UK payroll and tax overview.

Your guide to doing business in the United Kingdom

Doing Business in the United Kingdom

The United Kingdom comprises four nations: England, Scotland, Wales and Northern Ireland. Surrounded by water, with the Irish Sea and Atlantic Ocean to the west, the North Sea to the east, and the English Channel to the south, the UK built a historic empire on its ability to explore and trade overseas. Today, the UK is a highly developed economy - the sixth largest in the world - and remains a trade gateway to Europe and the Americas. Historically reliant on agriculture, the modern UK economy is highly diversified: rapid industrialisation led to the rise of the manufacturing and service sectors in the 19th and 20th centuries before automobile, aerospace, and high-technology production grew rapidly in importance. The UK’s financial services sector is one of the most prominent in the world, and comprises around 73% of the country’s GDP. Capital city, London, is a major financial hub for thousands of international organisations and attracts business interest from across the globe. With a 2018 GDP of over $2.85 trillion, the UK remains a major global business destination, and is a member-nation of the G7, the WTO and the OECD. In 2019, the UK was ranked 8th on the World Bank’s Ease of Doing Business Survey.

Doing Business in the UK

The UK’s economy is diverse and growing, with opportunities for investment across a variety of industries. In 2015-2016, a record number of inward investment projects created or safeguarded around 116,000 jobs, while government efforts to engage in emerging markets have reinforced the UK’s position as a global business destination.

So, why invest in the UK?

  • Diverse economy: The UK has developed a strong, expansive business infrastructure. Popular foreign direct investment targets include the the oil and gas, technology, sustainable energy, automotive, and manufacturing industries.
  • Ease of doing business: The World Bank Survey 2016 ranked the UK as the best destination in Europe for ‘Ease of Doing Business’ (ranking 7th in the world). The UK ranks 6th in the world for ‘Protecting Minority Investors’.
  • Skilled labour: Home to several of the world’s leading universities, the UK’s research sector supports a high standard of technological innovation and development, and attracts substantial international investment.
  • Strategic location: As a leading financial centre, London is perfectly placed to offer foreign investors a commercial gateway to the rest of the world, along with a spectrum of connected business opportunities.

Foreign Direct Investment in the UK

The UK government provides incentives for foreign investment in key industries to attract foreign companies to invest in the UK. The UK offers investors access to a wealthy and stable economy, supported by a highly educated workforce.

Starting a Company in the UK

Every time a new company starts trading in the UK, this company has to be registered as an employer with HM Revenue and Customs (HMRC). This process involves providing HMRC with all the relevant company details, including the trading name of the company, the registered address details etc. in order for them to recognize you as a trading company. More importantly, this process also gives you the reference numbers to allow you to liaise with HMRC in future, and to ensure that you are given full credit for any payments of Income Tax and National Insurance that you make in the future.

Business Banking in the UK

It is mandatory to make payments to both employees and the authorities from an in-country bank account. Generally, banks are open to the public from 0900 to 1700 Mon-Fri, 0900 to 1500 Saturdays, and closed on Sundays.

Working Days & Working Hours in the UK

The working week in the UK is Monday to Friday. The working day for commercial offices is usually eight hours, typically from 0800 or 0900 to 1600 or 1700. Lunch breaks are usually one hour.

Basic Facts about the UK

An island nation at the edge of western Europe, the United Kingdom is a three hundred year-old union of four separate states: England, Scotland, Wales and Northern Ireland. While Northern Ireland shares its southern border with the Republic of Ireland, the UK’s next closest neighbours are France and Belgium across the English Channel - and, the Netherlands, Germany and Denmark, across the North Sea. Bordered by oceans on all sides, the United Kingdom is a historic seafaring nation, with a background of international exploration and colonisation which gave rise to the British Empire, and contributed to the country’s modern-day global influence. The UK has a temperate climate with cold, wet winters and mild summers, and holds a variety of interior environments - from remote forests and mountains - to stretches of beach coastline, and bustling urban environments. As one of the world’s busiest and most populous financial hubs, its capital city, London, is an epicentre of trade and commerce, and a popular tourism destination for millions of visitors.

Full Name: United Kingdom of Great Britain and Northern Ireland

Population: 66.65 million (UN, 2019)

Capital: London

Major Language: English

Major Religion: Christianity

Monetary Unit: 1 pound sterling = 100 pence

Main Exports: Manufactured goods, chemicals, foodstuffs

GNI per Capita: US $41,330 (World Bank, 2018)

Internet Domain: .uk

International Dialling Code: +44

UK Income Tax & Social Security (National Insurance Contributions)

PAYE (Pay as You Earn) is the system that HM Revenue & Customs (HMRC) use to collect Income Tax and National Insurance contributions (NICs) from employees' pay as they earn it.

As an employer, you will have to deduct tax and NICs from your employees' pay each pay period and pay Employer's Class 1 NICs if they earn above a certain threshold. You pay these amounts to HMRC monthly or quarterly. If you do not send the correct amount, or if you send it in late, you may have to pay interest.

The amount you can earn before you start paying income tax (personal allowance) is £12,500 in tax year 2020/2021. If you earn in excess of £100,000, then for every £2 you earn over £100,000, you lose £1 of personal allowance.

The income tax bands for the 2020/2021 tax year are different for the rest of the UK and for Scotland, and are as follows:

Rest of the UK Rate:

Scottish Rate of Income Tax:

For the 2020/2021 tax year, there are two sets of Scottish tax rates to be used.

From 6th April 2020 - 10th May 2020

From 11th May 2020 - 5th April 2021

Welsh Rate of Income Tax

For the 2020/2021 tax year, in addition to the Scottish Rate of Income Tax, there is also a Welsh Rate of Income Tax.

The rest of the UK tax rates are reduced by 10% each to 10%, 30% and 35%, and the Welsh Rate of Income Tax is then added back on to these rates. The Welsh Rate of Income Tax rate has been set at 10% by the Welsh Government, so the tax rates and bands are the same as the rest of the UK rates.

STBV (Short Term Business Visitors in the UK)

The STBV arrangement is a relaxation of the strict Income Tax (PAYE) withholding obligations that arise on UK employers in respect of any employees from overseas who spend more than 60 days working in the UK in any UK tax year. The STBV arrangement removes the strict PAYE withholding obligations in respect of certain employees from overseas providing various conditions are met.

Social Security Contributions in the UK

As an employer, you pay National Insurance contributions (NICs) on the earnings you provide to your employees. Earnings include not only cash amounts but also benefits, such as providing your employees with company cars.

Most workers (both employed and self-employed) also pay NICs on their earnings, in addition to Income Tax. Many of these contributions go towards building up workers’ entitlements to social security benefits such as Jobseeker’s Allowance and the State Pension.

The tax and NICs due on your employees’ earnings are calculated and deducted at the same time through the PAYE (Pay as You Earn) system when you operate your regular payroll. You then pay them to HM Revenue & Customs (HMRC). However, the NICs that apply to many employer-provided benefits are calculated separately after the end of the tax year. Please note, there is no separate NIC rate for Scottish or Welsh employees.

The UK government introduced legislation, which requires all employers to enroll their workers into a qualifying workplace pension scheme if they are not already in one. Previously, many workers failed to take up valuable pension benefits because they did not make an application to join their employer's scheme. Automatic enrolment is designed to overcome this.

Although automatic enrolment came into force from 1 October 2012, individual employers' duties have been introduced gradually over the last six years, based on the employer's size. All employers regardless of size have had to be involved in the scheme from October 2017 at the latest.

For a defined contribution scheme, the amount of money paid in by the employee, their employer and by the government from tax relief is worked out as a percentage of total earnings. 'Tax relief' means that some of the money that would have gone to the government in the form of tax now goes into the pension pot instead.

The government has set a minimum percentage that has to be contributed in total. This means the employee contribution, the employer contribution and the tax relief added together. This minimum increases gradually and was 2% from October 2012 to April 2018, was 5% from April 2018 to April 2019 and 8% from April 2019 onwards.

Reporting Tax & Social Security in the UK

Monthly

On a monthly basis, PAYE must be paid over to HMRC. This must reach HMRC by 22nd of the following month if paying electronically. If you operate PAYE (Pay as You Earn), there are a number of key tasks you must complete in the period around the end of the tax year on 5 April.

Yearly

Under Real Time Information (RTI), reports are sent to HMRC in real time, so HMRC have to be notified “on or before” each payment is made to employees or pensioners. Each employee still has to be provided with a year-end P60 form summarizing their earnings and tax deducted in the previous tax year.

PAYE Settlement Agreement (PSA)

A PSA is an agreement with HMRC where a company agrees to meet some Income Tax and National Insurance liability on behalf of its employees. This is generally used where a company has paid for staff entertaining, and doesn’t want their staff to have a tax liability on this benefit, although it can be used for relocation expenses (over the HMRC limit for allowable expenses) and other irregular items of expenditure.

The PSA is an easement to make life simpler for both the company and HMRC, and can reduce the end of year reporting significantly if used correctly. Entering into a PSA is a good thing, as it demonstrates to HMRC that you are aware of your reporting obligations.

Taxable Benefits

Where an employer provides taxable benefits in addition to salary, these can be reported and taxed in one of two ways.

  1. The company can register for voluntary payrolling of benefits, and include the benefits in the taxable pay of each employee through the payroll. The registration for this must be completed prior to the beginning of the tax year.
  2. At the end of each tax year, employers have to report to HMRC and to the individuals any benefits provided to their employees which have not already been reported and taxed via the payroll. This reporting is carried out using forms P11D. The majority of benefits provided to employees have to be reported to HMRC, including medical cover, mileage payments made in excess of the approved HMRC rates, company cars and so on. In addition to this a benefit summary form P11D(B) has to be prepared and submitted to HMRC by 6th July following the end of the tax year.

New Employees in the UK

The employer will supply full details of the employee to HMRC via their payroll system when they submit their RTI file.

Leavers in the UK

When an employee leaves a company in the UK, the employer must complete a form P45 confirming:

  • Leaving date
  • Full name
  • Home address
  • National Insurance Number
  • Date of birth
  • Gender
  • Works/payroll number
  • The individual's tax code

Employers also have to provide:

  • The employee’s overall pay and tax totals for the tax year so far, including from any previous employments during the year
  • The employee’s pay and tax figures relating only to their work for you during the tax year, if these differ from the employee's overall totals for the year

A copy of the P45 form is given to the employee. HMRC are notified that an employee has left a company by including a date of leaving in the next RTI submission.

Payroll in the United Kingdom

Employers are legally responsible for completing all payroll tasks in the UK. An employer may choose to outsource payroll to a payroll provider, or operate it in-house using payroll software. Most employers in the UK process payroll using PAYE: HMRC’s system to make National Insurance and Income Tax deductions from employee wages.

Like other territories, residency status is relevant to tax liability in the UK. While non-residents pay tax only on income earned within the UK, residents must pay tax on all UK income and foreign income. With this in mind, businesses with international employee populations must take steps to remain in compliance with the UK’s tax laws. In some cases, it may be advisable for foreign businesses to engage a payroll service provider to meet their international compliance needs by developing a global payroll solution. Payroll providers represent a way for foreign businesses to achieve compliance quickly, while also delivering pay efficiently to their employee populations.

In the UK, PAYE payroll runs the 6th to the 5th of the following month. Employers must calculate tax, National Insurance contributions, and other deductions, issue employees with payslips (it is legally acceptable to issue payslips online in the UK), and make an FPS report to HMRC on or before payday each month.

Reports

Payroll reports must be kept for 3 years from the end of the tax year they relate to.

Employment Law in the UK

UK Holiday Entitlement & Holiday Pay Calculations

Most employees are legally entitled to paid holidays/annual leave. A worker's statutory paid holiday entitlement is 5.6 weeks (28 days for a worker working a five-day week). This can include public and bank holidays. The entitlement for part-time workers is calculated on a pro-rata basis.

Statutory Maternity Pay and Leave in the UK

If an employee is expecting a baby, she may be entitled to Statutory Maternity Pay (SMP). This replaces her normal earnings to help her take time off around the time of the birth.

Whether the employer will have to pay SMP to an expectant employee depends on how long they've worked for that employer and how much they earn.

Payments of SMP count as earnings therefore the employer must deduct tax and National Insurance contributions (NICs) from them in the usual way.

An employer will normally be able to recover some or all of the SMP payments made to the employee.

An employee who is expecting a baby has the right to 26 weeks of 'Ordinary Maternity Leave' and 26 weeks 'Additional Maternity Leave' - making one year in total. As long as they give you proper notice they can take this no matter how long they've worked for you, how many hours they work or how much they're paid.

SMP Rates

For the first six weeks, the employer must pay the employee SMP at the rate of 90 per cent of their average weekly earnings.

For the next 33 weeks you must pay them the lower of the following:

  • £151.20 or
  • 90 per cent of their average weekly earnings
  • If the employer’s total National Insurance payments were £45,000 a year or less for the previous tax year, they'll be able to recover 103 per cent of the SMP. This is to compensate the employer for the NICs they would have had to pay on the SMP.
  • If the employer’s National Insurance payments were more than £45,000 for the previous tax year they will be able to recover 92 per cent of the SMP that they have paid.
  • The employer can recover SMP by deducting it from your monthly PAYE (Pay as You Earn) payments. Or you can ask HM Revenue & Customs (HMRC) for funding in advance.

Paternity Leave in the UK

An employee is entitled to Ordinary Statutory Paternity Pay (OSPP) if their partner has a baby or adopts a child.

This replaces their normal earnings and helps them take time off to care for the child or support the mother.

As their employer, whether you have to pay them OSPP depends on how long they've worked for you, how much they earn and when the baby is due or the date of adoption. The employee will also have to provide the employer with a declaration covering family commitment and give you notice of when they want the payment to start.

Payments of OSPP count as earnings. The employer must deduct tax and National Insurance contributions (NICs) from them in the usual way.

The employer will normally be able to recover some or all of the OSPP you pay

The employee may be entitled to ordinary paternity leave and OSPP for birth if they have responsibility for the baby's upbringing, are taking time off to support the mother or care for the baby and they're either:

  • the baby's biological father or
  • the mother's husband or partner - including a female partner in a same sex couple

Where a couple adopts a child, the partner, male or female, who is not claiming Statutory Adoption Pay (SAP) may be able to claim OSPP. The employee may be entitled to ordinary paternity leave and OSPP for adoption if they’re either:

  • adopting a child with their partner or
  • the partner of someone adopting a child on their own

In this situation, the adoption must also be being arranged through an adoption agency in the UK, or for adoption from abroad the adopter has to have received Official Notification.

Ordinary Paternity Leave

The employee is entitled to ordinary paternity leave if both of the following apply:

  • they've worked for you continuously for at least 26 weeks up to and into the 15th week before the date the baby's due, or 26 weeks into the week the adoption agency told the adopter they had been matched with a child
  • they continue to work for you until the date the baby is born, or the date the adopted child is placed

The date an adopted child is expected to be placed is shown on the matching certificate from the adoption agency.

Your employee is entitled to take one- or two-weeks’ ordinary paternity leave within 56 days of the date of the baby's birth or the date an adopted child is placed with the adopter. They can't take odd days off and if they take two weeks they must take them together.

Ordinary Statutory Paternity Pay (OSPP)

If the employee is entitled to ordinary paternity leave they may also be entitled to OSPP for the period of their leave. They'll be entitled to OSPP if they have average earnings at least equal to the NICs Lower Earnings Limit (LEL) - £120 a week for 2020-21.

Your employee should inform the employer that they will be taking ordinary paternity leave by the 15th week before the date the baby's due, or within seven days of the date the adopter was told they'd been matched with a child. The employee should give 28 days' notice of when they want their OSPP to start.

OSPP rates

If your employee is entitled to OSPP, you must pay them the lower of:

  • £151.20 - from 6 April 2020 or
  • 90 per cent of their average weekly earnings

The employer will be able to recover at least 92 per cent of the OSPP that they have paid. The recovery rates and qualifying conditions are the same as for SMP (see above).

If the employee's earnings are below the LEL, or they're not entitled to OSPP for some other reason, they may be entitled to other financial support from the Department for Work and Pensions (DWP).

Statutory Sick Pay in the UK

Statutory Sick Pay (SSP) is paid to employees who are unable to work because of illness. SSP is paid at the same time and in the same way as you would pay wages for the same period.

An employer is responsible for paying SSP to employees who meet certain qualifying conditions. A record must be kept to show any SSP the employer has paid on the employee's form P11 Deductions Working Sheet - or equivalent payroll record.

If you keep paying your employees their normal wage when they're sick - and you pay them at least as much as the SSP they'd get - you don't have to operate the SSP scheme.

You must put your sickness policy in a written statement of employment particulars and give a copy to all employees who have worked for you for at least a month.

SSP isn't payable straight away. The first three qualifying days (days the employee normally works for you) of a Period of Incapacity for Work (PIW) are called 'waiting days' when SSP isn't payable: SSP is payable from the first qualifying day after the three waiting days. However, if several PIWs are linked, the waiting days only apply to the first PIW.

If you have an employee who is off sick for at least four consecutive days, but who does not qualify for SSP, you must complete form SSP1 and give it to them within 7 days of them notifying sickness. They can then claim Employment and Support Allowance (ESA) from their local Jobcentre Plus.

The weekly rate of SSP from 6th April 2020 is £95.85.

To be entitled to SSP for any period of incapacity for work (PIW) commencing on or after 6th April 2020(and not linked to an earlier period) employees will have to average weekly earnings of at least £120.00.

UK National Service in the UK

There is no compulsory national service in United Kingdom.

Employee Benefits in the UK

Payrolling of Benefits in Kind (BiK)

An important legislation change is now in effect for any employers who provide benefits to their employees, and who either report these on forms P11D at the end of the tax year, or who currently tax these benefits through the payroll.

If you intend to payroll benefits and expenses, or if you are doing so already, you must now register them with HM Revenue and Customs (HMRC) using the online Payrolling Benefits in Kind (PBIK) service. If you use this service and payroll benefits and expenses, you will not have to report them on a P11D. Any unofficial payrolling of benefits schemes (private medical benefit etc.) can no longer be used, and approval for these schemes is now required. From the 2016/2017 tax year, HMRC no longer accepts informal reports of employee benefits, sometimes referred to as lists.

If you use this service, the only benefits you will not be able to payroll for the 2020/2021 tax year are:

  • Employer-provided living accommodation
  • Interest free and low interest (beneficial) loans

If you have previously been payrolling these benefits informally, you can continue to do so but you must still report them on a P11D.

From the start of the 2017/18 tax year, you can choose to account for the tax on the benefits In kind, (BiKs) you provide to your employees through PAYE each payday.

You will need to register before 6th April to start payrolling for the following tax year. This is because HMRC will need to amend your employees’ tax codes in advance to remove any BiKs previously included.

You work out the cash equivalent of a BiK for payrolling in the same way as you do for a BiK that you report on a form P11D. This has not changed.

If you are not sure what the value of the BiK is at the start of the tax year – for example, you expect to renew your premium part way through the tax year – then you can make an estimate of the cash equivalent of the BiK.

When your employee leaves their job, their BiK will usually stop when they do so, and only occasionally will it continue beyond their leaving date.

The value of a BiK may sometimes change part way through the tax year. This can be for a number of reasons. If this happens then you need to recalculate the cash equivalent of the benefit. This means you recalculate the taxable amount of the BiK to add to your employees’ wage payments.

The PAYE regulations prevent employers from deducting more than 50% in tax from an employee’s pay. This is called the overriding limit and ensures that employees are not left with too little pay to cover their living costs.

In some circumstances, the provision of a high value BiK/expense, combined with low pay, could mean that the employee takes home little or nothing. This might be where an employee is being paid Statutory Sick Pay.

Employers are allowed to stop payrolling BiKs where payment of the taxable amount of BiK means that the tax payable will exceed 50% of the employee’s cash pay. To protect employees and comply with the regulations you have the following options:

Option 1:

You can exclude the employee from payrolling. Go into the Online Payrolling Benefit In Kind

Service and exclude them. If you exclude them, the BiK that they receive will be reintroduced into their tax code.

Excluding them means that you will be required to send a P11D after the end of the tax year. If you wish to recommence payrolling in the next tax year, you will have to wait until after you have sent your P11D, as it is a trigger for amending tax codes. To recommence payrolling you review the employee exclusion list to take the employee off it.

Option 2:

Do not exclude the employee in the Online Payrolling Benefit In Kind Service. Carry forward the taxable amount of BIK into future pay periods.

Employee Expenses in the UK

It is important for your staff to know what is expected of them when they travel on business, what they are allowed to claim, and perhaps more importantly from a compliance perspective, what they are not allowed to claim.

Exemptions and Dispensations

HMRC have replaced the old system of dispensations with a series of ‘exemptions’. These exemptions mean that you don’t have to report some routine employee expenses to HM Revenue and Customs (HMRC). You can no longer apply for a dispensation, but if you had previously agreed a dispensation including bespoke subsistence rates with HMRC between 6 April 2011 and 5 April 2016, you can submit an application to HMRC to carry on using them. You are only allowed to use any bespoke rates for up to 5 years from the date they were agreed by HMRC.

Expenses Covered by an Exemption

With the introduction of the exemption system, there is no requirement for you to report certain categories of business expenses and benefits, such as:

  • business travel
  • phone bills
  • business entertainment expenses
  • uniform and tools for work

In order to qualify for the automatic exemption, you must be:

  • paying a flat rate to your employee as part of their earnings. This flat rate can either be one of HMRCs published benchmark rates or alternatively a ‘bespoke’ rate approved by HMRC
  • alternatively, you can qualify for the reporting exemption by reimbursing the employee’s actual costs

You still have an obligation to deduct and pay tax and National Insurance on any other expenses and benefits you provide to your employees, and report them to HMRC as usual.

How Do You Apply for an Exemption?

If you are paying HMRC’s benchmark scale rates for allowable expenses there is no requirement for you to apply for an exemption.

If, however, you want to pay bespoke rates to your employees, you would still be required to apply for an exemption. As part of the application process, you would need to give HMRC evidence that the rates you want to use are based on your employees’ actual expenses, usually by providing a sample of actual expense claim forms.

Checking Expenses

As with the old dispensation system, you must still have a system in place to check that any expenses payments you make are within the approved rates. Employees are not allowed to check their own expenses, so someone else within your company needs to do this to make sure the amounts being claimed are appropriate. You should also ensure that your employees keep proof of their expenses, for example receipts or bills, in case you need to check them.

UK Visas and UK Work Permits

Whether or not you need to obtain a visa before you travel to the UK depends on your nationality and the reason you want to travel to the country.

You will not need a visa or a work permit if you hold a passport issued by the UK or any other country in the European Economic Area (EEA) or Switzerland.

If you are travelling to the UK from outside the EEA or Switzerland, then you will usually require either a visa or an entry certificate. Further information on this can be found on the UK Home Office Border Agency website.

You can apply for a visitor visa at visa application centres in any country. You must apply for any other type of entry clearance in the country or territory where you live.

Most work-based categories are part of the UK's points-based system for immigration. If you want to visit the UK for a short time as a businessperson, sportsperson or entertainer, you may be able to come here as a visitor.

High-Value Migrants

Investors, entrepreneurs and exceptionally talented people can apply to enter or stay in the UK without needing a job offer - but you will need to pass a points-based assessment.

Skilled Workers

If you have been offered a skilled job in the UK and your prospective employer is willing to sponsor you, you can apply to come or remain here to do that job.

Temporary Workers

If an employer in the UK is willing to sponsor you, or if you are a national of a country that participates in the youth mobility scheme, you may be eligible to come and work in the UK for a short period.

Other Categories

You can also apply to work in the UK as a domestic worker; as the sole representative of an overseas firm; or as a representative of an overseas newspaper, news agency or broadcasting organisation.

For Workers and Businesspersons from Turkey

Turkish citizens can benefit from a European agreement with Turkey if they want to establish themselves in business in the UK, or if they are already working here legally.

For Commonwealth Citizens with UK Ancestry

If you are a Commonwealth citizen and at least one of your grandparents was born in the UK, you can apply to come here to work.

Further Information

For more information, or assistance with United Kingdom payroll enquiries please contact:

The activpayroll Global Payroll Team

Email: activGlobalSales@activpayroll.com Tel: +44 (0) 1224 860 800

For more information, or assistance with United Kingdom tax enquiries please contact:

The activpayroll Global Mobility Team

Email: graham.mckechnie@activpayroll.com Tel: +44 (0) 131 240 4300

About this Payroll & Tax Overview

About this Payroll & Tax overview

Please note that this document gives general guidance only and should not be regarded as an authoritative or complete statement of the law, regulations or tax position in any country. You should always seek specific advice for each specific situation. This document should not be relied upon as professional advice and activpayroll accepts no liability for reliance on its contents.