The United Kingdom operates a comprehensive tax system that impacts both employers and employees. For employers, managing payroll involves understanding obligations related to Pay As You Earn (PAYE) income tax and National Insurance Contributions (NICs). Employees are subject to deductions from their gross pay for income tax and NICs, while also potentially benefiting from various tax allowances and deductions that reduce their taxable income. Navigating these requirements accurately is crucial for compliance and smooth payroll operations.
Understanding the specific rules for the tax year, which runs from 6 April to 5 April, is essential. The 2025/2026 tax year will have its own set of rates, thresholds, and regulations that employers must adhere to when processing payroll and reporting to HM Revenue and Customs (HMRC).
Employer Social Security and Payroll Tax Obligations
Employers in the UK are primarily responsible for calculating, deducting, and paying National Insurance Contributions (NICs) on behalf of their employees, in addition to their own employer contributions. These contributions fund state benefits and services.
Employer's Class 1 NICs are paid on employee earnings above a certain threshold. The rate is applied to earnings above the secondary threshold, with no upper earnings limit for the employer contribution.
| Earnings Period | Secondary Threshold (per week) | Secondary Threshold (per month) | Secondary Threshold (per year) | Employer Class 1 NIC Rate |
|---|---|---|---|---|
| Weekly | £175 | - | - | 13.8% |
| Monthly | - | £758 | - | 13.8% |
| Annually | - | - | £9,100 | 13.8% |
Note: These thresholds and rates are based on the 2024/2025 tax year and are subject to change for the 2025/2026 tax year.
Employers may also be liable for the Apprenticeship Levy if their annual pay bill exceeds £3 million. The levy rate is 0.5% of the annual pay bill, and employers receive an allowance of £15,000 to offset against their levy payment.
Income Tax Withholding Requirements
Employers are required to operate the Pay As You Earn (PAYE) system to deduct income tax from their employees' wages or salaries before they are paid. The amount of tax deducted depends on the employee's tax code, their earnings, and the current income tax rates and bands.
An employee's tax code is issued by HMRC and reflects their tax-free allowances. The standard personal allowance is the amount of income an individual can earn before income tax is payable. For the 2024/2025 tax year, the standard Personal Allowance is £12,570. This allowance is reduced for individuals with income over £100,000 and is lost completely for income over £125,140.
Income tax rates vary depending on the level of income and the region of the UK the employee resides in (England, Wales, Northern Ireland, or Scotland).
Income Tax Rates and Bands (England, Wales, and Northern Ireland - 2024/2025 Tax Year)
| Taxable Income Band | Rate |
|---|---|
| Up to £12,570 | 0% |
| £12,571 to £50,270 | 20% |
| £50,271 to £125,140 | 40% |
| Over £125,140 | 45% |
Income Tax Rates and Bands (Scotland - 2024/2025 Tax Year)
| Taxable Income Band | Rate |
|---|---|
| Up to £12,570 | 0% |
| £12,571 to £14,732 | 19% |
| £14,733 to £25,296 | 20% |
| £25,297 to £43,662 | 21% |
| £43,663 to £75,000 | 42% |
| £75,001 to £125,140 | 46% |
| Over £125,140 | 48% |
Note: These rates and bands are based on the 2024/2025 tax year and are subject to change for the 2025/2026 tax year. Scottish rates and bands are set by the Scottish Parliament.
Employers calculate the tax deduction for each pay period based on the employee's tax code and the proportion of the annual tax bands applicable to that period (e.g., weekly, monthly).
Employee Tax Deductions and Allowances
Employees' tax liability is reduced by their personal allowance and potentially other allowances or eligible tax reliefs. The standard Personal Allowance is the most common deduction.
Other allowances and reliefs that can affect an employee's tax code include:
- Marriage Allowance: Allows a spouse or civil partner to transfer 10% of their Personal Allowance to their partner if they earn less than the Personal Allowance and their partner is not a higher or additional rate taxpayer.
- Blind Person's Allowance: An additional tax-free allowance for registered blind individuals.
- Tax relief on pension contributions: Contributions to registered pension schemes can receive tax relief. This is often given at source by the pension provider, but for some schemes, the employee receives tax relief through their tax code.
- Gift Aid: Donations to charity under Gift Aid can extend the basic rate band for the donor.
- Job expenses: Employees may be able to claim tax relief on certain work-related expenses not reimbursed by their employer, such as business travel, professional fees, or uniforms.
These allowances and reliefs are typically factored into the employee's tax code, which instructs the employer on how much tax-free income to apply before calculating tax deductions.
Tax Compliance and Reporting Deadlines
UK employers must comply with Real Time Information (RTI) reporting requirements. This means submitting payroll information to HMRC on or before the date employees are paid.
Key RTI submissions include:
- Full Payment Submission (FPS): Submitted each time an employer pays employees, detailing payments, deductions, and starter/leaver information.
- Employer Payment Summary (EPS): Submitted monthly (if applicable) to report figures such as NICs reclaimed (e.g., statutory payments), Apprenticeship Levy, or if no employees were paid in a period.
Employers must also:
- Provide employees with a P60 form at the end of the tax year (by 31 May) showing their total pay and deductions for the year.
- Report expenses and benefits provided to employees (that are not payrolled) on P11D forms (by 6 July after the tax year ends).
- Pay the PAYE tax and NICs deducted from employees' pay, plus the employer's NICs, to HMRC, usually by the 22nd of the month following the pay period (19th if paying by post).
Failure to meet these reporting and payment deadlines can result in penalties and interest.
Special Tax Considerations for Foreign Workers and Companies
Employing foreign workers or operating as a foreign company in the UK introduces additional tax complexities.
- Residency Status: An individual's tax liability in the UK depends on their tax residency status. Different rules apply to residents, non-residents, and those who are temporarily non-resident. This affects how their worldwide income is taxed in the UK.
- National Insurance Contributions: The requirement to pay UK NICs generally depends on where the work is performed. Special rules and agreements (like social security agreements or EU regulations, though post-Brexit rules apply) can affect whether NICs are due in the UK or another country, particularly for seconded workers.
- Double Taxation Treaties: The UK has double taxation agreements with many countries. These treaties can determine which country has the primary right to tax certain types of income and provide relief to prevent individuals from being taxed twice on the same income.
- Permanent Establishment: A foreign company may become subject to UK corporation tax if it is deemed to have a 'permanent establishment' in the UK. Employing staff in the UK can contribute to establishing a permanent establishment.
- PAYE for Foreign Employers: Even if a foreign company does not have a registered office or branch in the UK, it may still be required to operate PAYE if it employs individuals who work in the UK. In such cases, appointing an agent or using an Employer of Record is often necessary to handle UK payroll and tax obligations compliantly.
