United Kingdom Payroll and Income Tax Guide

Learn about payroll and income taxes in the United Kingdom, including employer contributions and tax treaties.

United Kingdom Services

Content

8 minutes read

What is Payroll Tax in the United Kingdom?

Employer and Employee Responsibilities

Overview of Income Tax in the United Kingdom

Remote People: The Answer for International Companies

Hire with an Employer of Record Solution

The United Kingdom remains one of the world’s most attractive destinations for international business, with an economy valued at approximately £2.8 trillion and a workforce exceeding 35 million skilled professionals. As a global financial center and innovation hub, the UK offers opportunities for companies seeking to expand their operations.

The UK tax framework operates through HM Revenue and Customs (HMRC), which oversees payroll taxes and income tax collection across England, Wales, Scotland, and Northern Ireland.

The British tax system combines National Insurance contributions with income tax to fund public services and social benefits. Our detailed guide on doing business in the United Kingdom provides insights for businesses considering establishing or expanding their presence in the United Kingdom for the broader business environment and regulatory framework.

What is Payroll Tax in the United Kingdom?

In the United Kingdom, payroll tax is the National Insurance Contributions (NICs), which fund the state pension system, unemployment benefits, and portions of the National Health Service.

National insurance is a social insurance system where employers and employees contribute based on earnings. Employers must understand that National Insurance Contributions apply to most forms of employee compensation, including regular wages, bonuses, and certain employee benefits in kind.

Employer and Employee Responsibilities

The UK operates a system where employers and employees contribute to National Insurance at different rates and thresholds. Employers begin paying National Insurance once an employee’s earnings exceed the secondary threshold.

Employers must calculate, collect, and remit their and their employees’ National Insurance contributions through the Pay As You Earn (PAYE) system. This real-time information system requires employers to report payroll information to HMRC each time they pay their employees.

As an employer, your responsibilities go beyond managing payroll, and you don’t want to risk your company’s growth with the wrong crowd. A specialized recruitment agency in the UK ensures that finding and managing employees can be done right.

Employer National Insurance Contributions

This is the primary tax paid by employers on their employees’ earnings. For the 2024-2025 tax year, employers must pay Class 1 Secondary NICs at a rate of 13.8% on all employee earnings above the Secondary Threshold, which is set at £175 per week (£9,100 per year). For the 2025-2026 tax year, the employer NICs rate is scheduled to increase to 15%, with the threshold also subject to adjustment.

The Employment Allowance

The government offers Employment Allowance to support small businesses. Eligible employers can use this to reduce their annual employer NICs bill by up to £5,000 for the 2024-2025 tax year.

However, there are eligibility criteria; for example, companies with an employer NICs liability of £100,000 or more in the previous tax year, or companies where a director is the sole employee, cannot claim it.

Mandatory Workplace Pensions

Under the UK’s auto-enrolment rules, every employer must provide a workplace pension scheme for eligible staff and contribute to it. An eligible employee is someone between 22 and the State Pension age who earns at least £10,000 per year. The employer is required to contribute at least 3% of this amount.

The Apprenticeship Levy

This applies to large employers with an annual UK pay bill of over £3 million. The levy is set at 0.5% of the total annual pay bill, though employers receive a £15,000 allowance to offset against it. The funds are used to support apprenticeship training across the country.

These combined costs mean the true cost of hiring an employee in the UK can be over 16% higher than their gross salary. To understand these costs better, you can use our free global payroll tax calculator to estimate your total spend.

Apprentice and Young Worker Exemptions

The UK tax Government further incentivizes big companies to pay the apprenticeship levy by providing exemptions to encourage employment of younger workers and apprentices. Employers don’t pay National Insurance for employees under 21 or apprentices under 25 on earnings up to the Upper Secondary Threshold, reducing youth unemployment and investing in training the next generation of workers.

Employee National Insurance Contributions

For the 2024-2025 tax year, the main rate for most employees is 8% on earnings between the Primary Threshold (£12,570 per year) and the Upper Earnings Limit (£50,270 per year). On all earnings above this limit, the rate falls to 2%.

Not sure where to get started with payroll and HR management? Our PEO services in the UK can take on the entire workload from day one.

Overview of Income Tax in the United Kingdom

In the UK’s income tax system, a key feature is the Personal Allowance, which is the income an individual can earn each year before they start paying tax. The standard Personal Allowance is £12,570. However, this allowance is reduced by £1 for every £2 of income earned above £100,000, meaning it is completely withdrawn for those earning £125,140 or more.

England, Wales, or Northern Ireland Income Tax System

If an employee lives in England, Wales, or Northern Ireland, there are three income tax bands and rates above the tax-free personal allowance:

Tax Band	Tax Rate
Basic rate	20%
Higher rate	40%
Additional rate	45%

Income Tax Rates & Bands 2024-2026 (England, Wales, & Northern Ireland)

Tax Band	Taxable Income	Tax Rate
Personal Allowance	Up to £12,570	0%
Basic Rate	£12,571 to £50,270	20%
Higher Rate	£50,271 to £125,140	40%
Additional Rate	Over £125,140	45%

Scotland's Income Tax System

Scotland has its own income tax rates and bands that differ from the rest of the UK (Table 2). It includes additional tax bands and different thresholds, though National Insurance rates remain consistent across all UK nations. Employers must apply the correct Scottish tax codes for employees who are Scottish taxpayers, which HMRC determines based on an individual’s main residence location.

Income Tax Rates & Bands 2025-2026 (Scotland)

Tax Band	Taxable Income	Tax Rate
Personal Allowance	Up to £12,570	0%
Starter Rate	£12,571 to £15,397	19%
Scottish Basic Rate	£15,398 to £27,491	20%
Intermediate Rate	£27,492 to £43,662	21%
Higher Rate	£43,663 to £75,000	42%
Advanced Rate	£75,001 to £125,140	45%
Top Rate	Over £125,140	48%

Learn the essentials of hiring employees in the UK and unlock what makes this market unique.

Remote People: The Answer for International Companies

Employers, especially foreign ones, face many challenges due to the differences between the countries’ legal and tax systems:

Physical Establishment: If an employee’s activities are seen as generating revenue in the UK, the foreign parent company could become subject to UK Corporation Tax on those profits.
Employment Law: UK law mandates a statutory notice period for termination, rules around redundancy pay, and legally required entitlements for sick leave, annual holidays, and parental leave. Mishandling employee rights can easily lead to a costly wrongful dismissal claim.
Payroll and Benefits Administration: In addition to calculating and remitting income tax and NICs, employers must contribute to mandatory workplace pensions and ensure Real-Time Information (RTI) reporting to HMRC.
Foreign Workers: Employers work through complex work visas and permits, each with specific eligibility criteria and application processes. It is a criminal offence to employ someone who does not have the legal right to work in the UK.

Remote People’s Employer of Record (EOR) service in the United Kingdom answers all your recruitment, hiring, and payroll questions in the United Kingdom.

Hire with an Employer of Record Solution

An EOR in the United Kingdom is a third-party organization that acts as the legal employer for your staff in a country where you don’t have your entity. Your company retains full control over employees’ daily tasks and strategic work, while the EOR handles all the legal, HR, and administrative responsibilities.

What remote people can do for you:

Eliminate Physical Establishment: We manage all aspects of tax compliance while you maintain operational control over your employees’ daily activities.
Ensure Full Compliance with UK Law: We handle compliant UK employment contracts (for full-time employees and contractors), and manage statutory benefits, including pensions, sick pay, and annual leave.
Simplify Payroll and Tax: Our service manages the entire UK payroll process. We accurately calculate and remit all Income Tax and National Insurance contributions to HMRC, issue payslips, handle all RTI reporting, and issue different employment-related forms.
Save Time and Money: An EOR allows you to enter the UK market and hire top talent in a matter of days, not the months it would take to establish a local subsidiary, avoiding substantial legal fees, registration costs, and administrative setup.

By partnering with Remote People, you can build your team in the UK, leveraging our wealth of experience to reduce risk and ensure a seamless adventure for you and your employees.

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