How does UK payroll tax work in 2026?

Employment Allowance

Eligible employers can offset up to £10,500 of their annual Class 1 NIC bill via the Employment Allowance. The £100,000 employer NIC eligibility cap was removed in 2025, opening the allowance to larger businesses for the first time. A small or mid-sized UK company can wipe out most of the NIC liability on the first £70,000 of payroll above the secondary threshold. Eligibility still excludes single-director limited companies where the director is the only employee.

Apprenticeship Levy

If your annual pay bill exceeds £3 million, you pay 0.5% Apprenticeship Levy on the excess above £15,000. For a mid-market business hiring through Teamed’s EOR, the Levy typically triggers around 40 to 50 UK employees on average tech salaries. You can draw down the levy for apprenticeship training within 24 months.

Class 1 NIC is calculated on a weekly or monthly basis matching the payroll cycle, not annually. This matters for irregular earners. A one-off bonus is taxed differently from the same amount spread evenly across the year, because the weekly or monthly calculation method applies.

Self-employed NIC (Class 2 and Class 4) is different and outside scope here. Class 4 sits at 6% on self-employed profits between the lower and upper profit limits.

The personal allowance taper above £100,000

Above £100,000 of adjusted net income, the personal allowance falls by £1 for every £2 earned. By £125,140 the personal allowance is fully withdrawn. This creates an effective marginal rate of 60% between £100,000 and £125,140. Workers in this band have a strong reason to salary-sacrifice into pension, which does not count toward adjusted net income for taper purposes.

Scottish income tax

Scottish-resident taxpayers face different bands and rates under the Scottish Rate of Income Tax. The bands diverge meaningfully from the rest of the UK at higher earnings. Teamed’s payroll applies the correct tax code based on the employee’s residence and the HMRC-issued tax code, so Scottish employees are calculated correctly from day one.

The RTI submissions an employer must file:

• FPS (Full Payment Submission), on or before each payday, for every employee paid
• EPS (Employer Payment Summary), monthly if claims such as the Employment Allowance apply or no FPS was sent that period
• EYU (Earlier Year Update), correction submissions for prior tax years if needed

Penalties for late RTI filing:

The penalty regime stacks. A small employer missing three monthly RTI deadlines incurs £300 in penalties before any interest on unpaid tax.

P45, P60, P11D: what each one does

Teamed runs all payroll documents end-to-end. Clients receive the outputs but do not need to administer them directly.

1. Collect pay data

   Gather salary, hours worked, bonuses, and any benefits in kind for the pay period before the run closes.

2. Calculate gross pay

   Total all earnings for the period. Include regular salary, variable pay, and any taxable benefits.

3. Deduct employee NIC and income tax

   Apply the employee NIC rate and HMRC-issued PAYE tax code to calculate net take-home. Student loan deductions apply where the Plan indicator is set.

4. Calculate employer NIC and pension

   Calculate employer Class 1 NIC at 15% above the secondary threshold, plus the 3% employer pension contribution on qualifying earnings.

5. Submit the Full Payment Submission

   File the FPS with HMRC on or before payday. This is the real-time reporting requirement. Late submissions trigger automatic penalties.

6. Pay HMRC and the pension provider

   Pay HMRC the PAYE and NIC liability by the 19th (cheque) or 22nd (electronic payment) of the following month. Pay pension contributions to the scheme within the required window.

The three categories of worker under auto-enrolment:

• Eligible jobholders (aged 22 or over, earning over £10,000 a year) are enrolled on day one of eligibility
• Non-eligible jobholders (for example aged 16 to 21 earning over £6,240, or aged 22 or over earning £6,240 to £10,000) can opt in and receive employer contributions
• Entitled workers (aged 16 or over earning below £6,240) can join the scheme but do not receive employer contributions

Workers can opt out within the first month and receive a refund of contributions. After that window, opting out requires re-enrolment three years later.

Tax relief on pension contributions

The scheme Teamed uses is a UK-qualifying defined-contribution scheme. Contributions are tax-relieved at source for employees, meaning the full gross contribution goes into the pension and the payslip shows a smaller net deduction.

Student loan deductions in payroll

UK graduates with student loans repay through payroll once earnings exceed the relevant plan threshold. Plan 1, Plan 2, Plan 4 (Scotland), Plan 5, and postgraduate loans all have different repayment triggers. Repayment rates are 9% above threshold for Plans 1 to 5, and 6% for postgraduate loans. The employee’s tax code includes a Plan indicator. Teamed’s onboarding collects this data and applies the correct code from day one.

The government has signalled it wants to eventually align the 18-20 rate with the National Living Wage. The Low Pay Commission has proposed extending the National Living Wage to age 20 from 2027, then to ages 18 and 19 from 2028 or 2029, but neither is a fixed statutory date yet.

Real HR and legal experts handle your UK hires, from the first offer letter through every RTI submission and year-end P60. An actual person, not a chatbot or a pooled queue. There is no setup fee and no exit fee. Employer cost passes through at cost, itemised on every invoice.

EOR payroll, contractor onboarding, and entity setup all live on one platform. A UK contractor who converts to PAYE keeps their record. That same employee can graduate from EOR to your own UK entity without switching systems. Run the Employer Cost Calculator to see the full picture. EOR is the right model for a first UK hire, until it isn’t. Start from the UK hiring overview.

Key sources: GOV.UK employing people, HMRC PAYE for employers, and ACAS employment advice.