UK payroll: A guide for foreign employers

Since April 2013, all UK employers must report payroll information to HMRC in real time using the RTI system. This means submitting a Full Payment Submission (FPS) every time you pay an employee, on or before the payment date.

The FPS includes details of each employee’s pay, tax deductions, National Insurance contributions, student loan deductions, and pension contributions for that pay period. You also submit an Employer Payment Summary (EPS) if you need to report any reductions to what you owe HMRC (for example, if you are recovering statutory maternity pay or claiming the Employment Allowance).

Late or inaccurate RTI submissions trigger penalties from HMRC. These start at £100 per month for small employers (1-9 employees) and increase with employer size. Persistent failures attract additional penalties and interest charges.

RTI submissions must be made through HMRC-recognised payroll software. HMRC provides a free Basic PAYE Tools for employers with fewer than 10 employees, but most employers use commercial payroll software or outsource payroll to a provider that handles submissions on their behalf.

Each employee is assigned a tax code by HMRC, which determines their tax-free allowance and the rate at which tax is deducted. The standard tax code for 2025/26 is 1257L, reflecting the £12,570 personal allowance.

England, Wales, and Northern Ireland rates for 2025/26:

• 0% on the first £12,570 (personal allowance)
• 20% on £12,571 to £50,270 (basic rate)
• 40% on £50,271 to £125,140 (higher rate)
• 45% above £125,140 (additional rate)

The personal allowance tapers by £1 for every £2 earned above £100,000, reaching zero at £125,140.

Scotland uses a different six-band system ranging from 19% to 48%. Scottish taxpayers are identified by a tax code beginning with ‘S’. If you employ someone who lives in Scotland, your payroll must apply the Scottish rates to their non-savings, non-dividend income.

Income tax is calculated cumulatively across the tax year (6 April to 5 April), which means each payroll run takes into account all previous payments and deductions in the current tax year. This cumulative method ensures that employees who start mid-year or have irregular earnings still pay the correct total amount of tax.

Employees pay Class 1 National Insurance on earnings above the primary threshold.

2025/26 rates:

• 0% on earnings up to £242/week (£12,570/year)
• 8% on earnings from £242 to £967/week (£12,570 to £50,270/year)
• 2% on earnings above £967/week (£50,270/year)

National Insurance is calculated on a non-cumulative (week-by-week or month-by-month) basis, unlike income tax. Each pay period is treated independently.

Depending on the employee’s circumstances, you may also need to deduct student loan repayments (Plan 1, Plan 2, Plan 4, or Postgraduate Loan, each with different thresholds and rates), court orders, and pension contributions under auto-enrolment.

This is the single largest additional employer cost in the UK and it changed significantly in April 2025.

2025/26 rates:

• 15% on all employee earnings above £96/week (£5,000/year)

The rate increased from 13.8% in April 2025, and the threshold at which employer NI kicks in dropped from £9,100 to £5,000 per year. The combined effect is a meaningful increase in employment costs, particularly for lower and mid-range salaries.

Employment Allowance: Eligible employers can reduce their annual NI liability by up to £10,500. The previous £100,000 eligibility cap was removed in April 2025, so more businesses now qualify. Single-director companies with no other employees are excluded.

Apprenticeship Levy: Employers with a total annual UK pay bill exceeding £3 million pay 0.5% of that pay bill, offset by a £15,000 annual allowance.

Every UK employer must automatically enrol eligible workers (aged 22 to State Pension age, earning above £10,000/year) into a qualifying workplace pension scheme.

Minimum contributions on qualifying earnings (£6,240 to £50,270):

• Employer: minimum 3%
• Employee: minimum 5% (including tax relief)
• Total: minimum 8%

This is not optional. The employer must set up and maintain a qualifying pension scheme, process enrolments, manage opt-outs, handle contribution calculations, and re-enrol opted-out employees every three years. Failure to comply can result in enforcement action from The Pensions Regulator, including fixed and escalating penalty notices.

The employer is also responsible for administering and paying various statutory payments, some of which are partially recoverable from HMRC.

Statutory Sick Pay (SSP): £118.75/week for up to 28 weeks, currently payable from the 4th qualifying day. From April 2026, SSP becomes payable from day one of absence with no lower earnings limit, under the Employment Rights Act 2025.

Statutory Maternity Pay (SMP): 90% of average weekly earnings for 6 weeks, then £187.18/week or 90% (whichever is lower) for 33 weeks. Employers can recover 92% of SMP paid (or 103% for small employers qualifying for Small Employers’ Relief).

Statutory Paternity Pay (SPP): £187.18/week or 90% of average weekly earnings (whichever is lower) for up to 2 weeks.

Statutory Shared Parental Pay (ShPP): £187.18/week or 90% of average weekly earnings (whichever is lower) for up to 37 weeks (shared between parents).

This gives you maximum control but requires the most investment. You need to incorporate a UK company, register as an employer with HMRC, open a UK bank account, set up payroll software, arrange a qualifying pension scheme, and either hire someone with UK payroll expertise or invest in learning the system yourself.

This makes sense if you are building a permanent, long-term UK presence with a substantial team. For a small number of employees, the overhead is hard to justify.

You still need the UK entity, but you hand the operational payroll work to a specialist UK payroll bureau or provider. They handle the calculations, RTI submissions, pension administration, and year-end reporting on your behalf. You remain the legal employer and carry the compliance responsibility, but the day-to-day execution sits with the payroll provider.

This is a practical middle ground for companies that want a UK entity for strategic reasons but do not want to build internal payroll capability. UK payroll outsourcing typically costs between £5 and £15 per employee per month for basic processing, with additional charges for pension administration, year-end filing, and ad-hoc queries.

The limitation is that outsourced payroll only covers payroll. It does not handle employment contracts, HR compliance, statutory leave administration, termination procedures, or any of the other obligations that come with being an employer in the UK. You still need to manage all of that yourself or through other providers.

An Employer of Record handles everything. The EOR employs your UK workers through its own entity and manages the full employment lifecycle: contracts, onboarding, PAYE and NI, pension auto-enrolment, statutory leave, benefits, and compliance with UK employment law including terminations.

You do not need to set up a UK entity, register with HMRC, arrange a pension scheme, or build payroll infrastructure. The EOR is the legal employer and carries the compliance burden. You manage the work, the priorities, and the relationship with your employee.

For foreign companies that want to hire in the UK without the overhead of establishing and maintaining their own entity, this is typically the fastest and most practical route. For a detailed comparison of these options, see our complete guide to Employer of Record in the UK.

The systems are fundamentally different. The UK’s cumulative PAYE system, RTI reporting, and employer pension obligations have no direct equivalent in the US. Attempting to run UK payroll through a US payroll system, or applying US payroll logic to UK calculations, will result in errors.

Employer National Insurance at 15% on earnings above £5,000/year is a significant additional cost that catches many foreign employers off guard. For an employee on a £50,000 salary, employer NI alone adds £6,750 to the annual cost of employment. This needs to be factored into budgets from the outset.

Auto-enrolment is not optional. Every UK employer must set up a qualifying pension scheme, enrol eligible employees, make minimum contributions, and manage the ongoing administration. Foreign companies sometimes treat this as something they will “get to later.” The Pensions Regulator does not share that view.

If you engage contractors in the UK through an intermediary (such as a personal service company), medium and large businesses are responsible for determining the contractor’s employment status under the off-payroll working rules. Getting this wrong can result in liability for unpaid PAYE and NI, plus penalties. If you are unsure about a contractor’s status, it may be safer to employ them through an EOR from the start.

The Employment Rights Act 2025 introduces significant changes to UK employment law between April 2026 and January 2027, including day-one rights to paternity and parental leave, SSP from day one, fire and rehire restrictions, and a reduction in the unfair dismissal qualifying period to 6 months. Foreign employers who are not tracking these changes risk falling out of compliance. See our guide to Employer of Record in the UK for a detailed breakdown of what is changing and when.