An overview of UK payroll costs

Calculating UK payroll for your employees should not be taken lightly. The employee will suffer if the correct calculation and methodology including previous UK experience is not applied. We look at providing an overview of UK payroll costs, taken from a typical payroll summary spreadsheet we provide to our clients, and break it down – cost by cost – including pension.

UK National Insurance – what is it?

National Insurance in the UK is effectively our tax system paid by workers and employers for funding of state benefits. It is very similar to Social Security.

Employer National Insurance

For each employee, an employer has to pay National Insurance on all earnings above £758.00 per month.  The rate of National Insurance is 15.05%.  So for an employee earning £5,000.00 in a month the Employer National Insurance would be £638.42 (£5,000.00 – £758 = £4,242 x 15.05% = £638.42). This is paid by the employer.

Employee National Insurance

An employee has to pay National Insurance contributions if they earn more than £1048 per month. For earnings between £1048.01 and £4,189 per month the rate is 13.25% and for all earnings over £4,189 per month the rate is 3.25%.

Using the example above an employee earning £5,000.00 per month the Employee National Insurance due would be £442.54. National Insurance due on earnings between £1048.01 and £4189.00 = £416.18

{£4189.00 – £1048.01 = £3140.99 x 13.25% = £416.18}

National Insurance due on earnings over £4189.00 = £26.36

{£5000 – £4189.00 = £811 x 3.25% = £26.36}

Total Employee National Insurance = £442.54

{£416.18 + £26.36}

This is paid by employee as a payroll deduction from gross salary.

Please note: The NI calculations relate to employees on category A only. There’s a number of different categories outlined on the HMRC website here, each of which attract different calculations. 

Auto Enrolled pension

As a UK based employer, the company must have an auto-enrolment compliant pension scheme in place should it’s employees wish to join or not (they will be automatically opted in, but have the option to opt-out, and any contributions collected – refunded. There are varying methods of contribution – minimum and enhanced. We explore company pension schemes further here. Contribution basis can cover employees total pay – including salary, car allowances, commissions bonuses etc.  It can also include bare minimum.

The pension provider could be a state backed pension scheme, such as Nest or The People’s Pension, or a different provider such as Aviva, Aegon etc.

PAYE (Pay as you Earn)

The amount of income tax that is deducted from an employee’s pay depends on their tax code and how much taxable income is above their Personal tax free Allowance. Their tax code determines their personal tax free allowance. The rates of tax are then banded. For all earnings above an employees tax free threshold up to  £50,270 per annum the basic rate of tax is 20%, for earnings between £50,271 p.a and £150,000 p.a the rate is 40% and for earnings above £150,000 p.a. it is 45%.

PAYE is paid by employee as a payroll deduction and is difficult to give an example as is very specific to each employee as it is dependent on their personal tax code.

Payroll taxes due

Payroll taxes due equals the total amount of PAYE, Employer and Employee National Insurance and Student Loan that needs to be paid over to HMRC. (PAYE, Employee National Insurance and Student Loan are collected from employees by deduction to their gross salary).  Some companies are able to take advantage of the Government’s Employment Allowance – which is currently £5,000 per annum. This means that you can get up to £5,000 in any tax year off your Employer National Insurance bill.

Student Loan

Students attending university can borrow money from the government to pay for university tuition fees and to help with living costs whilst at university.  When they finish their course and start working as soon as they earn over a specific threshold they need to start repaying their student loan.

Depending on the year that they started their course, there are two different types of student loan:

• for those who started a course before 1^st September 2012 they are on Plan 1
• for those who started on or after 1^st September 2012 they are on Plan 2.

For Plan 1 an employee pays back 9% on all earnings over £1,682.00 a month.  So using our example of an employee, on Plan 1 – student loan, earning £5,000 per month his student loan repayment would be £298.00 (£5,000 – £1682 = £3318 x 9% = £298.62 but this is rounded down to £298. This is paid by employee as a payroll deduction from gross pay.

For Plan 2, an employee pays back 9% on all earnings over £2,274 a month.  So using our example of an employee, on Plan 2 – student loan, earning £5,000 per month his student loan repayment would be £262.00 (£5,000 – £2,724 = £2,276 x 9% = £204.84 but this Is rounded down to £204. This Is paid by employee as a payroll deduction from gross pay.

These figures are for the 2022-23 tax year only and is meant to provide an overview of UK payroll costs. This should not be taken as a given for every UK based employer, and professional support should be undertaken for your UK based team.