In the UK, you must pay employer's National Insurance Contributions (NIC) and taxes relating to your workforce. Therefore, it’s essential for new UK employers to understand and follow the key commitments to avoid expensive penalties.
Lee Knight, Employer Solutions Director at RSM, outlines the key facts you need to know in this guide to employment tax and NIC.
UK employment tax: the basics
Before getting into the details of UK tax, here are brief explanations of the main terms associated with employment tax and employer's National Insurance Contributions:
- HM Revenue & Customs (HMRC): This is the UK’s tax authority.
- Tax year: The current tax year in the UK is from 6 April 2024 to 5 April 2025.
- Pay As You Earn (PAYE): Under PAYE, an employer deducts PAYE tax and National Insurance Contributions (NIC) from an employee’s pay. Both PAYE and NIC are then paid to HMRC.
- Income tax: You are responsible for calculating the income tax each employee must pay — this will depend on their earnings and tax band.
- Employer's National Insurance Contributions: You are also responsible for calculating the amount of NIC each employee must pay (depending on their NI rates), and you must also pay the employer NIC.
- P11D form: This is used to report employee benefits in kind, which are benefits your employees receive in addition to their base salary. They may include private healthcare and company cars.
Register with HMRC
As a UK employer, you must register with HM Revenue & Customs (HMRC) to pay employees as per National Minimum Wage legislation. This also ensures that income tax and employees’ NIC are correctly deducted from earnings through the Pay As You Earn (PAYE) scheme.
Follow deadlines
Under PAYE, employers must complete tasks by statutory deadlines each tax month. Penalties can apply where these obligations are not met.
For example, information must be reported to HMRC online under Real Time Information (RTI) on or before employees are paid, and tax and NIC must be paid to HMRC by the 22 day of the month following payment.
Apprenticeship Levy
Generally, if you are an employer with an annual total pay bill exceeding £3m, you must also pay an Apprenticeship Levy through the PAYE system. Where employers are connected, the Apprenticeship Levy rules can be more complex, and advice should be sought to ensure the correct amount of Apprenticeship Levy is paid.
Take advice
It is essential to seek professional advice to determine whether this applies to your internationally mobile employees, short-term business visitors and non-resident directors working in the UK.
What about employee non-cash benefits and expenses?
As an employer, you must also report certain non-cash benefits provided to employees using a P11D. You must submit this information to HMRC by 6 July of the following tax year.
It is, however, also possible to “payroll” certain benefits for tax purposes and deal with certain benefits (such as staff entertainment) via a PAYE Settlement Agreement.
If you fail to report taxable benefits
If you do not report taxable benefits to HMRC correctly, HMRC can ask you as an employer to pay the income tax and NIC due on the benefits on a grossed-up basis, together with interest and penalties.
This can be expensive, especially as HMRC can go back six tax years to collect the income tax and NIC due.
Here are some examples of the common errors made by employers that you should avoid:
- Incorrectly applying tax exemptions to benefits when the exemption conditions are not met.
- Not reporting benefit values correctly for tax purposes when benefits are provided under Optional Remuneration Arrangements (for example, under salary sacrifice).
- Not considering all benefits provided under flexible benefit schemes.
- Paying employee expenses that may be exempt or attract tax relief overseas but are liable to tax and NIC as earnings in the UK.
Also, it’s helpful to know that an exemption for employee business expenses can be used (meaning that the expenses are not reportable to HMRC nor liable to tax or NIC) but only where certain conditions are met.
Off-payroll workers and employment tax in the UK
Be careful, and don’t get caught with self-employed individuals and off-payroll workers.
Your responsibilities
If you engage self-employed individuals, you must check that their contractual and working arrangements support self-employed status by applying certain tests and undertaking a status assessment.
Make sure the status of self-employed individuals is correctly considered from the outset and that you have robust procedures and record-keeping practices for such workers.
There can also be issues regarding using other structures, such as umbrella companies and employers of record.
Check the rules to avoid costly mistakes
As a UK business, you should always check if the rules apply to you, as mistakes can be costly. If HMRC contends that self-employed individuals should have been treated as employees, HMRC can recover the underpaid tax and NIC, which you should have paid through PAYE. Plus, interest charges and penalties.
The IR35 rules
Businesses can also have obligations for other off-payroll workers who are not engaged directly as individuals.
In particular, the UK’s “IR35” rules can apply when a worker personally provides services to an end-user via their intermediary (such as a personal service company).
This can place complex obligations on the end-user of such a worker’s services and anyone else involved in the supply of such a worker to an end-user.
This can include the obligation to operate tax, NIC and the Apprenticeship Levy under PAYE.
Share-based incentives
In the UK, many employers offer share-based incentives to recruit, retain and motivate their workforce.
Therefore, it’s essential to understand where employment income arises and the obligations that you, as the employer, will be expected to satisfy to stay compliant.
This includes deducting PAYE/NIC about share awards and ensuring satisfactory annual reporting (due every 6 July).
The tax treatment can be specific to structuring these arrangements, and your company may also consider if they meet the conditions of any of the UK’s tax-advantaged employee share plans.
Last updated: January 2025