Payroll in the UK

In the UK, payroll tax works through the Pay As You Earn (PAYE) system.

PAYE (Pay As You Earn) is the UK government’s scheme for collecting tax and national insurance from employees, administered by UK HMRC (HM Revenue and Customs). Payroll can be run monthly or on a weekly basis. Employers deduct tax and National Insurance contributions from employee wages before paying them.

Payroll taxes are payable to HMRC after the 6th but before the 22nd of the month following the payroll date. The first £12,570 of income is considered a personal allowance in the UK, therefore this amount is not taxed. After £12,570, the income is taxed at progressively higher amounts, depending on earnings.

National Insurance contributions begin at a far lower level than formal taxes – the ‘tax-free allowance’ isn’t entirely free. If you are employed, you are required to pay Class 1 National Insurance contributions based on your level of earnings. These contributions are automatically deducted by your employer. If you are self-employed you are required to pay Class 2 contributions at a flat weekly rate and Class 4 contributions annually, based on your level of taxable profits.

UK payroll and employee compensation are governed by several laws, such as Employment Rights Act 1996, National Minimum Wage Act 1998, Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000 and Agency Workers Regulations 2010, Income Tax (Earnings and Pension) Act 2003 and Income Tax Act 2007, National Insurance Contributions Act of 2015 and Pensions Act 2008.

Companies in the UK need to be aware of some other additional legislations, such as IR35 & contractor employment regulations (designed to prevent disguised employment) and the Payroll legislation & the European Union (as the UK is leaving the European Union, the payroll legislation, currently based on European regulations, might face changes).

Workers who earn above a certain level will have income taxes deducted, and employers must also withhold contributions for things like student loan repayment and pensions, if necessary.

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