Payroll & Employment Guide UK

Employment contracts in the UK can be part-time or full-time based on the working hours, fixed-term or indefinite based on the duration, and zero-call contracts for project-based work. Regardless of their type, they must be in a written form and contain particulars such as working hours, wages, paid leave, notice periods, termination policies, and similar.

Notice periods: Ranging from one week to 12 weeks, depending on the length of employment.

Termination of employment: Termination can occur due to the expiry of the contract, retirement, mutual agreement, serious breach of contract, dismissal, court decision, and other reasons.

Employers in the UK must provide mandatory employment benefits in line with the country’s labour law. Many of them also offer extra perks to stay competitive in the job market. Understanding both of them is essential to attracting and retaining talent.

• Mandatory benefits: Pension, statutory sick pay, redundancy pay
• Common perks: Meal vouchers, transport reimbursements.
• Leave policies: Paid annual leave, maternity/paternity leave.
• Healthcare: Provided primarily by the National Health Service (NHS), which offers comprehensive healthcare to all UK residents. Many employees also choose private health insurance for faster access and broader coverage.
• Retirement benefits:
• State Pension of up to £221.20 per week (2025) for individuals with 35 qualifying years.
• Workplace pension under the auto-enrolment scheme, with contributions from both employer and employee.
• Option to contribute to personal pensions to supplement retirement income.
• At retirement, up to 25% of the pension pot can be withdrawn tax-free, with the remainder subject to income tax.
• Pension Credit is available for low-income retirees.
• Social security contributions: National Insurance Contributions (NICs) and employer payments to HMRC fund healthcare, pensions, and other social security benefits.
• Bonus and incentives: Performance bonuses are taxed at the same rate as regular salary income; their category does not alter payroll calculations.

Employers in the UK must collect income tax and National Insurance contributions (NICs) from employee wages through a PAYE system. Other tax regulations may apply depending on the nature of income, such as dividends, royalties, and VAT.

Income tax applies to all forms of employee earnings - including salary, wages, bonuses, and other compensation. Employers must use the employee’s tax code to determine how much tax to deduct, which reflects their personal allowance and any additional income.

When a new employee joins, their income tax is automatically deducted through the PAYE system, ensuring compliance and accuracy in tax withholding.

Personal income tax rate: From 0% to 45% in England, Wales, and Northern Ireland; from 19% to 48% in Scotland.

VAT: 20%

Tax allowances: Personal non-taxable allowance

Additional tax reliefs: Work-from-home allowance

Salaries in the UK can be paid weekly, monthly, or even for 10 days, with a maximum duration of 31 days. During the pay reference period, employees must receive at least the minimum statutory wage, calculated based on their age.

In the UK, salaries must be contracted and paid exclusively in GBP, usually by the end of each month. Salary calculations are based on the actual working days within the month, and employees are typically paid over 12 months — there are no provisions for a 13th or 14th salary.

While there are thresholds and ceiling limits for employee National Insurance and pension contributions, both are mandatory.

Salary payment deadline: By the 10th of the following month.

Taxes and contributions payment deadline: 22nd of the following month.

Payroll declarations deadline: On or before the date employees are paid.

Payroll currency: GBP

Monthly declarations: Employers must submit Real Time Information (RTI) to HMRC each time they pay employees, ensuring timely reporting of taxes and NICs.

Quarterly declarations: Businesses registered for VAT must submit quarterly VAT returns outlining VAT charged on sales and paid on purchases.

Annual declarations: At year-end, employers issue P60 forms summarising pay and deductions, and must file both an End of Year Declaration and Corporation Tax return with HMRC.

Labour laws in the UK are outlined in a range of employment laws, including the Employment Rights Act and related legislation. Such legislation governs aspects like employment types, minimum wage, working hours, statutory benefits, and similar.

Total employment cost:

• Employer’s National Insurance contributions: 15%
• Employees’ National Insurance contributions: 8% (+2% for high-earning employees)

Minimum wage: £12.21 per hour

Probation period: Three to six months.

Foreign nationals looking to work in the UK must hold a valid visa or work permit suited to their job role and qualifications. The type of visa, application process, and costs will vary depending on the worker’s nationality, skill level, and employment contract.

Types of permits: Skilled worker permit

Process length: Two to three months

Process cost: £8200

With EOR services in the UK, you can legally employ workers in the country without opening your own legal entities. As an official employer, your EOR will take over all your legal responsibilities, including:

• Legal employment and contracts
• Payroll processing
• Tax withholding
• Benefits administration
• Onboarding/offboarding employees

PEO services allow you to get HR and administrative support while you remain the legal employer for your team in the UK. PEO services are ideal for employers who already have legal entities but need support for managing:

• HR support and workforce administration
• Payroll and benefits management
• Compliance and local labour law guidance
• Employment contracts assistance

Native Teams provides a payroll calculator adjusted to the UK’s local labour laws. With our calculator, you can easily estimate net and gross salaries, employer/employee contributions, and other mandatory deductions in the country.