UK employment taxes

What are the UK employment taxes?

Employers have to deduct Personal Income Tax and National Insurance contribution from employment via a system called PAYE (Pay As You Earn).

What is PAYE?

Employers normally have to operate PAYE (Pay As You Earn) as part of payroll. PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment. When paying employees through payroll, businesses also need to make deductions for PAYE.

How to register for payroll?

Businesses need to register as an employer with HM Revenue and Customs to get a login for PAYE Online.
Alternatively businesses can authorize an agent such as an accountant.
An agent needs a PAYE Reference Number and an Accounts Office Reference Number to get authorisation.

When to report paid salaries?

Reports to HMRC must be sent before any payments to employees.
Employers are legally responsible for completing all PAYE tasks even if an agent is getting paid to do them.
1Office can provide the keeping of employee records, providing payslips and making payments to HM Revenue and Customs.

When to pay taxes on salaries?

Businesses must pay the PAYE bill to HM Revenue and Customs by the 22nd of the month for all the salaries paid previous month. Month is defined not as a calendar month but as a period between 6th date of the month and 5th date of the following month. Small employers that expect to pay less than £1,500 a month can arrange to pay quarterly.

What are the other reporting duties for employers?

Businesses need to tell HMRC when a new employee joins and if an employee’s circumstances change (e.g. they reach the State Pension age or become a director). The required information needed to be sent to HMRC is:  the employee full name, Date of Birth(DOB), National Insurance (NI) Number, Gender and their address.
Businesses must submit annual reports at the end of the tax year including information about any expenses or benefits. Employers pay Class 1A and 1B National Insurance once a year on expenses and benefits they give to their employees.
The rate for the tax year 2016 to 2017 is 13.8%.

What is National Insurance?

National Insurance (NI) is a system of contributions paid by workers and employers towards the cost of certain state benefits.  It was initially a contributory system of insurance against illness and unemployment, and later also provided pensions and other benefits.
Class 1 National Insurance contributions
You pay Class 1 on your salary, commission, bonuses and overtime, as well as on sick pay and maternity, paternity and adoption pay from an employer.
National Insurance is calculated on gross earnings before tax, or pension deductions) above the earnings threshold for 2016-17 the National Insurance is £155 per week or £8,060 per year.

  • If you earn above the threshold you pay 12% of your earnings between £8,060 and £43,000.
  • Anything above £43,000 there is an additional 2%
  • If your earnings are below the earning threshold there is no National Insurance contributions.

Class 2 National Insurance Contributions
You only pay Class 2 contributions if you are self-employed.

  • Class 2 contributions are £2.80 per week or £145.60 per year

If earnings are below £5,965 you can elect not to pay National Insurance

Class 3 National Insurance Contributions
These are voluntary contributions that count towards your total contributions record. The class 3 National Insurance Contributions can only be paid if you are currently not working, you’re not liable for, or you’re exempt from, Class 1 or Class 2 contributions, you live abroad.
The Class 3 National Insurance rate for the year 2016-17 is £14.10 per week.

Class 4 National Insurance Contributions
If you’re self-employed, you must additionally pay Class 4 contributions once your profits reach a certain limit.

  • 2016-17 the Class 4 contributions are 9% of taxable profits between £8,060 and £43,000. On profits over £43,000 there is an additional 2%

What is the National Insurance category letter?

Employers use an employee’s National Insurance category letter when they run payroll to work out the contributions they both need to make. An employee’s NI category letter is dependent on their age and whether they have a separate(contracted-out) pension scheme.

Employees in pension schemes that are not contracted-out form categories A, B, C and J. Employees in a contracted-out workplace pension scheme form categories D, E, C and L. Most employees fall into category A or D.

Are there any other deductions from payroll?

Other deductions businesses may need to make include student loan repayments or pension contributions.

Can non-resident companies set up a payroll in the UK?

A non-resident company can’t set up a standard payroll scheme until it has business premises in the UK.
Non-resident companies without business premises in the UK can only be registered for a “National Insurance only scheme”.
The reason is that a non-resident company does not have the jurisdiction to withhold income tax from its employees’ pay.
As employees would be responsible for paying their own income tax regardless of your PAYE registration status it may be more convenient to pay them on a self-employed basis until you do not have premises in the UK.