Guide - 11 August 2021

Payroll Services in the UK

Set up PAYE and Payroll

All companies must register as employers and set up their PAYE (Pay As You Earn) scheme, even if they only have one employee. PAYE is not a tax. It is a sophisticated system for collecting income tax and National Insurance at source from earnings and pension payments.

All employers must operate PAYE for every employee, irrespective of whether they are part-time or “casual” workers, students, or school leavers.

Registration for the PAYE Scheme can be done by applying online via www.gov.uk, and it can take up to 5 working days to get your employer’s PAYE reference number.

Once registered for PAYE, an employer can either set up and run payroll themselves using payroll software or hire a payroll provider to do it for them.

UK Employers' obligations

The PAYE Scheme must be registered before the first payday.

An employer is responsible for collecting and keeping employee records and legally accountable for compliance with PAYE, even if payroll is outsourced. Employers Liability Insurance is another legal requirement if your business employs one or more people.

When employing staff in the UK, an employer must ensure that every employee has the right to work, even if they are a UK citizen. These checks will require either a physical check of ID documents or applicants with a Biometric Residence Permit will need an online check.

From the 1st of January 2021, a new immigration system will apply when employing staff from the EU, and EU citizens moving to the UK to work will require a visa in advance.

Employing illegal workers is a criminal offence that can carry a prison sentence of up to 5 years in jail. Even a genuine failure to undertake adequate checks can result in a fine of up to £20,000 per illegal worker. Depending on the industry, the employer may also need to carry out a Disclosure and Barring Service (DBS) check to establish an applicant’s criminal record.

An employer must inform HM Revenue and Customs (HMRC) when they take on a new employee who should also provide a P45 from their previous employer. This form details the taxes the employee has paid to date in the tax year and helps determine the correct tax code. It may also indicate if the employee is paying back a student loan. If the new employee does not have the P45, they need to complete the HMRC’s Starter Checklist, determining the correct tax code to use for them.

All new employees are entitled to a written statement of employment within two months of the initial hiring, including terms and conditions of employment, wages, a discussion of pensions, sick pay, absence, holiday pay, total hours, and other common issues.

There is no specific law on probation that determines how long it should be. However, typically a probationary period is to last no longer than six months (or three months when an employee is moving to a new post internally) and can be a short as one month for contract workers.

An itemised pay statement must be given to an employee (electronically or on paper) each time they are paid following The Employment Rights Act 1996 (ERA).

An employer must submit payroll information to HMRC on or before the day they pay employees. The report is the Real Time Information (RTI) submitted via an online gateway and includes all payroll information from payments and income taxes to social contributions.

Operating PAYE

Tax year and tax calendar

The tax year runs from 6th April of one year to 5th April of the following year.

The tax year is split into tax periods comprising tax weeks and tax months for calculating income tax under PAYE. Typically, there are 52 tax weeks, but it is possible for there to be 53 weeks and 12 tax months.

The frequency at which an employee is paid does not affect the overall income tax due in total for the tax year.

The date when the employee is paid determines the tax week or tax month.

Tax rates 2021-2022 for England & Wales

Income tax bands 2021 - 2022
20% (basic rate) £1 - £37,700
40% (higher rate) £37,700 - £150,000
45% (additional rate) Over £150,000
Emergency tax code 1257L

**Scottish tax rates are different to England & Wales and split across 5 bands.

Employees’ income tax deductions, certain National Insurance payments and student loan repayments, form the monthly PAYE bill. The PAYE bill must be paid by the 22nd of the tax month that follows the payroll date. Tax months run from the 6th, so essentially, the bill must be settled between the 6th and 22nd.

What to pay employees

All UK workers are entitled to the National Minimum Wage (NMW) and the Living Wage. These rates change every year on the 1st April. The Living Wage applies to all workers aged over 23. However, NMW applies to several categories' dependent on the worker’s age.

The NMW for aged 23 and over applicable from 1 April 2021 is £8.91.

Pensions

Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. This is called 'automatic enrolment' - AE. Currently, AE applies to employees aged 22 or over, who earn a minimum of £10,000 from one employment.

The Minimum Contribution level: Employee 5%, Employer 3%, Total 8%.

Paid Leave – Holidays, Maternity (Paternity) and Sick Pay

Almost all workers are legally entitled to 5.6 weeks’ paid holiday per year (statutory leave entitlement or annual leave, including public and bank holidays). Therefore, those working a typical 5-day work week must receive at least 28 days paid annual leave per year.

Part-time workers are also entitled to at least 5.6 weeks’ paid holiday, but this is calculated on a pro-rata basis, so it will amount to fewer than 28 days.

Statutory Maternity Pay (SMP) weekly £151.97 for 33 weeks.

Statutory Paternity Pay (SPP) weekly £151.97, maximum 2 weeks.

Statutory Sick Pay (SSP) is £96.35 per week for up to 28 weeks.

All above rates apply to the average weekly earnings (AWE) at or above £120 per week.

Did you know that there are payments and benefits not taxable you can provide to your employees?

Your employees may be provided with benefits or expenses, but these are not always taxable.

Examples of this are free or subsidised meals, trivial benefits, employer contributions into a pension, medical treatment and health screening, job-related training, parking, certain gifts, travel costs, mobile phones, and many more.

Please speak to our payroll team for full details.

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