An Introduction to Payroll
Payroll in the United Kingdom is a difficult subject for many international managers and organisations looking to do business in the country.
Because of the country’s efficient regulatory framework and proximity to other European countries, the UK has long been a preferred ‘first stop’ on worldwide expansion plans for many enterprises.
You will need to hire personnel to work for your firm sooner or later after starting a business in the United Kingdom. And, in order to handle them effectively, you must be familiar with a wide range of payroll and labour laws.
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Payroll for accountants used financial journal entries to describe an organization’s transactions and total cash flow. Payroll entries are part of a general ledger, which organises all financial data. Human resources can pull all of an employee’s payroll information and submit it to their manager for inclusion in their performance evaluation.
Payroll in the United Kingdom: An Overview
Every business requires proper financial management and record-keeping. Payroll is in charge of this, as well as making the necessary payments to employees and tax authorities.
In the United Kingdom, the payroll and payroll tax systems are both efficient and well-developed.
The law establishes the minimum wage as well as the required tax and social security deductions. A government-provided real-time online system for documenting and collecting all payments from businesses is also available. Workers and contracts have different regulations, and firms are accountable for accurate and timely calculation and payment.
Payroll is the most often outsourced HR function, according to a 2020 research from the UK Chartered Institute of Personnel and Development (CIPD), with roughly 39 percent of small businesses opting to outsource in the UK.
Whether payroll is handled in-house or outsourced, the company is still legally responsible for adhering to UK payroll regulations.
Non-compliance or improper submissions carry severe consequences. Following the right pension auto-enrolment rules, for example, can result in fines ranging from £400 to £10,000.
What Is Payroll Legislation In The United Kingdom?
Payroll and employee compensation in the United Kingdom are governed by a number of laws. The most important are:
- The Employment Rights Act of 1996 protects workers’ rights. This is the primary statute that applies to all employees in the United Kingdom. Contract types, approved and unlawful salary deductions, and the right to paid time off work are all covered under UK payroll legislation.
- The National Minimum Wage Act of 1998 established the national minimum wage.
- The United Kingdom has strict minimum wage laws. This law establishes the rules and procedures for the UK’s minimum wage, however rates vary.
- The Part-Time Workers (Prevention of Discriminatory Treatment) Regulations of 2000 and the Agency Workers Regulations of 2010 both apply to part-time workers. These two laws help to ensure that these workers receive equal and fair treatment (and pay).
- Income Tax (Earnings and Pensions) Act of 2003 and Income Tax (Earnings and Pensions) Act of 2007. These laws govern how personal and payroll taxes are paid in the United Kingdom.
- The National Insurance Contributions Act of 2015 was enacted in 2015. This comprises UK social security legislation, as well as payments and penalties for businesses.
- Act of 2008 on Pensions. Unless they opt out, UK companies are required to set up and contribute to a pension fund for their employees.
These regulations control the payment of wages and the deductions that must be made from it.
The following are some additional details concerning UK payroll legislation that businesses should be aware of:
Contractor employment and IR35.
Any company that hires freelancers or contractors must follow the so-called IR35 regulations. These rules are in place to prohibit disguised employment, which means that such workers will have to pay additional taxes. Employers will be responsible for determining IR35 status starting in April 2021. (not the worker).
The European Union and Payroll Legislation
The United Kingdom is now negotiating its exit from the European Union. Many of the UK’s payroll and taxation legislation are based on European directives. There may be modifications to payroll legislation or working hour regulations in the future. Employers in the United Kingdom will certainly face adjustments if they run payroll throughout Europe, since legislation will change.
The UK’s Minimum Wage
In the United Kingdom, there is clearly established minimum wage legislation. Minimum wage laws were initially enacted in the United Kingdom in 1909, but only for particular industries and with numerous exceptions. The National Minimum Wage Act of 1998 was the first piece of legislation to include all employees and industries (the wage was set at £3.60 at the time, but has since altered).
All workers in the UK are entitled to the minimum wage, whether they are paid hourly or on a fixed income (it is then based on contracted hours).
For the tax year 2020/2021, the UK minimum wage is as follows for various age groups:
- Apprentice worker (under 19 years old or any age during the first year of the scheme): £4.15 per hour
- £4.55 for those under the age of eighteen
- £6.45 for ages 18 to 20.
- £8.20 for those aged 21 to 24
- £8.72 for those aged 25 and up
UK Payroll and PAYE
The UK government’s PAYE (Pay As You Earn) scheme collects tax and national insurance from employees. Any business with one or more employees must register, retain records, and submit complete payment information through the PAYE system. HMRC in the United Kingdom is in charge of administering it (HM Revenue and Customs).
Any new employee will be assigned a tax code, which is required in order to register them as a new employee. This might be a new one based on their circumstances or an old one from a prior job (as mentioned on an employee’s P45 form).
All payroll information must be submitted on or before the day employees are paid (through a system called Real Time Information). A Full Payment Submission is what it’s called (FPS). This is normally done on a monthly basis, but it can also be done on a weekly basis. By the 22nd of the month following the payroll date, any payments payable to HMRC through the PAYE system must be made.
Any other mandatory payments to employees are also made through PAYE, in addition to the normal income. Sick pay, maternity pay, paternity pay, and redundancy compensation are all examples of this.
Social Security and Taxes
Employers must compute all social security and payroll taxes in the UK for each employee as part of PAYE filing. These are then deducted from the employee’s wages and sent straight to HMRC via PAYE.
The following are the important points.
Individual Income Tax (IIT)
Employees are taxed on a graduated scale as follows (these rates are correct for the 2020/2021 tax year, but they may change):
The first £12,500 of your earnings are tax-free (This is the personal allowance and can vary depending on individual circumstances)
Income between the personal allowance and £50,000 is subject to a 20% basic rate of tax.
Income between £50,001 and £150,000 is subject to a 40% higher rate of tax.
An additional rate of 45 percent applies to income beyond £150,000.
If a person earns money in addition to their principal wage, they must file a personal tax return (typically a Self Assessment tax return) to indicate any additional tax obligations. It is the individual’s job to take care of this.
Companies doing business in Scotland should be aware that the Scottish government has the authority to create various income tax bands and rates (although it has to keep the same personal allowance level). It adds two extra tax bands to the tax levels in 2020-2021, with the following rates:
- Starting rate of 19 percent for income between personal allowance and £14,585.
- For income between £14.586 and £25,158, the basic rate is 20%.
- The intermediate rate of 21% applies to income between £25,159 and £43,430.
- Higher rate of 41% for income between £43.431 and £150,000
- The top rate is 46 percent for income exceeding £150,000.
Contributions to Social Security
In the United Kingdom, all employees are required to pay social security contributions. National Insurance is the term for this. Both the employer and the employee must pay contributions. Both are deducted from your wages in the United Kingdom.
- National Insurance for Employers. This is set at 13.8 percent of all monthly revenues over £732. It is paid directly by the employer and is not deducted from earnings.
- Employee National Insurance is a type of insurance that covers employees. This is deducted from the employee’s salary via payroll deduction. It’s set to:
- No payment if your monthly salary is less than £792.
- 12 percent for monthly incomes of £792 to £4167
- 2% if you earn more than £4167 every month
Employees in certain categories are eligible for reduced National Insurance contributions. This contains (for a complete list, see the government website):
- Employers cannot contribute less than £4167 per month to employees under the age of 21.
- Employees beyond the age of the state pension – there is no contribution from the employer.
- Employers only need to contribute over £4,167 per month for employees who are already paying contributions in another employment.
Contributions to a Pension
All firms should provide a workplace pension to employees over the age of 22 who earn more than £10,000. Unless employees opt out, they should be automatically enrolled in this programme, with money taken through PAYE.
This is a contributing pension, which means that both the employee and the employer contribute. From April 1, 2019, the employer’s minimum contribution will be 3%, and the employee’s minimum contribution will be 5%. The employer can choose from a variety of pension plans (both government-sponsored and private), but they must meet certain criteria.
Repayment of Student Loans
Government loan repayments are frequently due from UK university graduates, and these are collected through UK payroll. The amount to be paid is determined by the employee’s wage and repayment plan. The plan is depending on nationality and when the course began (see the government’s website for details). This is:
- On Plan 1, 9% of income over £19,390 is taxed.
- On Plan 2, 9% of income over £26,575 is taxed.
- For postgraduate loans, 6% of income over £21,000 is required.
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