UK Payroll Laws and Legislations You Need to Know About

• Reading Time: 7 Minutes
• Published: November 5, 2022
• Last Updated: February 13, 2025

Whether you are a small business owner or a large corporation with thousands of employees, payroll is essential to your company’s operating plan. Without it, your business wouldn’t be able to function. However, the importance of payroll in business is not usually understood even today. In-house or outsourced payroll provides valuable insight into your company’s operations and employee behaviour. It can help you identify problems before they become issues and save time by streamlining your company’s payouts. If your company withholds or delays payments to its employees or contractors, it operates an automatic wage deduction without a valid basis. It will certainly lead to fines, penalties, legal action, or all three. But before setting up a payroll system, an employer must comply with and understand the payroll legislations of their country. In this blog, we will discuss various payroll legislations and essential laws that must be complied with.

Payroll is basically a process to handle an employee’s wage and related tax. The physical payout of wages and taxes is handled by PAYE (Pay As You Earn), a UK government scheme administered by HMRC. But what exactly consists of PAYE? Let us find out more about it:

What is PAYE?

PAYE, which stands for Pay As You Earn, is a system that enables employers to deduct National Insurance (NI) and income tax before paying wages to their employees. It is a system generated by HMRC for taxing UK workers or those with other earnings. Every employee is given a PAYE tax code that determines the amount of tax to be deducted from their earnings, which is deducted before the wages are credited to the employees. Employers registered for PAYE must ensure various compliances even if they have hired payroll outsourcing companies to look after their payroll system.

Useful Read: All You Need To Know About PAYE

Since employees are the foundation of any business, they can make or break an organisation. That is why it becomes essential to set up a good payroll system that ensures timely and correct employee payments. However, a question arises about whether every business needs to set up a payroll. The answer is yes. If an organisation has employees, then it must set up a payroll system. Otherwise, a business might face situations of hefty fines and penalties. A business owner can either set up an in-house payroll or hire outsourced payroll. Hiring outsourced payroll allows businesses to reduce the stress and burden of managing the payroll process.

Certain payroll legislations need to be observed, whether your payroll is managed by an in-house payroll team or an outsourced payroll service provider. Main payroll legislations prevalent in the UK are mentioned below:

Employment Rights Act 1996- This Act lays out the right of workers in the United Kingdom. It covers the rights of employees in situations like dismissal, parental leave, unfair dismissal, and redundancy. The Act underlines different employee contract types you can offer, employee entitlements like pensions, termination of employment, study and training, time off, etc. The full-time workers have the right to avail of paid time off up to 28 days of paid holiday. On the other hand, for part-time workers, paid time off is calculated via the gov.uk tool.

National Minimum Wage Act 1998- This Act specifies the minimum pay per hour a UK business should pay an employee. All the workers and apprentices aged under 23 are legally entitled to minimum wage as stated in the Act. This Act is reviewed and revised annually to ensure that the workers receive economic compensation covering basic living costs. In fact, the National Living Wage was previously for those aged over 25 however from 1st April 2021, it also applies to those aged 23 and 24.

If the apprentice is 19 or over and have completed the first year of current apprenticeship, they are entitled to the minimum wage for their age.

National living wage- The national living wage ensures that all workers aged 23 or over and not in the first year of an apprenticeship are paid. The amount specified is at least £9.50 per hour to those legally entitled to the same. It is considered illegal if an employer pays below the national living wage, so workers should check their pay and ensure timely payment receipt. Not paying your employees NMW or NLW can lead to HMRC investigation or facing charges at an employment tribunal or even civil court

Income tax (Earnings and Pensions) Act 2003 and Income tax act 2007- These two Acts specify the rules and payments for Income tax to be followed for payroll. The income tax (earnings and pensions) Act 2003 is the main tax legislation that governs employee share schemes and employment-related securities.

Pensions Act 2008- As per the specified Act, every employer must provide and contribute to a pension fund for staff above the age of 22. An opt-in or opt-out process states that an employer must auto-enroll and inform their staff unless they choose to opt-out. Any failure to do so would result in hefty fines between £400-£10,000. In order to avoid such costly mistakes, employers should utilise payroll outsourcing companies to ensure timely compliance of such payroll legislation.

Seven Things You Must Do When Employing Staff for the first time

• Wage: Decide on the wage for employees while ensuring that you pay at least the National Minimum Wag
• Right to Work: Disclosure and Barring Service (DBS) check is required in a few industries or sectors; get it done if it is applicable for your business.
• DBS Check: Disclosure and Barring Service (DBS) check is required in a few industries or sectors; get it done if it is applicable for your business.
• Employer’s Liability Insurance: This is a must before you hire staff; the absence of this can lead to a monetary penalty.
• Written Statement of Employment: This is required if you’re employing someone for more than one month; this has all the details of the job.
• Register as an Employer: You must register with HMRC for PAYE before you pay your new staff.
• Workplace Pension: Check whether you have to enrol your staff into a workplace pension scheme under the new government rules.

Conclusion

All UK-based businesses pay their employees through Her Majesty’s Revenue and Customs (HMRC) and the Pay-As-You-Earn (PAYE) system. It must be followed even if an organisation has only one employee. An employer is occupied with various roles and responsibilities, and payroll is an essential part of them. Payroll is a time-consuming and hectic task that needs detailed attention and expert involvement. In order to reduce such unnecessary burdens and undue stress, employers can choose an outsourced payroll process. Outsourcing payroll eliminates the stress related to payroll and allows businesses to focus on profit-generating activities. As a result, employers can refocus entirely on their organisation and enhance business growth.

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