Payroll in the United Kingdom (UK)

Mercans stands out as a premier provider of payroll services in the United Kingdom. Our unwavering commitment to delivering exceptional payroll solutions is evident through our customized services, leveraging cutting-edge technology to meet the distinctive requirements of employers across various industries and sizes. With extensive experience in the payroll sector, Mercans guarantees precise and compliant payroll services in the United Kingdom, positioning us as the preferred choice for businesses managing any scale of workforce. Rely on Mercans for accurate and punctual transactions, coupled with the convenience of multi-currency payments. As your local payroll partner in the United Kingdom, we take pride in our in-country payroll specialists, possessing in-depth knowledge of local regulations, providing comprehensive support for a seamless and tailored payroll experience aligned with your business needs.

Payroll Software in the UK

HR Blizz is HMRC-recognized payroll software in the UK, offering native payroll capability across 160 countries. With its scalable and configurable features, it supports headcounts ranging from 1 to 125,000 employees. HR Blizz ensures military-grade security standards, being SOC 1 and 2 audited, ISO 9001, 20000, and 27001 certified, and OWASP Level 3 tested. The choice is yours with HR Blizz, available as either a Managed Payroll or SaaS solution, providing last-mile compliance support with built-in global labor law and statutory compliance. Its user-friendly interface allows for easy additions of new entities in minutes, and seamless integration capabilities with leading HRMS systems like Workday, SAP SuccessFactors, Dayforce, and more, result in tremendous savings – over 50% compared to legacy and mainstream payroll applications.

Things you need to know before running payroll in the United Kingdom (UK)

Minimum Wages

The National Minimum Wage, calculated hourly, applies universally to eligible workers, requiring them to assess their equivalent hourly rate, regardless of their payment method. Various checks based on ‘time work,’ ‘salaried hours,’ ‘output work,’ or ‘unmeasured work’ determine compliance, with the National Minimum Wage calculator serving as a tool to verify payments against the set standards.

National Living Wage and National Minimum Wage Rates (April 2023 – April 2024)

Age GroupApril 2023 (current rate)April 2024
23 and over£10.42£11.44
21 to 22£10.18£8.60
18 to 20£7.49£6.40
Under 18£5.28£6.40
Apprentice£5.28£6.40

Note: Rates are per hour.

National Living Wage (for those aged 23 and over):

April 2023 (current rate)

£10.42

April 2024

£11.44

National Minimum Wage (for those at least school leaving age):

23 and over

£10.42 (April 2023) / £11.44 (April 2024)

21 to 22

£10.18 (April 2023) / £8.60 (April 2024)

18 to 20

£7.49 (April 2023) / £6.40 (April 2024)

Under 18

£5.28 (April 2023) / £6.40 (April 2024)

Apprentices:

Apprentices aged under 19 or 19 and in the first year: £5.28
Apprentices aged 19 or over and completed the first year: £10.18 (April 2023) / £6.40 (April 2024)

Working Hours

The maximum weekly working hours for most individuals are capped at 48 hours, typically averaged over 17 weeks. This is governed by the ‘working time directive’ or ‘working time regulations.’ Exceptions exist, such as roles requiring 24-hour staffing, jobs in the armed forces, emergency services, or police, security and surveillance positions, domestic servants in private households, seafarers, sea-fishermen, and workers on vessels in inland waterways. Additionally, those in control of their working time, like managing executives with decision-making authority, may not be subject to the 48-hour limit. Individuals under 18 years old are restricted to 8 hours a day or 40 hours a week. Opting out of the 48-hour week is a choice available to workers.

Payroll Cycle

In the UK, payroll frequencies differ and may occur on a daily, weekly, fortnightly, or monthly basis. The prevalent choice is the monthly processing of payroll. At the conclusion of the pay period, employers are required to furnish employees with a payslip detailing earnings before and after deductions.

Employers in the UK have the flexibility to change paydays or alter the frequency of employee payments. When moving the payday to the same tax month or week, the first new payment is treated as an additional payment for that period. No special actions are required if the new payday falls in a different tax month or week. HM Revenue and Customs (HMRC) provides guidance on calculating National Insurance after changing paydays. If changing the frequency of payments, employers should contact the employer helpline. Most payroll software can handle these changes automatically, but there are limitations when using HMRC’s Basic PAYE Tools. Employers paying more often or less often should follow specific guidelines to ensure accurate deductions. Additionally, there is an option for an annual payroll scheme for PAYE, allowing employers to register with HMRC as an ‘annual scheme’ for yearly reports and payments. When changing the month of employee payments, employers need to submit the necessary reports to HMRC.

What are payroll taxes in the UK? 

In the UK, payroll taxes primarily encompass income tax (administered through PAYE) and National Insurance contributions. The PAYE system is the mechanism through which HMRC collects these taxes from businesses. Employers also deal with an additional tax on benefits such as company cars and health insurance. Apart from these, deductions from employee salaries cover pension contributions, student loan repayments, and Child Maintenance Payments where applicable. Navigating these elements is essential for effective payroll management.

National Insurance Contributions

Employee Class 1 National Insurance contributions consist of deductions from their pay (employee’s National Insurance) and payments made by their employer (employer’s National Insurance). The deduction and payment amounts are influenced by the employee’s National Insurance category letter and the earnings within each band. The detailed tables outline employee and employer National Insurance rates for different income bands. Employers use the employee’s category letter to determine contributions, with examples provided for clarity.

Employee National Insurance rates (effective from 6 January 2024 to 5 April 2024):

Category letter£123 to £242 (£533 to £1,048 a month)£242.01 to £967 (£1,048.01 to £4,189 a month)Over £967 a week (£4,189 a month)
A0%10%2%
B0%3.85%2%
CN/AN/AN/A
F0%10%2%
H0%10%2%
I0%3.85%2%
J0%2%2%
L0%2%2%
M0%10%2%
SN/AN/AN/A
V0%10%2%
Z0%2%2%

Employer National Insurance rates (effective from 6 April 2023 to 5 April 2024):

Category letter£123 to £175 (£533 to £758 a month)£175.01 to £481 (£758.01 to £2,083 a month)£481.01 to £967 (£2,083.01 to £4,189 a month)Over £967 a week (£4,189 a month)
A0%13.8%13.8%13.8%
B0%13.8%13.8%13.8%
C0%13.8%13.8%13.8%
F0%0%13.8%13.8%
H0%0%0%13.8%
I0%0%13.8%13.8%
J0%13.8%13.8%13.8%
L0%0%13.8%13.8%
M0%0%0%13.8%
S0%0%13.8%13.8%
V0%0%0%13.8%
Z0%0%0%13.8%

Class 1A and Class 1B rates:

  • Employers pay Class 1A and 1B National Insurance on expenses and benefits they give to their employees. The rate from 6 April 2023 to 5 April 2024 on expenses and benefits is 13.8%. Detailed guidance on all Class 1A and Class 1B rates is available from HMRC.

National Insurance Category Letters and Employee Groups:

Most employees have category letter A. Employees can find their category letter on their payslip.

Category letterEmployee group
AAll employees apart from those in groups B, C, H, J, M, V, and Z
BMarried women and widows entitled to pay reduced National Insurance
CEmployees over the State Pension age
HApprentices under 25
JEmployees who can defer National Insurance because they’re already paying it in another job
MEmployees under 21
VEmployees who are working in their first job since leaving the armed forces (veterans)
ZEmployees under 21 who can defer National Insurance because they’re already paying it in another job

Category letters for employees who work in freeports

Employers use category letters F, I, L, and S for employees who work in a freeport.

Category letterEmployee group
FAll employees who work in freeports, apart from those in groups I, L, and S
IMarried women and widows who work in freeports and are entitled to pay reduced National Insurance
LEmployees who work in freeports and can defer National Insurance because they’re already paying it in another job
SEmployees who work in freeports and are over the State Pension age

Category letter X

Employers use category letter X for employees who do not have to pay National Insurance, for example because they’re under 16.

Personal Income Taxes 

Understanding Income Tax in the UK is crucial, especially in the context of withholding tax from employees’ salaries and remitting it to authorities. The standard Personal Allowance is £12,570, indicating the income exempt from taxation. It’s worth noting that Personal Allowance may vary if Marriage Allowance or Blind Person’s Allowance is claimed and decreases for incomes surpassing £100,000.

Income Tax Rates and Bands (for standard Personal Allowance of £12,570):

BandTaxable incomeTax rate
Personal AllowanceUp to £12,5700%
Basic rate£12,571 to £50,27020%
Higher rate£50,271 to £125,14040%
Additional rateOver £125,14045%

Other Allowances

  • Tax-free allowances for:

    • Savings interest.
    • Dividend income if you own shares in a company.
  • Additional tax-free allowances:

    • Your first £1,000 of income from self-employment (trading allowance).
    • Your first £1,000 of income from rented property (unless you’re using the Rent a Room Scheme).

Ensure you are aware of eligibility criteria for trading and property allowances. Remember that any interest, dividends, or income exceeding these allowances will be subject to taxation.

Claiming Income Tax Reliefs

Eligible individuals can claim Income Tax reliefs, potentially reducing their tax liability.

Marriage Allowance

For married couples or civil partners, Marriage Allowance enables a reduction in the partner’s tax if one’s income is below the standard Personal Allowance.

Married Couple’s Allowance

If Marriage Allowance is not claimed and either partner was born before 6 April 1935, Married Couple’s Allowance might be applicable.

For those employed or receiving a pension, it’s crucial to check Income Tax details, including Personal Allowance, tax code, paid tax in the current tax year, and an estimate for the remaining year.

Mercans ensures clarity on Income Tax regulations, allowing individuals to make informed financial decisions while navigating the complexities of the UK tax system.

What are Employee Tax Codes?

Deductions are made according to the employee tax code, making it essential to grasp how to interpret and apply this code. Comprising a combination of numbers and a letter (e.g., 1257L), the tax code plays a crucial role in accurately calculating the amount of tax deductions from an employee’s pay throughout the year.

Key Steps

  • New Employee Onboarding:

    • When bringing a new employee on board, the initial tax code is often derived from their P45, consisting of numerical and alphabetical components.
  • Annual Tax Code Update:

    • t’s customary to update an employee’s tax code at the beginning of each tax year.
    • n case of any changes to the tax code during the year, HM Revenue and Customs (HMRC) will notify you via email, prompting a timely update of payroll records.

Common Tax Code – 1257L

  • The prevalent tax code for the tax year 2023 to 2024 is 1257L. This code is typically assigned to individuals with a single job, no untaxed income, unpaid tax, or taxable benefits (e.g., a company car).
  • It’s important to note that if the code is followed by ‘W1,’ ‘M1,’ or ‘X,’ it becomes an emergency tax code, applicable when a new employee lacks a P45.

Understanding and accurately implementing tax codes is pivotal to Mercans’ commitment to precision and compliance in payroll management.

How to run payroll in the UK?

In the realm of payroll responsibilities in the UK, employers should meticulously follow HMRC’s outlined guidelines for effective PAYE management. The structured process, unfolding from the 6th to the 5th of each tax month, serves as a temporal guidepost. Integrating PAYE seamlessly into overall payroll operations is crucial, requiring precision in timing to avoid penalties. Compliance with HMRC regulations is imperative, and employers must stay informed about updates to ensure adherence to the latest standards. The tax month boundaries act as critical milestones, demanding a meticulous approach to payroll activities within this timeframe. This commitment to accuracy and compliance not only safeguards against potential penalties but also fosters a streamlined and efficient payroll process in accordance with HMRC expectations.

Before Employees’ Payday:

Employer Payment Summary (EPS):

Submit an EPS to HM Revenue and Customs (HMRC) if no employees are paid in a given tax month.

On or Before Payday:

Utilize your payroll software to:

Record employees’ pay, encompassing salary, wages, and additional earnings.
Calculate deductions from their pay, including tax and National Insurance.
Compute the employer’s National Insurance contribution for earnings exceeding £242 per week.
Generate payslips for each employee, using alternative software if necessary.
Report pay and deductions to HMRC through a Full Payment Submission (FPS).

For employees earning less than £123 per week, focus on recording and reporting pay, except in cases of multiple jobs or pension income.

In the Following Tax Month (Starting on the 6th)

Online Review and EPS Submission

Access your FPS online from the 10th to review what you owe.
Submit an EPS by the 19th to claim reductions on your HMRC liability, such as statutory pay.

View and Pay HMRC

Check the balance owed in your HMRC online account within 2 days (or by the 14th if EPS was sent before the 11th).
Make the payment to HMRC by the 22nd (or the 19th if paying by post) to avoid penalties. Quarterly payments may be an option for those paying less than £1,500 per month.

Late Reporting

HMRC issues late filing notices for failure to submit or late submission of FPS, potentially resulting in penalties.
Late, missing, or incorrect payroll reports may impact employees’ income-related benefits, such as Universal Credit.

Adhering to these steps ensures compliance and timely payroll processing, benefiting both employers and employees. If you have specific queries or require further assistance, feel free to reach out to our dedicated team.

What are P45, P60 and other forms?

In the realm of payroll documentation, P45 and P60 forms play pivotal roles in capturing essential employee information. The P45, issued when an employee leaves a job, details earnings and taxes paid during employment, aiding in seamless transitions. On the other hand, the P60 summarizes annual earnings and deductions, crucial for filing taxes. These forms are not just paperwork; they’re integral to compliance and employee financial records.

At Mercans, we understand the significance of these documents. As part of our comprehensive payroll process, we not only generate P45s and P60s accurately but also assist our clients throughout, ensuring compliance with HMRC regulations. Our commitment extends beyond numbers; we aim to make payroll management a smooth and error-free experience for our clients.

 Here’s a breakdown:

P45 Form

Purpose

Issued when an employee concludes their tenure with an employer.

Content

Outlines tax and National Insurance contributions paid during the employment.

P60 Form

Purpose

Given annually at the tax year’s end (April).

Content

Summarizes total earnings, tax deductions, and National Insurance contributions for the tax year.

Forms Production

Employers generally use payroll software for seamless P45 and P60 generation.
HMRC’s Basic PAYE Tools offer an alternative for employers without form-producing capabilities in their software.

Exemptions and Additional Forms

Employers exempt from online filing can contact HMRC for form orders.
Exemptions may apply to care and support employers or under specific circumstances.
Explore other PAYE forms, like HMRC’s starter checklist and P46(Car) form for specific employee scenarios.

These forms are critical for maintaining accurate financial records and ensuring compliance with tax regulations.

Payroll Annual Reporting Assistance

As an employer entrusted with payroll management, efficiently navigating annual reporting obligations is crucial. Mercans is here to guide you through the essential tasks: From generating accurate P45s and P60s to ensuring compliance with HMRC regulations, we take care of the intricate details. 

Our commitment extends beyond routine payroll processing; we handle the complexities of annual reporting, allowing you to focus on your core business activities. With Mercans by your side, you can confidently navigate the intricacies of payroll management, secure in the knowledge that your annual reporting requirements are in expert hands. Mercans is here to guide you through the essential tasks:

Final Payroll Report

Deadline

On or before your employees’ payday.

Action

Submit your conclusive payroll report for the concluding tax year to HM Revenue and Customs (HMRC).

Employee Payroll Records Update

Commencement

From 6 April.

Task

Ensure meticulous updating of employee payroll records, reflecting any changes relevant to the new tax year.

Payroll Software Update

Commencement

From 6 April, or as prompted by your software provider.

Objective

Keep your payroll software current, adhering to updates or modifications suggested by your software provider.

P60 Distribution

Deadline

By 31 May.

Responsibility

Furnish employees with their P60 forms, summarizing crucial financial details for the concluded tax year.

Employee Expenses and Benefits Reporting

Deadline

By 6 July.

Action

Report any employee expenses and benefits, ensuring compliance with HMRC regulations.

Mercans understands the intricacies of these processes and stands ready to assist, ensuring your payroll operations seamlessly transition from one tax year to the next.

Pension Auto Enrolment

Pension auto-enrollment, a government-initiated measure designed to bolster retirement savings for employees, mandates the inclusion of all eligible workers in a qualifying workplace pension scheme. Employers are obligated to contribute a minimum of 2% of each employee’s qualifying earnings since April 2018, complemented by a 3% employee contribution to meet the stipulated 5% total contribution threshold. Automatic enrollment criteria encompass individuals aged between 22 and 65, earning over £10,000 annually, and actively working or ordinarily working in the UK, inclusive of part-time and contract workers. While workers falling outside these criteria maintain the right to join a qualifying pension scheme, they can exercise this option by expressing their intent to “opt in” to their employer, who is obliged to facilitate their inclusion.

Real Time Information

The shift to Real Time Information (RTI) in the UK payroll system was prompted by the anticipated introduction of Universal Credit in October 2013, a comprehensive initiative aimed at streamlining benefits for individuals seeking employment or those with a modest income. Universal Credit consolidates various allowances, including Jobseeker’s Allowance, Employment and Support Allowance, Income Support, Child Tax Credits, Working Tax Credits, and Housing Benefits, into a single payment. Recognizing the necessity for a continuously updated view of recipients’ income, the implementation of Real Time Information (RTI) was introduced. For employers and pension providers across the UK, RTI mandates the use of compliant software to seamlessly submit returns to HMRC. 

Similar to the previous PAYE system, penalties are imposed for late or deliberately inaccurate submissions. Employers need to adhere to specific steps and timings, and the decision to manage payroll in-house determines the level of involvement required. Employers must follow instructions meticulously to ensure a smooth RTI process. The first RTI return submission involves sending employee details for alignment with HMRC records, followed by regular Full Payment Submissions (FPS). Employer Alignment Submissions (EAS) may be requested initially. For employers with annual payrolls, applying for classification as an annual scheme is possible if certain conditions are met: all employees are paid annually, simultaneously, on the same date, and the employer is obligated to pay HMRC annually.

Employee Benefits in the UK

Employee benefits play a crucial role in ensuring the well-being of the workforce. In the United Kingdom, several statutory schemes are in place to provide financial support during specific life events. These benefits aim to assist employees during periods of sickness, maternity, adoption, and shared parental responsibilities. Let’s explore the key aspects of Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Adoption Pay (SAP), and Shared Parental Pay (ShPP) in the UK.

Statutory Sick Pay (SSP)

Statutory Sick Pay is designed to support employees who are unable to work due to illness or self-isolation. To qualify, an employee must be classified as an employee, have done some work for the employer, earn an average of at least £120 per week, and have been ill or self-isolating for at least four consecutive days. The Period of Incapacity (PIW) encompasses days of sickness, including weekends and bank holidays. Qualifying Days (QD) are the days the employee would normally work, and Waiting Days (WD) are the first three qualifying days without SSP.

Statutory Maternity Pay (SMP)

Statutory Maternity Pay provides financial support to employed women during maternity leave. Noteworthy terms include Additional Maternity Leave (AML), Expected Week of Confinement (EWC), Higher Rate for the first 6 weeks, Ordinary Maternity Leave (OML), Qualifying Week (QW), and Small Employers’ Relief (SER).

Work out Average Weekly Earnings (AWE) and SMP

AWE is calculated in an 8-week relevant period, and SMP is paid for up to 39 weeks, starting automatically if the employee is off work for a pregnancy-related illness.

Statutory Adoption Pay (SAP)

Statutory Adoption Pay supports employees adopting a child or having a child through surrogacy. Key terms include Adopter, Matching Date, Matching Evidence, and Placed/Placement. AWE is calculated in an 8-week relevant period, and SAP is paid for 39 weeks, with rates similar to SMP. Employers can reclaim SAP through an EPS submitted to HMRC.

Shared Parental Pay (ShPP)

Shared Parental Pay allows parents to share leave after childbirth or adoption. It is available if the employee or their partner ends maternity or adoption pay early. ShPP is paid at £151.97 a week or 90% of average weekly earnings, whichever is lower. Employers can reclaim ShPP through an EPS submitted to HMRC.

Payroll Outsourcing in the UK

Navigating the complexities of payroll management in the United Kingdom demands precision and compliance. Mercans, with its expertise in global payroll outsourcing, emerges as a reliable partner for businesses seeking streamlined payroll processes. As a trusted ally, Mercans ensures adherence to the intricate payroll regulations of the UK, including tax deductions, statutory payments, and reporting requirements. The team at Mercans leverages cutting-edge technology to provide accurate and timely payroll services, allowing businesses to focus on their core competencies. With a commitment to efficiency and compliance, Mercans delivers tailored payroll solutions that align with the unique needs of each client, ensuring a seamless and error-free payroll experience.

Conclusion

In the dynamic landscape of global business, Mercans stands as a beacon of proficiency in payroll outsourcing. By choosing Mercans, businesses not only gain access to a team of seasoned professionals well-versed in UK payroll intricacies but also unlock the benefits of precision, compliance, and time efficiency. As a strategic partner, Mercans empowers organizations to transcend payroll challenges, fostering a conducive environment for growth and success. Elevate your payroll experience with Mercans – where expertise meets excellence.

This document was prepared for informational purposes only. As local laws & regulations keeps on changing. Please consult your tax & legal advisors as well.