A guide to UK payroll taxes


As an employer, you are responsible for ensuring that employee’s income taxes and deductions are made. PAYE (Pay As You Earn) is the UK’s system for collecting all employment related taxes. It uses an employee’s unique tax code and an employer’s PAYE reference to keep a register of all monies owed – but for an employer, navigating and tracking their payroll tax obligations can be complex.

Payments can be made by cheque, in person at a bank branch, or online through a digital transfer. But what is it that needs to be paid?

Read on to gain further understanding of UK payroll taxes.

Payroll tax obligations

Every month, you will need to collect and send a number of payments on behalf of your employees. These overall payroll taxes will be split between the following:

  • Their income tax – which will be dependent on their salary
  •  National insurance – this is split between employee (primary) and employer (secondary) contributions
  • Pension contributions – in the UK, 8% of an employee’s annual wage must go towards their pension. This must be at least 3% from the employer.

Additionally, if you have employees with student loans, the repayments will also need to be made automatically from their monthly salary.

How to calculate payroll taxes in the UK

To calculate the taxes for an individual’s pay, both their personal allowances and individual tax bands must be considered. Both part time and full time employees may also have a national insurance liability.

Additionally, you will be required to pay secondary National Insurance for every employee earning over the NIC threshold. How much you will need to pay depends on which category they are in. You must also make contributions on an employee’s taxable benefits or expenses.

Calculating all payroll tax deductions can be complex, particularly if you have a number of employees. Accountancy software, such as Xero, will often make the calculations and the deductions for you, automatically logging and recording payments, as part of its payroll processing functions.

However, if you want to process your payroll manually, the Government website offers a number of tools to help ease the pressure on companies – such as their PAYE calculator.

How  bonuses and raises affect payroll tax

If you have multiple employees, it’s likely that you will have awarded a bonus or a raise to one of them, as a reward for excellent work, or as a result of a promotion. Some companies may also offer bonuses in the forms of pension contributions, or awarding of company shares.

There are no laws in the UK regarding bonuses. Some countries, such as the Netherlands, and Austria, are required to pay staff an additional – often referred to as the thirteenth – month’s salary every year (if your business operates internationally, it is worth being aware of this).

Whilst you may not be required to award bonuses, financial compensation is a common incentive, and an annual Christmas bonus is not uncommon. Both bonuses and raises are subject to a standard rate of tax – an employee will pay tax within their regular band, as well as national insurance and student loan repayments from their extra payments and their regular pay. Bonuses must be recorded as such on your payroll – many accountancy software packages will automatically keep a record of all bonuses paid.

The employment allowance

You may, or may not, have heard of this government initiative. It’s little heard of, but is designed to help smaller businesses with their employment costs.

The employment allowance grants relief on an Employer National Insurance Bill to qualifying companies. This relief is available immediately, and can be up to £5,000 per financial year.

To be eligible to claim, you must have at least one registered employee paying Class 1 NICs, and the total national insurance liability must be less than £100,000 a year, and your work must take place primarily within the private sector – this grant is not available to charities and trusts. It is also worth noting that IR35 payments, or payments to off-payroll workers, do not qualify. If you have more than one PAYE reference, you can only claim against a single payroll.

If your organisation qualifies, you can claim for this within HMRC’s PAYE tool, and it can be integrated into your regular payroll.

UK payroll tax considerations at year end

Companies who pay their employees on a weekly or bi-weekly basis may need to add a 53rd or 54th week to their yearly payroll, if their ‘pay day’ is scheduled to fall on or in the pay period following April 5th. If this is the case, the weeks needed will simply needed to be added as an additional payroll, and employees will need to be switched to a week one tax. Most payroll systems will automatically do this, but it should be manually checked code to prevent employees over-paying on tax.  Businesses are also required to:

• Provide all employees with a P60 no later than the 31st May
• Submit EPS and an FPS report
• Review the P9X for the next financial year

Legal payroll requirements

As in all areas of business, due care and attention should be given to ensuring that all payroll processing duties are carried out in a compliant manner. As a PAYE registered employer, you should keep an up-to-date record of all payments made to staff, as well as an accurate employee register, with all employment contracts to hand.

This record should include:

  • Your monthly payroll
    • Any monetary rewards that have been given to staff – including bonuses
    • All logged expenses
    • IR35 payments

Ensuring your records are accurate is crucial, as compliance checks are carried out. You should expect one every six years as standard, but they can be more frequent. These are carried out by HMRC .They can be triggered by a specific event – for example, if your claim for a VAT refund is much higher than your turnover – but can also be random.

Payroll processing packages offered by MSP Payroll
Payroll can be technically complex, and often requires specialist knowledge. Outsourcing to an external company can remove the pressure, leaving companies safe in the knowledge that their payroll is being processed in a timely and accurate manner, and that all payroll tax considerations are accounted for.

Payroll outsourcing is a time and cost effective solution for businesses of all sizes across all industries. If it’s right for your business, MSP Payroll  can help. To find out more about the services that we provide, or to get started, please contact us.






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