Understanding Payroll in the United Kingdom: What Global Companies Need to Know About UK Payroll
Mar 14, 2017
Though the political upheaval of Brexit has created a wealth of uncertainty around the economic situation in the United Kingdom, the UK remains a powerhouse of international business for many global companies. Though experts project UK growth to slow in coming years (with a forecast of 1.2% for 2017), its manufacturing, exports, and services sectors have shown positive activity of late – boding well for continued economic progress across the country, in spite of Brexit-related concerns.
For expanding companies, the UK offers an efficient regulatory environment and many similarities to the U.S. in terms of business structures and general expectations – making it a frequent ‘first stop’ for U.S.-based companies and other Western organizations as they engage in international expansion. As global companies strategize how to manage their UK operations following the Brexit vote, they’ll need to understand the following nuances of the country’s unique employment guidelines, payroll laws, and tax requirements.
The legal process of getting a business set up in the UK is relatively short, but consists of several steps. A company must decide its official name; establish a registered office address, liability structure, statement of capital, and officers list; and verify which SIC number (or “standard industrial classification of economic activities”) identifies what the business does. From there, it can file the necessary forms online with Companies House – a division of Her Majesty’s Revenue and Customs (HMRC) – for just £12. Companies are usually registered in 24 hours.
Companies must register for a VAT if taxable goods and services have exceeded £83,000 over the previous 12 months (though this figure can change). The online registration can be completed here, or it can be done through the traditional mail structure. Before a VAT can be obtained, a business must be in good standing with HMRC Online Services. The process takes less than a day and has no charge.
All companies must also register to contribute to national insurance and the pay as you earn (PAYE) tax. This is a process that is also done through the HMRC; it takes 3 days, can be accomplished simultaneously with the previous step, and there is no charge. Lastly, companies looking to do business in the UK must sign up for employer's liability insurance for a minimum insurance protection requirement of GBP 5,000,000. This takes about a day and the process costs nothing, minus the actual cost of the insurance.
When you hire a new employee, he or she will need to provide you with a current form P45 from their previous employer. If they individual does not have the P45, completing the HMRC’s Starter Checklist will determine the correct tax code to use for them. In terms of employment status, the UK differentiates ‘employees’ from ‘workers,’ with workers generally being contract-based.
Broadly, employees are entitled to all of the same rights as workers – including statutory minimum paid holidays, 48-hour workweeks, and whistleblower protections (among others) – as well additional rights around leave, termination protections (including a period of minimum notice), and redundancy pay.
Employees are also entitled to a written statement of employment within two months of the initial hiring, including terms and conditions of employment, wages, and a discussion of pensions, sick pay, absence, holiday pay, total hours and other common issues. There is no law determining the length of a probationary period, though is typical for a probationary period to last no longer than six months or three months when an employee is moving to a new post internally. Organizations typically need a need a ‘sponsor licence’ to employ someone from outside the European Economic Area to work in the UK. The type of licence will depend on the type of worker an organization wants to sponsor.
Compensation, Bonuses & Severance
The minimum wage is regulated by the National Minimum Wage (NMW), which depends on the age of the employee or worker. (Use this calculator to check if a correct minimum wage has been paid.) There is usually a cap of 48 hours on the workweek, although workers can volunteer to opt out of this protection.
Bonus schemes are quite common in the UK, with the stipulations outlined in the applicable employment contract. Any worker who is working more than 6 hours a day is entitled to a 20-minute rest break away from work. There is also an 11-hour rest break daily during every 24-hour period, and a 24-hour weekly rest break for every 7-day workweek.
Aside from unpaid benefits (e.g. accrued minimum leave entitlement in lieu) there are no statutory requirements for severance pay except for redundancies. Any employee that has been employed continuously for 2 years or more gains the right to the statutory redundancy payment (SRP).
Tax & Withholding Considerations
The UK’s Real Time Information (RTI) system requires that all payroll information, from payments and income taxes to social contributions, is reported to HMRC on a pay-as-you-earn (PAYE) basis in real time whenever an employee is compensated. The system largely benefits employers; since organizations report their payroll data on a continues basis, they don’t 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 system, employers have to advise HMRC if a new employee joins or leaves, or if an employee’s circumstances change e.g. they become a director.
The corporate income tax rate in the UK is 20 percent and individual income tax rates range from 0 to 45 percent depending on salary. Payroll taxes are payable to HMRC after the 6th but before 22nd of the month following the payroll date, i.e. for a pay date of 31st March payroll taxes need to be paid after 6th April but before 22nd April.
The UK’s National Insurance scheme covers concerns ranging from pension to maternity leave to unemployment, with employer and employee contributions varying depending on employment status and salary. Generally, the employer contributes 13.8% and the employee contributes 12%.
Almost all workers are legally entitled to 5.6 weeks’ paid holiday per year (known as statutory leave entitlement or annual leave). Notably, 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. UK labor laws also stipulate a Statutory Sick Pay (SSP) of £88.45 per week for up to 28 weeks. However, many employers provide contractual sick pay that is higher than the standardized SSP rate.
Women are eligible for up to 26 weeks of ‘Ordinary Maternity Leave’ and up 26 more weeks of Additional Maternity Leave. Employees must take at least 2 weeks after any baby is born, with certain factory workers required to take 4 weeks off. Maternity pay can be stretched for up to 39 weeks. Men are generally entitled to two weeks’ paternity leave, taken within 56 days of the date of childbirth.
|Date||UK's Public Holiday Schedule|
|January 1st||New Year's Day|
|Friday before Easter Sunday||Good Friday|
|First Monday in May||Early May Bank Holiday|
|Last Monday in May||Spring Bank Holiday|
|December 25th||Christmas Day|
|December 26th||Boxing Day|
Your Payroll in the UK
Payroll in the UK should not be an issue that bottlenecks your business. There are many employee protections to consider, and outsourcing your global payroll administration to a dedicated and experience professional team is the best way to stay in compliance. The right global payroll solution helps to ensure that your business maintains its momentum, complies with PAYE expectations (and other guidelines) and always has the ability to scale up or down to meet your needs in the UK and throughout the rest of the world.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.