The UK payroll landscape has always been defined by HM Revenue and Customs (HMRC) and the tax structure that is in place nationally. With the UK’s exit from the European Union at the end of January this year, there is a fair bit of uncertainty around what lies ahead for UK businesses, and whether the economy will contract before it grows. Indeed, with the Covid-19 pandemic affecting the UK like most countries globally, companies are considering how best to save money ongoing. Contracting payroll services to an international payrolling company has proven to be a popular way for companies to maximize their outgoings. The UK has always been a popular country for international companies to base their headquarters in, and certainly in which to have an office in. The larger the company is, the more diverse their tax needs become, especially for paying employees.
Every country has their own tax requirements and payroll laws, and ongoing tax compliance depends on meeting these regulations ongoing. For international companies and any company that works with someone based in the UK, there is a requirement to be aware, and to comply with, the data protection terms as set out under the General Data Protection Regulations. As the UK is now outside the EU, there could be a change to this requirement in the future, but for now, full alignment to the GDPR exists for UK residents. This covers how data can be transferred, stored, or accessed.
The UK payroll obligations are fairly straightforward as compared to various other countries, but many issues still arise with setting up and running payroll in the UK, including many employee protections and rights to consider. There are ongoing developments in the area of tax, such as HMRC’s ongoing modernization of their system to make a shift towards digital taxation. International payroll companies are well placed to understand the nuances of the UK system and to keep on the right side of compliance.
UK Employee Payroll Obligations
Employers of UK businesses must inform HMRC whenever a new employee is hired. A P45 should be provided by the employee, which is a form they gather from their previous employer, and that will be used by the new employer to file the employee’s working details. This includes the amount of tax the employee paid to date and will allow HMRC to establish a tax code for that employee. If the employee is paying back a student loan, this information will also be on the P45. If the employee does not have their P45, a checklist is available from the HMRC called the ‘Starter Checklist’ which employers can use to determine the correct tax rate.
UK Workers are bound by minimum wage laws, with the current National Minimum Wage being £8.72 as of April 2020, which only applies to workers over 25 years of age, while the lower national minimum wage £8.20 applies to employees between the ages of 21 and 24. Employees aged between 18 and 20 are on a £6.45 rate, while under 18s are regulated at a minimum £4.55. The national minimum wage for Apprentices is £4.15. The wage is rate worked out hourly but applies to workers on salary as well.
In the UK, most wages are paid monthly by electronic funds transfer. Employers are required by law to provide a monthly pay slip with the issuance of every payment. Employers are also required to auto enroll all eligible staff into a pension program (commonly called a scheme in the UK). A portion of this payment must be an employer’s contribution, but employees can choose to pay into this as well. Any employee over 22 years of age who earns over £10,000 annually must be enrolled into a pension scheme.
UK Employment Tax & Withholding Considerations
The UK tax system requires employee’s wages information to be provided to the HMRC on a ‘Pay As You Earn’ (commonly referred to as PAYE) basis, which means income taxes and social contributions must be deducted from every wage payment made to any employee. The submission of this information to HMRC is normally made by employers on the day before the payments to employees are made, or prior to that even.
Individual employee income tax in the UK can range from nothing to 45%, dependent upon the employee’s salary. Every employee in the UK has a tax free allowance of up to £12,500, and any earnings that fall between £12,501 and £50,000 is taxed at a 20% flat rate. Earnings between £50,001 and £150,000 are taxed at a 40% rate, and anything over £150,001 is taxed at 45%. The PAYE submissions also include National Insurance payments, and payments for student loans where applicable. PAYE bills must be paid to HMRC no later than the 22nd of each tax month that follows a payroll date. Since the tax month in the UK runs from the 6th of each month, these submissions are effectively due between the 6th and the 22nd.
Off payroll working regulations also need to be followed and are commonly referred to as IR35 rules. There are several considerations that must be worked through to ensure a person falls under the IR35 category rather than the employee category. The UK Government stated if a UK contractor works with a client that is wholly based overseas, the contractor can determine their own tax status between employee and self employed coming into effect April 2021. With the tiered national wage system and other structural differences between the UK tax system and that of other countries, it is important to use payroll services that can provide a comprehensive service inclusive of employee and IR35 requirements.
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