax year ends.

Start new year payroll

Prior to processing the new year's payroll, it is important for the employer to ensure that their payroll software is up to date. If they are using a version older than 14.2.14330.88, they should download and install basic PAYE tools again. The version number can be found in the bottom-left corner of the tool. This step is crucial to ensure that the payroll software incorporates the latest rates and thresholds for Income Tax, National Insurance, and other relevant aspects.

Common Payroll Mistakes in the UK

. Common Payroll Mistakes

For employers who manages payroll in-house, it is crucial that they are well-informed about common payroll mistakes that can happen.

Handling payroll is delicate affair for business, as a slightest mishap can have significant financial consequences. By understanding and recognizing these common mistakes, employers can take proactive measures to prevent any potential errors and avoid incurring fines or penalties.

In the following section, we will provide overview of some of the most frequently encountered payroll mistakes.

  • Missing deadlines is a common payroll mistake that occurs frequently. With numerous HMRC payroll deadlines to manage, it's easy to overlook or forget one, resulting in penalties for late tax filing.
  • Misclassifying employees as freelancers or contractors is another common payroll mistake that can result in problems like unpaid benefits and inaccurate payment calculations, requiring complex and time-consuming resolutions.
  • Using incorrect tax codes is a common payroll mistake that can lead to complications for employers and employees, resulting in overpayment or underpayment of taxes. Failure to update any change in employee’s tax code is the main reason for this.
  • Managing auto-enrolment can be challenging. So, another common mistake is the failure to enrol eligible employees in the workplace pension scheme or properly manage opt-outs and postponements.
  • Miscalculating employee pay is another common mistake in payroll management. This can occur due to manual entry errors, outdated payroll systems, overlooking additional allowances, or failure to stay updated on the latest legislation.

Significance of Payroll Outsourcing

Significance of Payroll Outsourcing

Given the sensitive nature of payroll processing, even a minor error can have significant and costly repercussions. These consequences go beyond financial penalties, impacting employee satisfaction, leading to high turnover rates, increased hiring costs, and a tarnished business reputation.

To mitigate these risks and ensure accurate and timely payroll processing, the ideal solution is to outsource the payroll functions to experienced experts. By doing so, businesses can foster a productive and content workforce, while avoiding the detrimental effects of payroll mistakes.

Here are some key advantages of payroll outsourcing that highlight its importance in today's business environment.

  • Cost Saving: Outsourcing payroll often saves a firm money compared to carrying out the task in-house. Processing payroll in-house means investing in the necessary computer equipment, payroll or accounting software and providing training to ensure that payroll is processed correctly. Additionally, employers must stay up to date on changes in tax rules, personnel, and accounting deadlines. Missing these matters can be costly and expose the business to additional liability.
  • Prioritizing core business: Any time or resources devoted on payroll function deviates the business ability to concentrate on core business operations. By entrusting payroll processing to an expert, the business can optimize your time and energy for areas directly aligned with their core business objectives and revenue centres, such as customer service, sales, and marketing.
  • Saving time: Whether the employees are 10 or 100, payroll processing demands significant time and attention. Processing payroll in-house means employer or their staff may need to input extensive payroll data. Time is money, after all. Additionally, outsourcing payroll can help you avoid unexpected losses of time that may occur if employers make a payroll mistake, or if you receive notice of an unexpected audit.
  • Expert access: Working with an outsourced payroll provider means you gain access to their years of expertise. This instant access is especially important if you work in multiple jurisdictions and need an expert who is familiar with all local rules and regulations.
  • Regulatory Compliance: Legal and compliance requirements relating to payroll are often complex. By outsourcing payroll to a trusted service provider, the employer can delegate this task to a company that is knowledgeable about local, regional, and national laws and regulations. The employer can avoid penalties or unnecessary audits that are triggered by your non-compliance.

Conclusion

In conclusion, running payroll in the UK can be a complex process, but with the right knowledge and tools, it can be streamlined and efficient. Understanding the basics of the UK payroll system, including tax codes, deductions, and reporting requirements, is essential for any business operating in the UK.

Remember, payroll is not just about paying employees; it also involves complying with legal obligations and maintaining accurate records. By following best practices and seeking professional advice when needed, businesses can navigate the complexities of payroll in the UK and ensure smooth operations while keeping their employees satisfied.

We hope this guide has provided you with valuable insights and practical tips to help you effectively manage payroll in the UK. By implementing the knowledge gained from this blog, you can streamline your payroll processes and focus on growing your business with confidence.

UK Employer’s Responsibility

  • Registering with HMRC and setting up a PAYE scheme
  • Calculating employees’ pay correctly
  • Deducting the correct amount of tax and National Insurance from employees’ wages
  • Setting up a pension scheme where required, and paying into it
  • Submitting payroll information to HMRC on time
  • Paying taxes to HMRC on time

How Can UK Property Accountants Help?

We pride ourselves on our in-house payroll expertise, honed through years of effectively managing payroll for hundreds of clients.

 Contact us now and we will guarantee that you can:

  • Retain your workforce with confidence
  • Establish yourself as a trustworthy employer
  • Foster a productive, motivated workforce

Frequently Asked Questions

What payroll taxes do employers pay UK?

In the UK, employers pay income tax, National Insurance Contributions (NICs), the Apprenticeship Levy, and employer's National Insurance Contributions as part of their payroll taxes.

What are employer contributions in the UK?

Employer contributions in the UK refer to the various taxes and social security contributions, such as National Insurance contributions and pension contributions.

How often do I need to report payroll information to HMRC?

Payroll information in the UK must be reported to HMRC on or before each payday using approved software, while reporting frequency depends on the business's payroll schedule that can be monthly, weekly.

How much pension contribution do I need to pay in UK?

The pension contribution amount in the UK varies, but the total minimum contribution for automatic enrolment schemes is 8%, including both employer and employee contributions.

Can I outsource payroll management to a third-party provider?

Yes, you can outsource payroll management to a third-party provider, which offers benefits such as increased accuracy, time savings, compliance expertise, and reduced administrative burden.

What are standard deductions in UK?

Standard deductions in the UK include the personal allowance and deductions for expenses like pensions contributions, charitable donations, and business expenses.

What happens if I don't comply with payroll tax and deduction requirements?

Non-compliance with payroll tax and deduction requirements can lead to fines, penalties, and legal consequences including interest, sanctions, and jail sentences.

How do I make corrections to payroll reports sent to HMRC?

Employers can submit an FPS (Full Payment Summary) with the updated information or use an Earlier Year Update (EYU) for corrections related to previous tax years.

How much tax and National Insurance do you pay in the UK?

The amount of tax and National Insurance contributions you pay in the UK depends on your income and applicable tax rates and thresholds.

How do I pay payroll taxes online?

To pay payroll taxes online in the UK, you can use HMRC's online services, such as the Government Gateway or HMRC Online Payment System, for secure and convenient payments.

Alisha Shrestha
Our Complete Guides