Setting up your UK workforce: Overview of UK employment costs and employee benefits

Welcome to our comprehensive Doing Business in the UK article series, designed specifically for international businesses and investors looking to establish or expand their operations in the United Kingdom. This series aims to provide you with essential insights and practical guidance on navigating the UK business landscape.

Throughout this series, we will cover the initial setup of your business, understanding business taxes, and the process of registering a UK business. We will also delve into workforce setup, payroll, employment costs and international hiring considerations for businesses employing people in the UK. Finally, we also explore accountancy processes, compliance and management reporting requirements, and discuss the ins and outs of importing goods and services into the UK.

In most cases, the salaries of UK employees are driven by market conditions and depend on a range of factors, including sector, seniority, and location, as well as what has been negotiated with the employee.
 

However, a number of statutory rules must also be considered, particularly in relation to National Minimum Wage (NMW) legislation. Employing someone in the UK involves several costs beyond base salary. Key UK employment costs to take into account include:

• Gross salary: The agreed wage or salary paid to the employee.
• National Insurance Contributions (NICs): Employers must pay NICs on earnings above the relevant threshold. For current rates, please refer to HMRC guidance.
• Pension contributions: Employers are required to contribute to an employee’s pension under the auto‑enrolment regime. The minimum total contribution to a workplace pension is currently 8% of an employee’s qualifying earnings, typically split as 5% from the employee and 3% from the employer.
• Workplace benefits: Employers may offer additional benefits such as private medical insurance, company cars, or bonuses.
• Workplace insurance: Employers’ liability insurance is mandatory and protects against potential claims from employees.

These costs will vary depending on the role, industry, and the specific terms agreed with the employee.
 

Share Plans and Incentives

The UK is relatively unique in offering a range of share schemes for employees. The primary objective of these schemes is to shift share‑related gains from income tax into capital gains tax, which is generally taxed at a lower rate for UK‑resident employees.

There are two main discretionary schemes under which a company can grant options to acquire shares: the Enterprise Management Incentive (EMI) and the Company Share Option Plan (CSOP), which is less generous. Companies considering the introduction of these schemes should seek professional advice, as a number of qualifying conditions must be met, including requirements relating to company size and ownership structure.

The UK tax system also provides reliefs to encourage business owners to sell their companies to employees through an Employee Ownership Trust (EOT), offering a potentially tax‑efficient exit strategy.
 

UK Employee Benefits

Taxable benefits provided to employees must be reported annually on form P11D. Following submission of the P11D, tax relating to these benefits may be payable by both the employer and the employee. The employee’s tax code will be updated accordingly, and any employee tax due is typically collected through PAYE during the tax year.

Based on current information, P11Ds will be required for the 2023/24, 2024/25 and 2025/26 tax years, after which employee benefits will need to be payrolled.

Employers may also enter into administrative arrangements allowing them to settle income tax and NIC on behalf of employees for certain benefits, such as staff entertaining, gifts, and relocation expenses. These arrangements are known as PAYE settlement agreements (PSAs).