The United Kingdom (UK) is the world’s sixth-largest economy, and with a time zone of only five hours ahead of US Eastern time, it can be beneficial to expand your business operations there. To do so successfully, you must first learn how to do payroll in the UK. The basic steps are the same as with any country—you must register your business, set up a local bank account, get accurate employee information, and ensure compliance with local employment laws.
Use these seven steps as a guide on how to do payroll for your UK workers.
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A note about currency: UK’s currency is the Pound Sterling. For comparison, we’ll note the equivalent US Dollar (USD) figure, where applicable, using the conversion amount relevant at the time of writing this article. The conversion rate used is 1 Pound Sterling = 1.23 USD. Make sure you check current conversion rates to ensure accurate calculations.
Step 1: Set Up Your Business as an Employer
If you want to hire an employee and run payroll in the UK, you’ll first need to set up your business as an employer. Having an entity in the country allows you to hire and pay employees directly and sets you up for greater and easier expansion later. If you plan to have a large UK workforce, this is probably your best option, albeit a complex one. If you’re only looking to hire a few UK employees, you might be better off working with an employer of record (EOR) to hire and pay the workers for you.
If you choose to register your business and pay employees directly in the UK, you first need to register as an employer with HM Revenue and Customs (HMRC). You’ll also need to sign up for a Pay As You Earn (PAYE) Online account to pay taxes and national insurance contributions. You use this system to:
- View HMRC balance
- Pay your bill
- View your payment history
- Appeal a penalty
- Access tax codes and notices about your employees
- Send expenses and benefits returns
Avoiding Employee Misclassification: Employee vs Independent Contractor
The UK has more stringent employment laws than the US, making it crucial that you classify your workers correctly. In the UK, a worker is usually an employee if they are under contract or agreement to perform work or services personally for a business or company. This is quite broad, so if you’re unsure, it’s advisable to seek legal advice.
Typically, when a worker is an employee, the business withholds all relevant taxes and pays the appropriate government entities. Meanwhile, when the worker is an independent contractor, it’s their job to pay the appropriate taxes. If you’re trying to get around registering your business in the UK by partnering with an independent contractor, you put your business and the worker at risk of misclassification laws, leading to fines and penalties for each of you.
However, you can partner with an independent contractor in the UK—just make sure they’re actually a contractor and not an employee. Typically, a contractor retains control over their schedule and how they work. Meanwhile, if you’re telling someone when to work and how to do their job, they’re an employee.
Step 2: Establish Your Payroll Process & Policies
You’ll want to create a structured process so you don’t miss any vital payroll steps. Consider the following:
- Pay schedule: How frequently will you pay employees? Your options are weekly, every other week, twice per month, or monthly.
- Type of employees: Full- vs part-time?
- Tracking time: How will you track employee hours, and how will it be reported to you?
- Benefits: What benefits will you offer? Who pays for them? How will you manage the payroll deductions?
- Taxes: How often will you need to pay taxes? What tax rates will you pay? How often do you need to remit taxes, and to what agencies?
- Payroll processing and calculations: Will you calculate payroll by hand, Excel, or use a payroll service or software?
- Paychecks: Will you write manual checks, use pay cards, pay via direct deposit, or pay in cash?
The typical UK workday is 9 a.m. to 5 p.m., for a standard workweek of about 40 hours. Note that employees cannot work more than 48 hours per week on average over a rolling 17-week period. Employees can voluntarily opt out of this requirement. Employees are also only required to work overtime if their employment contract says so.
Importantly, the UK does not provide overtime pay rates, meaning employers don’t have to increase pay for employees working over 40 hours in a single workweek like in the US. However, employers must make sure the average worker’s pay for their total hours does not fall below the National Minimum Wage.
To ensure your company processes payroll in the UK effectively, you should also have policies on:
- Benefits: What benefits are required, and how do you remit payments?
- Leaves: What leaves are required to be paid vs unpaid, and at what rates?
- Overtime: At what rate do you need to pay employees overtime, and for how many hours? This should be stipulated in your employment contract.
- Absences: How do you track absences and know whether they’re paid or unpaid, excused or unexcused?
- Holidays: What holidays are paid and at what rate?
Step 3: Determine Salaries & Ensure Compliance
The cost of living in the UK is similar to the US, currently about 15% less expensive. The average annual salary in the UK is about £33,000 ($40,565). When determining what you’re going to pay your UK workers, consider their experience and skills, in addition to the cost of living. You may be able to save money by having UK workers, but you’ll still need to pay competitive rates to ensure you attract and retain the best talent.
Payroll & Employment Law Compliance
The UK has similar employment laws to the US—but some go further, providing additional benefits to employees. You must understand these differences to remain compliant.
Employers in the UK are required to provide employees with employment terms within two months of the employee’s hire date. This usually comes in the form of written employment contracts. While both countries use English as their predominant language, UK English is slightly different from US English, so make sure you’re using the correct wording in your employment contracts.
The UK has a federal minimum wage, and it applies to every worker that’s at least school leaving age, which varies based on where a worker lives. The minimum wage applies to all workers under the age of 23 and breaks down as follows:
Worker Age or Type | Minimum Wage from April 2023 |
|---|---|
21-22 | £10.18 |
18-20 | £7.49 |
16-17 | £5.28 |
Apprentice | £5.28 |
The UK also has a National Living Wage, which applies to all workers aged 23 and over. It’s currently £10.42 per hour.
The UK bases the workweek on eight-hour days, five days per week. Employees cannot work over 48 hours per week on average over a 17-week rolling period. If you expect employees to work overtime, you’ll need to put that in the employment contract and include any increase in pay rate for overtime hours. If you don’t include overtime in your employment contracts, your employees can refuse to work overtime.
Almost every worker in the UK is entitled to paid leave. Workers must receive at least 28 paid days off per calendar year. Bank and public holidays do not have to be given as paid leave, though an employer may if they choose and have a written policy. It’s important to note that workers do not have to be employed for a certain amount of time before they become entitled to this leave.
An employer can offer more than the minimum leave. If it does, it can place restrictions on the additional leave time, like requiring an employee to be employed for a certain amount of time. Employers may offer unlimited PTO, but you must ensure that employees actually take off the minimum amount of time off each year. Any accrued and unused leave must be paid out to workers upon their resignation or termination, even if they were terminated for gross misconduct.
Employers do not have to provide paid leave for bank holidays or public holidays, but these may be included in the minimum 28 paid days off for employees’ annual leave. Here are the holidays in the UK, and be sure to note that some holidays are only acknowledged in some countries:
- New Year’s Day
- 2nd January (Scotland only)
- St. Patrick’s Day (Northern Ireland only)
- Good Friday
- Easter Monday (England, Wales, and Northern Ireland)
- Early May bank holiday
- Spring bank holiday
- Battle of the Boyne (Northern Ireland only)
- Summer bank holiday
- St. Andrew’s Day (Scotland only)
- Christmas Day
- Boxing Day
UK employees are entitled to 28 weeks of paid sick leave. Employees out for at least four consecutive calendar days will be entitled to statutory sick pay per week of £99.35. To qualify for this rate, the employees must have average weekly earnings of at least £120. Employers can offer higher sick pay rates, but it must be agreed upon in the employment contract.
If an employee is sick for more than seven consecutive calendar days, their employer may request for proof in the form of a doctor’s note. Employees may, if they choose, use paid time off to cover some of their sick leave but they are not required to do so.
The statutory sick pay is set to increase to £109.40 per week by April.
UK law allows employees to take up to 52 weeks of maternity leave. The earliest leave can be taken is 11 weeks before the expected date of birth, and employees must take at least two weeks off after the birth.
Some of the time off under maternity leave is paid. Up to 39 weeks can be compensated as follows:
- 90% of the employee’s average weekly gross earnings for the first six weeks of maternity leave
- The lower of 90% of the employee’s average weekly gross earnings or £156.66 for the remaining 33 weeks
Paternity leave is also allowed under UK law. Employees may take one or two weeks off, and it must all be taken at once. Paternity leave cannot start before the child is born, and it must end within 56 days after the child’s birth date. Employees out on paternity leave are entitled to receive the lower of 90% of the employee’s average weekly gross earnings or £156.66. Note this amount is increasing in April 2023 to £172.48 per week.
The UK also provides for shared parental leave. Employees can share up to 50 weeks of leave and up to 37 weeks of pay between them. This time must be used within one year of the child’s birth. To be eligible for shared parental leave, both parents must take fewer than the 52 weeks of maternity leave and fewer than the 39 weeks of maternity leave pay. For example, if the mother has taken 22 weeks of maternity leave and pay, she can share 30 additional weeks of shared parental leave and 17 weeks of shared parental pay with the father. The pay for shared parental leave is the same as the maternity leave pay above.
UK employees are entitled to take leave to care for a dependent in an emergency. Compassionate leave may also be used for illness, injury, or assault. Employers are not required to pay employees for this time off, though they can. Employees do not have a limit on the amount of compassionate leave they can take, though in practice, taking too much time could impact their work.
Employees can take a reasonable amount of time off for the death of a family member, dependent, or someone who relied on them. This leave is not required to be compensated, though it can be.
Parents of a child that was stillborn or who has died are entitled to take two weeks of paid parental bereavement leave. This leave must be taken within 56 weeks of the date of the child’s death and can be taken as two whole weeks together, two individual weeks of leave, or only a single week of leave. This leave applies to biological or adoptive parents or parents of a child born to a surrogate.
Employees in the UK can be terminated for any fair reason:
- Lack of capability to do the job requirements
- Inappropriate workplace conduct
- Becoming redundant
- Breach of contract or statute
- Other substantial or legitimate reason
When terminating an employee in the UK, employers must provide notice to all employees who have worked for them for at least one month. One week’s notice is required for employees with up to two years of service, one additional week for each year of service up to 12 years, and 12 weeks of notice for employees with more than 12 years of service.
Severance pay is not required in the UK, though it is often offered. If an employment contract specifies severance pay, then companies must follow their contracts. Severance pay can only be given in lieu of termination notice if specifically provided for in the employment contract.
Under the Employment Rights Act, employees may be entitled to redundancy pay. If terminated, an employee is entitled to redundancy pay when:
- Their position is eliminated due to restructuring or company downsizing
- Their position is no longer required due to outsourcing or relocation
- Their job duties are no longer required due to changes in the business needs
To be eligible for redundancy pay, employees must have been employed for at least two years. If so, they’ll get:
- Half of one week’s pay for each full year employed while under age 22
- One week’s pay for each full year employed while age 22 up to age 41
- One and one-half week’s pay for each full year employed while age 41 or over
Redundancy pay is calculated as the weekly average the employee earned over the 12 weeks leading up to the notice of redundancy. There are caps on this pay of £571 per week and a maximum payout of £17,130.
Step 4: Collect Employee Data & Forms
As with US-based employees, you’ll need to collect certain data from your UK employees. This often includes:
- Employee’s full name
- Employee’s gender
- Employee’s date of birth
- Employee’s start date
- Employee’s permanent address in the UK
- Bank account information
Step 5: Collect Time Sheets & Calculate Payroll
When a business first launches, it often uses paper time sheets. We don’t recommend this if you have a large number of employees because it’s ripe for errors and misuse. The best and most effective way to keep track of employee hours is to use time tracking software. Your employees clock in and out electronically, and your managers can review and approve timesheets before they get to your payroll team for processing.
Once payroll gets the time sheets, they should still review them for accuracy. A second set of eyes to spot any glaring errors is crucial to ensuring your company runs payroll correctly each time. It’s easier to fix these errors before running payroll, and it creates a smoother process for everyone involved.
When calculating your UK payroll, you’ll need to account for tax and payroll deductions. Missing these will leave you out of compliance and could cause costly fines and penalties from UK government agencies. The amount of the deductions you’ll need to make from employees’ pay and the share of the deduction your company may need to pay are found in your HMRC account. For national insurance, for example, employees can pay between 0% and 12%, and employers pay between 0% and 13.8%.
Besides these payroll withholdings, you’ll also need to withhold appropriate income tax from your employee’s paychecks. Here are the current tax brackets in the UK.
For reference, the top tax bracket here is about $185,000. Be sure to keep track of where your employee works, too. With relatively short flights to and from the US east coast, your UK employee may come to the US and do work. Depending on where the employee does work inside the US, they may be subject to tax withholdings in that state. If you’re bringing the employee into the US to work, even for a day, they may also need a visa.
Step 6: Pay Employees
Now that you’ve reached the point of calculating your payroll, it’s time to pay your employees. Make sure you’re following the pay schedule you’ve previously outlined.
If you have just a single or a handful of employees in the UK, you may want to outsource your payroll to a local provider. They will be licensed and familiar with UK payroll laws and processes. While you’ll pay them a fee, it’ll likely be worth your time for just a few workers.
However, if you have more employees or plan on dramatically expanding your UK workforce, you may want to do payroll in-house. Make sure you or your payroll team are familiar with UK payroll laws and deductions to ensure you’re making the right deductions from employees’ paychecks and sending tax payments to the right UK government authorities.
On or before payday, you must also provide employees with a pay stub, often called a payslip in the UK. These must show:
- Gross wages for the pay period
- Deductions
- Net wages for the pay period
- The number of hours worked and if the pay varied
Your payroll software will be able to produce the payslips for you. The payslips can be provided on paper or electronically. You also need to report your pay to HMRC on or before each payday. Your payroll software will also be able to generate this information for you.
Step 7: Document & Store Your Payroll Records
Payroll records in the UK must be kept for at least three years. Your payroll records should include the basic employee data mentioned in step 4, as well as (at a minimum):
- The dates of employment and rate of pay
- The frequency of pay
- Deductions
- Net employee pay
- HMRC reports and payments
- Tax code notices
The HMRC routinely checks employer records. If you do not have what is required, it may estimate what you have to pay and charge a penalty of up to £3,000.
Bottom Line
Doing payroll in the UK for the first time is not as hard as in other foreign countries. With similar processes to the US, you’ll find it won’t take long to get the hang of it. Just make sure you take your time and set everything up correctly from the start.
