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UK Payroll explained
UK Payroll for Foreign Companies: A Practical Guide
Running payroll in the United Kingdom is one of those tasks that seems simple on the surface. You pay your people, you deduct some tax, and you send the numbers to HMRC. But once you dig into the details, particularly as a foreign company with no UK presence, the complexity reveals itself quickly.
PAYE, Real Time Information, National Insurance, pension auto-enrolment, statutory payments, annual reporting. The list goes on. And the penalties for getting it wrong are not trivial.
So, how does UK payroll actually work for foreign companies, and what are your options? Let us walk through it properly.
How does UK payroll work for foreign companies?
If you are a foreign company employing someone in the United Kingdom, you must operate PAYE (Pay As You Earn) and report to HMRC in real time. This means registering as an employer with HMRC, calculating and deducting income tax and National Insurance from your employee's pay each pay period, submitting payroll data to HMRC before every payday through the Real Time Information (RTI) system, paying employer National Insurance contributions, and enrolling eligible employees into a workplace pension scheme.
You also need to provide payslips, issue P45s when employees leave, and produce P60s at the end of each tax year. The whole system runs on the UK tax year, which runs from 6 April to 5 April.
The challenge for foreign companies is that all of this requires a UK payroll setup, and doing it from abroad introduces complications around bank accounts, HMRC registration, and ongoing compliance. You can manage this in-house, outsource to a UK payroll provider, or use an Employer of Record (EOR) to handle everything on your behalf. For a broader overview of your options, see our guide to hiring in the UK without a legal entity.
What is PAYE and how do you register?
PAYE stands for Pay As You Earn. It is HMRC's system for collecting income tax and National Insurance from employees at the source. Instead of employees paying their tax bill at the end of the year, you deduct it from their pay each payday and send it directly to HMRC.
Registering for PAYE
As a foreign employer, you need to register for PAYE with HMRC before your first payday. The registration process involves:
You will need this to access HMRC's online services.
You can do this up to two months before your first payday.
HMRC issues this after registration, and you need it for all payroll submissions.
This links your employees to your employer record.
Registration typically takes around five working days, but it can take longer. Do not wait until the last minute.
The challenge for foreign companies
Here is where it gets tricky. To register for PAYE, you generally need a UK address and a UK bank account for paying HMRC. Some foreign companies use a registered agent or a UK-based director to satisfy the address requirement. Others set up a UK subsidiary or branch.
If you do not have a UK presence, registering for PAYE in your own name is difficult. This is one of the main reasons foreign companies use an Employer of Record, as the EOR already has a registered PAYE scheme and can employ your UK staff through it. For a full explanation, see PAYE Explained.
What is Real Time Information (RTI)?
Real Time Information is the system HMRC uses to receive payroll data from employers. Since its introduction in 2013, it has replaced the old end-of-year P35 return with a requirement to report every time you pay your employees.
The two key RTI submissions
Full Payment Submission (FPS). You submit this on or before each payday. It includes details of every employee you have paid: their gross pay, tax deducted, National Insurance, pension contributions, and net pay. If you pay monthly, you submit 12 FPS filings per year. If you pay weekly, that is 52.
Employer Payment Summary (EPS). You submit this by the 19th of the following month if you need to report reductions to your PAYE liability, such as statutory maternity pay, statutory sick pay, or Employment Allowance claims. If you have nothing to report, you do not need to submit an EPS.
Penalties for late or missing submissions
HMRC takes RTI compliance seriously. If you file your FPS late, you face penalties:
1 to 9 employees: £100 per month
10 to 49 employees: £200 per month
50 to 249 employees: £300 per month
250 or more employees: £400 per month
Persistent late filing can trigger additional penalties and increased scrutiny from HMRC. For a foreign company unfamiliar with UK deadlines, this is a genuine risk.
Tax codes
HMRC issues a tax code to each employee, which tells you how much tax-free pay they are entitled to. The most common code for someone with one job and the standard Personal Allowance is 1257L. Getting tax codes wrong means either over-deducting or under-deducting tax, both of which create problems.
How do National Insurance contributions work?
National Insurance (NI) is the UK's social security contribution system. Both employers and employees pay it, and it funds the State Pension and certain benefits.
Employer NI is an additional cost on top of salary. For an employee earning £50,000, the employer NI bill is roughly £6,750 per year. This is a cost many foreign companies do not anticipate.
For a complete breakdown, including how NI rates have changed and what to expect going forward, see our guide to National Insurance in the UK.
What about pension auto-enrolment?
Under the Pensions Act 2008, every UK employer must automatically enrol eligible employees into a workplace pension scheme. This applies to foreign companies employing people in the UK just as much as it does to domestic ones.
Who qualifies for auto-enrolment?
An employee qualifies if they:
- Are aged between 22 and State Pension age
- Earn more than £10,000 per year
- Work in the UK under a contract of employment
Minimum contributions
The current minimum total contribution is 8% of qualifying earnings, with at least 3% coming from the employer and 5% from the employee. Qualifying earnings are the band of earnings between £6,240 and £50,270 per year.
For an employee earning £35,000, that means:
- Qualifying earnings: £35,000 minus £6,240 = £28,760
- Employer contribution (3%): £862.80
- Employee contribution (5%): £1,438
- Total annual pension contribution: £2,300.80
Re-enrolment
Every three years, you must re-enrol any employees who have opted out of the pension scheme. You also need to submit a re-declaration of compliance to The Pensions Regulator.
For a detailed guide to all of this, including the NEST pension scheme and how to manage opt-outs, see our article on UK workplace pension and auto-enrolment.
What annual payroll obligations do you have?
Beyond the regular RTI submissions, UK payroll involves several annual tasks.
P60
You must give a P60 to every employee who is working for you on the last day of the tax year (5 April). The P60 summarises their total pay and deductions for the year. The deadline is 31 May.
P45
When an employee leaves, you must issue a P45 showing their pay and tax deductions up to their leaving date. The employee needs this to give to their next employer so their tax code can be applied correctly. You should issue the P45 on or before the employee's last payday.
P11D
If you provide benefits in kind to employees (such as a company car, private medical insurance, or interest-free loans), you must report these on a P11D form. The deadline is 6 July following the end of the tax year. Class 1A National Insurance is due on the value of benefits provided.
End-of-year final FPS
Your final FPS of the tax year must indicate that it is the last submission. If you forget, HMRC will expect further submissions and may issue penalties.
What are the penalties for payroll non-compliance?
HMRC does not mess around with payroll compliance. Here is what you face if things go wrong:
Late FPS submission. £100 to £400 per month depending on the number of employees.
*Incorrect tax deductions. HMRC can issue a direction requiring you to pay the underpaid tax yourself rather than collecting it from the employee.
Late payment of PAYE to HMRC. Interest accrues from the due date. Persistent late payers may be moved to a more frequent payment schedule.
Failure to provide payslips. Employees have a legal right to an itemised payslip under the Employment Rights Act 1996. Failure to provide one can lead to an employment tribunal claim.
Pension non-compliance. The Pensions Regulator can issue compliance notices and escalating penalty notices of up to £10,000 per day for serious breaches.
Failure to pay the National Minimum Wage. HMRC can issue financial penalties of up to 200% of the underpayment and publicly name offending employers. The National Minimum Wage Act 1998 and the National Living Wage rules are strictly enforced.
For a foreign company unfamiliar with UK requirements, these penalties represent a real financial and reputational risk.
How does an EOR handle UK payroll for you?
An Employer of Record like Agility EOR takes the entire payroll burden off your plate. Here is what the process typically looks like:
You provide the employee's details, start date, salary, and any benefits. The EOR issues a compliant employment contract under the Employment Rights Act 1996.
The EOR calculates gross-to-net pay, deducts income tax through PAYE, calculates National Insurance contributions, manages pension auto-enrolment and contributions, and issues the employee's payslip.
The EOR files the FPS on or before each payday and handles any EPS submissions. They pay the PAYE and NI to HMRC by the due date (typically the 22nd of the following month for electronic payments).
The EOR issues P60s, handles P45s for leavers, and files P11Ds if applicable.
The EOR manages statutory sick pay, maternity pay, paternity pay, and shared parental pay in accordance with the Social Security Contributions and Benefits Act 1992.
When tax rates, NI thresholds, or pension rules change, the EOR updates their processes. You do not need to track HMRC announcements or budget changes.
This approach means you can hire in the UK within days, without registering for PAYE, without buying payroll software, and without employing a UK-based payroll administrator. For foreign companies testing the UK market or hiring a small team, this is often the most practical option. See our guide to hiring in the UK without a legal entity for more on how this works in practice.
What does it cost to run UK payroll in-house?
If you decide to manage payroll yourself rather than using an EOR, here is a rough cost breakdown:
£20 to £100 per month for cloud-based solutions like Xero Payroll, Sage, or QuickBooks. Larger operations may need enterprise solutions costing significantly more.
If you hire someone in-house to manage payroll, expect to pay £25,000 to £40,000 per year. Outsourced payroll bureaus typically charge £4 to £8 per employee per pay run.
A UK accountant to handle annual returns, P11Ds, and compliance typically costs £2,000 to £5,000 per year for a small employer.
If you use NEST (the government-backed pension scheme), there is no setup fee, but ongoing charges apply. Other pension providers charge administration fees.
UK payroll rules change regularly. You or your staff need to stay current with HMRC guidance, budget changes, and regulatory updates.
For a small foreign company with one to five UK employees, the in-house approach often costs more than an EOR when you factor in the time, risk, and overhead.
What payroll software is available in the UK?
If you do choose to run payroll in-house, these are the most common options:
Cloud-based, integrates with Xero accounting, suitable for small to medium employers. RTI-compliant.
One of the UK's most established payroll providers. Offers solutions for businesses of all sizes.
Good for small businesses already using QuickBooks for accounting.
A dedicated payroll solution popular with UK payroll bureaus and accountants.
Not payroll software per se, but the government's workplace pension scheme, which integrates with most payroll platforms.
All of these handle RTI submissions, tax code updates, and pension auto-enrolment to varying degrees. None of them eliminate the need for someone who understands UK payroll rules.
Agility EOR is far more than just a service provider. We’re flexible, innovative and focused on outstanding client service. Supporting you every step of the way – and valuing your people as the cornerstone of success.
Frequently asked questions
Yes, typically. HMRC requires PAYE payments to be made from a UK bank account, and employees expect to be paid into a UK bank account. Some foreign companies open a UK business bank account through their entity, while others use a multi-currency account with a UK sort code.
Technically, yes, but practically it is difficult. You need to manage RTI deadlines in UK time, deal with HMRC using UK-specific processes, and handle pension auto-enrolment with a UK pension provider. Time zones, banking requirements, and regulatory complexity make this challenging without UK-based support.
There is no legal requirement for a specific pay frequency, but monthly payroll is the norm in the UK. Weekly payroll is common in certain sectors like construction and hospitality. Whatever frequency you choose, you must submit an FPS on or before each payday.
The Employment Allowance lets eligible employers reduce their annual employer National Insurance liability by up to £10,500. It is claimed through the EPS. Not all employers qualify; companies where the sole employee is a director are excluded, for example.
If you process personal data for payroll purposes (which you inevitably do), you may need to register with the ICO under the UK General Data Protection Regulation (UK GDPR) and the Data Protection Act 2018. This applies to foreign companies processing data about UK-based employees.
An EOR is already registered with HMRC, already has payroll software, already manages pension schemes, and already understands UK employment law. They become the legal employer of your UK staff, which means they carry the compliance burden. You pay a single monthly invoice, and they handle the rest. For foreign companies, this removes the biggest barriers to hiring in the UK.
Speak to an expert
Want to employ someone in the UK without wrestling with HMRC? Agility EOR manages your UK payroll, tax, and pension obligations from start to finish. Get in touch to learn how we can help you hire in the UK quickly and compliantly.