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What Global Businesses Need to Know About Payroll in the United Kingdom.
It’s easy to think that the United Kingdom’s exit from the European Union means that it is less of an attractive place to do global business. And it is true to say that certain elements of international trade have become more complex post-Brexit. However, the UK still remains a strong option for organizations across all sectors to expand into.
The UK remains the sixth-largest economy in the world, and of the countries still in the EU, only Germany is bigger. Its workforce is relatively skilled and highly educated, and also benefits from English being the natural first language of the population. An economy built up of around 80% services and an efficient regulatory environment also mean the UK remains as open for business as before.
If you’re looking at expanding into the UK, then there are plenty of payroll considerations to take care of. This guide highlights all the key facts to be aware of.
Getting Started
If your business is establishing a physical presence in the UK, then you should register with Companies House, part of His Majesty’s Revenue and Customs (HMRC) within your first month of business. You should also register with HMRC as an employer for Pay As You Earn (PAYE), so that you can collect and remit income tax and National Insurance payments.
If your turnover is or is expected to be, more than £85,000 per year, then you will also need to register for, collect and remit Value Added Tax (VAT), which is currently levied at 20%. Registering for this can be done for free online, but you are likely to be required to keep regular digital records under the new Making Tax Digital (MTD) regulations. You should also keep abreast of further MTD developments in the coming years, as more types of tax may fall under its purview.
Employment Considerations
You should check the identity and right to work of every employee that you hire. A new immigration system is in place now that the UK is no longer in the EU, and EU citizens will therefore require a visa to live and work in the UK.
New employees are 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.
Working weeks are typically 40 hours, and cannot exceed 48 hours without prior agreement (calculated over a 17-week average). Overtime rates are agreed in employment contracts but must be at least the national minimum wage.
There is no law determining the length of a probationary period. However, it’s 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). Notice periods are one week for employees with at least one month’s experience, rising to one month after two years of service; employers can pay in lieu of notice if they prefer.
Compensation, Bonuses and Severance
The National Living Wage for employees aged 23 and over is £10.42 per hour (approx. €11.90; $12.60), as of April 1, 2023. Lower rates apply for younger employees and apprentices. With inflation relatively high in the UK at the time of writing, further increases are a possibility, so you should monitor proceedings in this area.
Salaries are generally paid monthly, normally towards the end of the month, and pay is generally expected to be remitted directly into the employee’s bank account. They should also receive a pay slip documenting their pay and deductions. Bonus payments are discretionary and are normally paid annually.
The only statutory severance pay in the UK is in the event of redundancy for employees who have at least two years of service: the value of this payment will vary depending on length of service and salary at time of the redundancy.
Tax and Social Security
The UK runs a Real Time Information system that requires payroll information to be reported to HMRC on or before the day you run payroll. You should also advise HMRC of any joiners, leavers, or change in status of existing employees.
As in most Western countries, income tax in the UK is levied progressively. The first £12,570 earned per year (approx. €14,300; $15,200) is exempt from income tax (known as the Personal Allowance). Earnings beyond this up to £50,270 (approx. €57,300; $60,800) are taxed at 20%; after this threshold, a 40% rate applies. The highest rate of 45% kicks in for all earnings over £150,000 (approx. €171,000; $181,000). You should also be aware that slightly different rates apply in Scotland.
The main form of social security in the UK is National Insurance (NI). There is a complex range of different categories that employees fall into, and these categories define how much both employees and employers have to make in contributions. Employer rates range between 15.05% and 18.05%, and employee rates range between 6.5% and 21.50%.
While National Insurance helps fund the state pension entitlement, UK businesses are also obliged to register their employees for additional ‘workplace pensions’, although employees have the right to opt out of these. Minimum contributions are 5% from employees and 3% from employers.
Corporation tax rates have changed in April 2023. Businesses making profits of less than £50,000 a year (approx. €57,000; $60,500) will continue to be taxed at 19%, while those making over £250,000 a year (approx. €285,000; $302,000) will be taxed at 25%. A ‘taper’ will be applied to those that fall in between these two rates, to ensure that the total rate applied gradually rises. In practice, this means that all profits between the £50,000 and £250,000 marks will be taxed at 26.5%.
Holidays and Leave
There are eight public holidays per year (ten in Northern Ireland). While paid leave entitlement is a minimum of 28 days per year, public holidays are included in this figure.
Paid sick leave can run for a maximum of 28 weeks, payable from the fourth day of absence at the Statutory Sick Pay (SSP) rate of £99.35 per week (approx. €115; $120). Employers can choose to pay extra sick pay beyond the statutory minimum at their discretion.
Statutory maternity leave is a maximum of 52 weeks, although the only mandatory leave is the two weeks immediately following the birth. Maternity pay is 90% of the employee’s earnings for the first 39 weeks, after which it drops to the lower of 90% or £156.66 a week. This lower rate also applies for the maximum of two weeks of paternity leave.
There are also a number of other smaller leave entitlements that can be applied on a discretionary basis in employment contracts, such as for bereavement and jury service.
The General Data Protection Regulation (GDPR)
Most overseas companies will be familiar with the GDPR – the European data protection legislation that came into force in May 2018. GDPR is focused on strengthening data privacy for all individuals within the European Union (EU), but it also covers the export of personal data outside of the EU.
Post-Brexit, the UK has retained the GDPR laws put in place by the EU; although it has the right to vary the UK legislation in the future, the UK Government has not done so at the time of writing.
For companies operating outside of the EU, there are compliance requirements on how employee data is transferred, accessed and stored – with hefty fines for any organization deemed to be in breach. For more information on GDPR and how it applies in the UK, visit the UK Information Commissioner’s Office (ICO) website.
Summary: Your Payroll in the UK
There’s plenty to get excited about if you’re looking at doing business in the UK. But while the country is welcoming to foreign investment, requirements around employment and payroll are relatively complicated. If you feel you need help navigating British regulations, then the support and expertise of a global payroll partner may come in particularly handy.
This guide 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. Click here to see more country payroll guides from CloudPay