Hiring and paying employees in the UK involves navigating a structured framework of legal, tax, and administrative responsibilities. This guide provides a comprehensive overview of how businesses—both domestic and international—can successfully hire and pay employees in the UK, ensuring compliance with employment law, payroll regulations, and benefits requirements.
Understanding UK employment laws
The UK has robust employment laws designed to protect employee rights. Familiarise yourself with the following key areas:
Employment contracts
- Requirement: A written employment contract must be provided to employees within two months of starting work.
- Contents: Include job title, working hours, salary, holiday entitlement, notice period, and any relevant terms, such as probationary periods and benefits.
Right to work checks
- Employers must verify that prospective employees have the right to work in the UK. Documents such as passports, visas, or settled status confirmation under the EU Settlement Scheme may be required.
Minimum wage
- National Minimum Wage (NMW): Applies to workers aged under 23.
- National Living Wage (NLW): Applies to workers aged 23 and over.
- Current rates (as of April 2024):
- NLW (23+ years): £11.00 per hour
- Aged 21-22: £10.18 per hour
- Aged 18-20: £7.49 per hour
- Apprentices: £5.28 per hour
Working hours and breaks
- Maximum weekly hours: 48 hours (averaged over 17 weeks), with an opt-out option for employees.
- Rest breaks: A 20-minute break is required for every 6 hours of work.
Setting up as an employer
Before hiring employees, businesses need to register as employers with HM Revenue & Customs (HMRC).
Registering with HMRC
- Timeline: Registration must occur before the first payday.
- Method: Online registration through the HMRC website.
- Employer PAYE reference: Issued upon registration and used for payroll submissions.
Setting up payroll
Employers must set up a payroll system to calculate wages, tax, and National Insurance contributions (NICs).
Choosing payroll software
- Options: Use HMRC’s free Basic PAYE Tools or commercial software like Sage, QuickBooks, or Xero for advanced functionality.
- Key features: Ensure the software supports Real Time Information (RTI) reporting.
Deductions and contributions
- Income Tax: Deducted at source under the Pay As You Earn (PAYE) system.
- Tax bands (2024/2025):
- Personal Allowance (0%): Up to £12,570
- Basic rate (20%): £12,571 to £50,270
- Higher rate (40%): £50,271 to £125,140
- Additional rate (45%): Above £125,140
- Tax bands (2024/2025):
- National Insurance Contributions (NICs):
- Employee contributions:
- Earnings above £242/week: 12%
- Earnings above £967/week: 2%
- Employer contributions:
- Earnings above £175/week: 13.8%
- Employee contributions:
- Workplace pensions:
- Auto-enrolment is mandatory for eligible employees.
- Minimum contributions:
- Employer: 3%
- Employee: 5%
Employee benefits and entitlements
Statutory benefits
Employees in the UK are entitled to a range of statutory benefits, including:
- Holiday entitlement:
- Minimum of 5.6 weeks (28 days for a full-time employee).
- Can include public holidays.
- Sick pay:
- Statutory Sick Pay (SSP): £109.40 per week (2025 rate) for up to 28 weeks, provided the employee earns at least £123/week.
- Parental leave:
- Maternity pay: Up to 39 weeks (90% of weekly earnings for the first 6 weeks; £172.48 per week thereafter).
- Paternity pay: 1-2 weeks at £172.48 per week or 90% of weekly earnings, whichever is lower.
Optional benefits
Enhancing employee packages with optional benefits can improve retention:
- Private health insurance
- Flexible working arrangements
- Professional development allowances
- Enhanced pension contributions
Post-hire compliance
Real Time Information (RTI) submissions
- Report payroll information to HMRC every payday.
- Include employee details, tax, and NICs deductions.
Paying HMRC
- Employers must pay tax and NICs by the 22nd of each month (or 19th if paying by cheque).
Managing workplace pensions
- Enrol eligible employees in a pension scheme within three months of starting employment.
- Use pension providers such as Nest, The People’s Pension, or Smart Pension.
Payroll process in the UK
Managing payroll in the UK involves a structured process to ensure employees are paid accurately and on time, while complying with legal and tax obligations. Below is a step-by-step breakdown of the UK payroll process:
1. Collect employee information
Before running payroll, gather all necessary details from employees:
- Personal details: Full name, address, date of birth, and National Insurance (NI) number.
- Bank account details: For direct deposit of wages.
- Starter forms: P45 from previous employment or a completed HMRC starter checklist.
- Employment terms: Salary or hourly rate, working hours, and deductions (e.g., student loans or child maintenance).
2. Set up payroll software
Employers must use payroll software that complies with HMRC’s Real Time Information (RTI) requirements. The software automates calculations for:
- Income tax (PAYE)
- National Insurance Contributions (NICs)
- Pensions (if auto-enrolment applies)
Popular payroll software options include:
- Sage: Comprehensive payroll and HR management tools.
- Xero: Integrated payroll for small businesses.
- QuickBooks: User-friendly platform with advanced reporting.
- HMRC Basic PAYE Tools: Free option for small employers.
See our guide to the best international payroll software.
3. Calculate wages and deductions
Use payroll software to calculate:
- Gross pay: Total salary or wages before deductions.
- Income tax: Deducted based on the PAYE system and the employee’s tax code.
- National Insurance Contributions (NICs): Both employee and employer NICs are calculated.
- Pension contributions: If the employee is auto-enrolled.
- Other deductions: Such as student loan repayments, salary sacrifice schemes, or court-ordered payments.
4. Submit Real Time Information (RTI) to HMRC
RTI requires employers to submit payroll data to HMRC every payday. This includes:
- Employee earnings
- Tax and NIC deductions
- Employer NIC contributions
RTI submission deadlines: On or before the employee’s payday.
5. Pay employees
Once calculations and submissions are complete:
- Net pay: Transfer the employee’s net pay directly into their bank account.
- Pay method options: Bank transfer (BACS), cheques, or cash (rarely used).
Provide employees with a payslip that includes:
- Gross pay
- Deductions (e.g., tax, NICs)
- Net pay
- Payment date
6. Pay HMRC
Employers must pay tax and NICs due to HMRC monthly or quarterly, depending on their PAYE bill size:
- Monthly payments: By the 22nd of the following month (19th for cheque payments).
- Quarterly payments: Available for small employers with PAYE liabilities under £1,500/month.
7. Manage workplace pensions
If eligible employees are auto-enrolled into a workplace pension:
- Deduct employee contributions and calculate employer contributions.
- Submit contributions to the pension provider (e.g., Nest, Smart Pension, or The People’s Pension).
8. Handle end-of-year payroll obligations
At the end of the tax year (5 April), employers must:
- Submit a Final Full Payment Submission (FPS) or Employer Payment Summary (EPS) to HMRC.
- Provide employees with a P60 form summarising their annual earnings and deductions.
- Re-enrol employees who opted out of pensions, if required under auto-enrolment rules.
Avoiding common pitfalls
Misclassification of workers
- Ensure proper classification of employees, workers, or self-employed contractors, as rights and tax obligations differ.
Late payroll submissions
- RTI penalties apply for late filings (£100–£400, depending on the size of your business).
Employment disputes
- Protect your business by implementing grievance procedures, clear policies, and legal advice.
Summary checklist
| Task | Deadline | Responsible Party |
|---|---|---|
| Register with HMRC | Before first payday | Employer |
| Verify right to work | Before start date | Employer |
| Provide employment contract | Within 2 months | Employer |
| Set up payroll system | Before first payday | Employer |
| Enrol in pension scheme | Within 3 months of hire | Employer |
| Submit RTI reports | On or before payday | Employer |
| Pay tax and NICs to HMRC | Monthly | Employer |
FAQ
Part-time and casual employees are subject to the same payroll processes as full-time employees. You must calculate their earnings based on the hours worked and deduct the appropriate tax and National Insurance Contributions (NICs). If their income is below the tax-free Personal Allowance (£12,570 for 2024/2025), they may not owe income tax but still need to be included in payroll reporting.
Missing an RTI submission deadline can result in penalties from HMRC, ranging from £100 to £400 depending on the number of employees in your business. To avoid this, ensure your payroll software reminders are enabled, and consider setting up a system for early submission.
Yes, many businesses outsource payroll to providers or accountants to save time and ensure compliance. Outsourcing can also provide access to expert advice on employment taxes and payroll management. See best international payroll services providers.
No, bonuses are treated as part of an employee’s gross pay and are subject to the same income tax and NIC rates as regular wages. They must be processed through payroll and included in RTI submissions.
Salary sacrifice arrangements, such as pension contributions or cycle-to-work schemes, reduce an employee’s gross pay before tax and NICs are calculated. You must adjust your payroll system to reflect these deductions and ensure they comply with HMRC rules.
Yes, directors who are paid a salary must be included in the payroll system, even if they are also shareholders. Director NICs are calculated differently, using an annual earnings threshold rather than weekly or monthly limits.
When an employee leaves, you must issue a P45 form that summarises their earnings and tax deductions up to their leave date. This form is provided to the employee for their future employer or tax purposes.
If an employee has a student loan, HMRC will inform you via their tax code. Repayments are calculated based on their earnings above the threshold for their loan plan (e.g., Plan 1 or Plan 2). These deductions are made via payroll and reported in RTI submissions.
Yes, international businesses with employees in the UK must comply with all UK payroll and tax regulations. This includes registering with HMRC, setting up PAYE, and ensuring all deductions are handled correctly. Consider consulting a UK-based accountant for guidance on compliance.
Employees on zero-hours contracts must still be included in payroll. They are entitled to minimum wage, holiday pay, and statutory benefits based on the hours they work. Ensure their pay is calculated accurately each pay period.
It is uncommon to pay employees in a currency other than GBP, as UK payroll is typically calculated and reported in pounds sterling. However, if this is necessary, ensure exchange rates are accounted for, and all PAYE submissions reflect the GBP equivalent.