A Guide to UK Payroll & Employment Taxes, Including Employer Contributions
If you’re lucky enough to employ people, and are therefore operating a payroll scheme, then you have an obligation to collect and pay taxes to HMRC on the gross wages you pay to your employees.
You knew this already of course, but we wanted to gather all the information on UK employment taxes, payroll deductions, contributions and so forth together in one handy place. It’s worth remembering that even company directors are considered employees, and are therefore liable to any of the UK payroll taxes mentioned in this article.
You can find more detailed information on the various taxes and deductions in our blog posts we’ve linked to below.
So take a read of our short post, and remember to bookmark this page and come back to it anytime you need a UK employer / payroll tax refresher!
What are UK payroll taxes?
When we refer to payroll taxes in the UK, we’re talking about income tax (administered through the PAYE system) and National Insurance contributions. There is another employment tax relating to the tax payable on benefits, for example company car, private health insurance, travel or entertainment expenses. The PAYE (Pay As You Earn) system is the mechanism by which HMRC collects all UK employment taxes from businesses.
As well as these payroll taxes, employers will have to make other deductions from gross employee salaries including pension contributions, student loan repayments, and Child Maintenance Payments (where applicable), but more on that later.
A contribution paid by UK employers, employees and self-employed individuals, National Insurance (NI) is used to pay for the State Pension, Jobseeker’s Allowance, bereavement support payments and more. There are various ‘classes’ of National Insurance that are determined by various factors, for example earnings thresholds, whether or not someone is self-employed, or if it’s a voluntary payment to fill gaps in NI records.
Class 1 NI is the most common type, and is payable on any employee’s earnings over £242 per week / £1,048 per month / £12,570 per year (2023/24 tax year). This is known as Primary Class 1 NI.
Additionally, employers must make a Secondary Class 1 NI contribution. Rather than being deducted from employee earnings, this is paid by the employer on behalf of employees. The income thresholds for Secondary Class NI are £175 per week / £758 per month / £9,100 per year (again, 2023/24 tax year), meaning you must pay this for all employees earning over those amounts.
Income tax is an example of UK employer payroll taxes that are collected by HMRC through the PAYE system each time employees are paid. As an employer, it’s your responsibility to deduct tax and NICs from an employee’s pay and let HMRC know about any additional (taxable) benefits-in-kind the employee receives. Handily, payroll software can calculate what should be deducted and paid to HMRC automatically. Two main factors determine how much income tax an employee will have deducted from their pay - their level of income and the amount of eligible personal allowance (dictated by their tax code).
Find out more about income UK tax brackets.
Tax on benefits
Another example of UK employment tax taken via the PAYE system, employers must pay tax and National Insurance on taxable ‘benefits-in-kind’ (BIK). In other words, any benefit offered on top of the employee’s salary. These could include private health insurance, gym membership, company car, travel or entertainment expenses, amongst others.
What are employer contributions, and how do they relate to UK employment tax?
When we hear the phrase ‘employer contributions’ in relation to employment tax in the UK, we tend to think of pensions. It does encompass the National Insurance and taxes on benefits that we’ve already spoken about too. But here we're going to get into pension contributions specifically.
All employers who hire staff must offer a pension scheme to employees within 3 months of their start date, based on qualifying criteria. This is what’s known as auto enrolment. So if an employee:
is aged between 22 and 68 (current state pension age);
earns at least £10,000 a year / £192 a week / £833 a month;
works in the UK, either under a contract of employment or to provide work or services as part of another business…
…then they must be auto-enrolled into a workplace pension scheme.
The employer’s minimum contribution is 3% of the employee’s gross qualifying earnings. Employees then have to contribute 5%, taking the total up to 8%. Employers can choose to pay more if they so wish, meaning that employees have to pay less from their own pockets (this could be a great recruitment and retention tactic).
Is there anything to be aware of from the perspective of student loan deductions and UK payroll tax?
Employers in the UK are obliged to deduct student or postgraduate loan repayments from relevant employees’ gross pay packets, and report these deductions to HMRC. The amounts owed are then transferred automatically through the PAYE system, and interest will then be applied to the balances of individual graduates. So in terms of UK payroll and tax, there are no additional payments to be made to HMRC by employers, over and above what is deducted from the individual’s gross salary.
Find out how payroll software can help simplify UK payroll tax calculations for all your employees by downloading our free buyers’ guide below.