Payroll in the UK:
What you need to know
Payroll may not be the most exciting topic when it comes to the world of work, but it’s definitely one of the most important. And with UK payroll legislation being as ever-changing as the British weather, it can be difficult to keep up.
The UK has a robust yet complex payroll and tax system, so as an employer, it pays to understand the basics. Wrapping your head around UK payroll taxes, deductions, and all the legal jargon can feel overwhelming at the best of times. But staying informed is the first step to a smooth-running business and happy employees.
That’s why the team at Gibson Watts Global have summarized below all there is to know about payroll in the UK.
The United Kingdom has a robust yet complex payroll and tax system, so as an employer, it pays to understand the basics. Wrapping your head around different contract types, taxes, and all the legal jargon can feel overwhelming at the best of times. But staying informed is the first step to a smooth-running business and happy employees.
That’s why the team at Gibson Watts Global have summarized below all there is to know about payroll in the UK.
Skip to a key chapter:
Employment Contracts in the UK
An employment contract is an agreement between an employer and an employee that outlines the terms and conditions of their working relationship.
An employee’s rights at work depend a lot on whether they’re an employee, a worker or self-employed.
The law states that employees have a number of employment rights called “statutory rights”. Self-employed contractors do not have the rights and protections afforded to employees and workers; with workers being offered some (but not all) of the same protections as employees.
Many businesses choose to “trial” an individual as a contractor initially as this can allow for terminating their employment on shorter notice if it doesn’t work out. Employees need at least 2 years’ continuous employment before they can claim unfair dismissal.
Various employment contract types such as full-time, part-time, fixed-term, temporary, agency, freelancers, contractors, and zero-hour contracts determine an individual’s specific employment rights and obligations within these categories.
UK Salary Payments and Requirements
Salaried workers in the UK are typically paid 12 equal instalments each year, directly into their bank accounts. Employers must register with His Majesty’s Revenue and Customs (HMRC) and use the Pay-As-You-Earn (PAYE) system to pay their employees.
PAYE is the system that HM Revenue and Customs (HMRC) uses to collect income tax and National Insurance contributions from employees. Employers are responsible for deducting PAYE from their employees’ wages and salaries before paying them, and then remitting the deductions to HMRC on a regular basis.
Employers must deduct taxes from employees’ pay checks every time they pay them, regardless of whether they are salaried or hourly workers.
Employers must send their most recent pay deductions to HMRC by the 19th or 22nd of each month, depending on payment method. They must also submit a final report for the year and provide Form 60 to each employee before the end of the payroll tax year (5th April).
In the United Kingdom, 13th-month pay is not mandatory, and it is not a common expectation among local employees. However, employers may introduce bonuses which are at the discretion of the employer.
Once you’ve registered as an employer, you can run payroll in the UK yourself or outsource it. If employers choose to outsource their payroll, they still have various responsibilities, including:
- Recording employee wages
- Creating payslips
- Administering national insurance contributions
Working Hours in the UK
Employees cannot work more than an average of 48 hours per week, unless they sign an agreement to this alongside their contract. A standard working week in the UK is Monday to Friday between 8:00/9:00 am to 4:00/5:00 pm with an hour lunch.
Employees are generally paid at their usual hourly rate, however if they work more than normal full-time hours or at unsociable times, they may get pay more.
Some employers in the UK give additional time off known as ‘time off in lieu (TOIL)’ in substitute of overtime pay.
National Living Wage
As of April 2025, these are the rates for the national living wage, and are subject to change on the 1st of April each year:
Age group | National living wage |
Apprentice | £7.55 |
Under 18 | £7.55 |
18-20 | £10.00 |
21 and over | £12.21 |
Apprentices are entitled to the apprentice rate if they’re either:
- Aged under 19
- Aged 19 or older and in the first year of their apprenticeship
For apprentices aged 19 or older, who have completed the first year of their apprenticeship, the minimum wage for their age will be applicable.
Corporate Tax
From April 2025, businesses will now pay 25% corporation tax rate, provided they report profits above £250,000. Smaller entities with profits of up to £50,000 will remain at the previous 19% rate. Between these two rates, a system of marginal relief will apply.
Companies are required to file a corporation tax return with HM Revenue and Customs (HMRC) each year. The tax return must show the company’s profits and losses for the year, as well as the amount of corporation tax that the company owes.
Income Tax
Your income tax rate in the UK depends on how much you earn.
The basic rate is 20%, but it goes up to 40% for earnings above £50,270 and to 45% for earnings over £125,140. You don’t have to pay any income tax on the first £12,570 of your earnings (this is called the Personal Allowance). However, if you earn more than £100,000, your Personal Allowance is reduced by £1 for every £2 you earn above £100,000.
In other words, the more you earn, the more income tax you have to pay.
Here is a table that shows the UK income tax rates for 2025-26:
Income | Tax rate |
Up to £12,570 | 0% |
£12,571 to £50,270 | 20% |
£50,271 to £137,710 | 40% |
Over £137,710 | 45% |
National Insurance (NI)
National Insurance is like income tax, but it helps to pay for government benefits when people need them, for example, when unemployed, ill, in retirement, or on bereavement leave.
This tax is paid by most workers, depending on their job and earnings. It’s a set amount taken off your wages, either automatically if you are in the PAYE system, or by making a payment through a self-assessment tax return if you’re not.
Individuals currently have to pay NI if they earn either:
- More than £1,048 per month (£12,570) as an employee, or
- Make more than £12,570 a year in profit from self-employment
The amount you owe for National Insurance (NI) varies based on your category. There are four main classes:
- Class 1 – Paid by employees and employers.
- Class 2 – A fixed rate for self-employed individuals.
- Class 3 – Voluntary contributions for those who wish to maintain their NI record for specific benefits, like the state pension.
- Class 4 – Paid by self-employed individuals on profits over a certain amount.
The 2025/26 tax year brings an increase in the Employers’ National Insurance contributions, from 13.8% to 15%, however this is not reflected in Employees’ contributions.
Pensions
In the UK, workplace pensions are a key part of the retirement savings system. A workplace pension scheme allows employees to save for their retirement with the help of their employer. When you work for an employer, you’re automatically enrolled into a pension scheme if you’re aged 22 or over; under State Pension age (currently 66 years old); and earn more than £10,000 a year.
The contribution rates are set by law. As of 2025, the total minimum contribution to a workplace pension is 8% of your qualifying earnings. This includes contributions from the employee, the employer, and government tax relief. Typically, an employee will contribute 5% of their earnings, while their employer contributes a minimum of 3%. The government adds tax relief on the contributions, which effectively boosts the amount the employee saves. For example, if an employee earns £30,000 a year, then the minimum total contribution of 8% would be £2,400, of which the employee would contribute £1,500 (5%), and their employer £900 (3%). They would also receive a tax relief of £300.
Employers are required to automatically enrol eligible workers into their pension scheme, but employees can choose to “opt out”, if they don’t wish to participate. However, if the individual opts out, both theirs and their employer’s contributions will stop, and they’ll lose out on the benefit of saving for their retirement. Opting out can only be done within the first month of enrolment, after which they’ll be enrolled again in three years, unless they opt out again.
Workplace pension schemes in the UK are designed to provide individuals with more financial security in retirement. Alongside the State Pension, these pensions can give workers a more comfortable retirement, especially if they start saving early in their careers. The contributions grow over time, and the pension amount which individuals receive when they retire depends on how much is paid in, and the performance of the investments in their pension pot.
Outsourcing Payroll in the United Kingdom
With all their quirks and nuances, it can be easy to miss things in your global payroll operations when you hire across borders. And if a business makes a payroll mistake, it could result in costly fears or even legal action.
A PEO/EOR (Professional Employer Organization/Employer of Record) can help businesses mitigate payroll risks and ensure that payroll is processed accurately and on time. PEOs/EORs have the expertise and resources to ensure that payroll complies with all applicable laws and regulations.
Need a UK payroll provider but don’t know where to start? Reach out to us today!