Understanding PAYE, National Insurance & Reporting Requirements Under Employer Of Record In UK

Hiring employees in the UK via an employer of record UK model offers a practical solution for businesses, avoiding the cost and complexity of establishing a local entity. The EOR takes on employment responsibilities, including payroll and compliance. To leverage this model effectively, it’s important to understand the UK’s payroll system, including PAYE, National Insurance contributions (NICs), and HMRC reporting requirements.

Key Takeaways

Under a UK EOR model, the EOR becomes the legal employer, handling PAYE withholding, NICs, and HMRC reporting.
Employers must withhold income tax in real time and remit both employee and employer National Insurance contributions.
Full Payment Submission (FPS) and Employer Payment Summary (EPS) are the primary reporting obligations under Real Time Information (RTI).
Employers must maintain payroll records, including payslips and benefits, for at least three years.
Partnering with a reliable EOR, such as Multiplier, ensures compliance and reduces the risk of penalties.

1. PAYE and its role in a UK EOR arrangement

PAYE (Pay As You Earn) is the UK’s income tax withholding system. Employers deduct income tax and other deductions (like NICs or student loan repayments) from wages before payment. This ensures continuous tax collection over the tax year.

In an employer of record UK setup, the EOR registers as a PAYE employer with HMRC, obtains an Employer Reference Number (ERN), and handles income tax deductions and reporting.

Key points about PAYE under an EOR:

The EOR applies each employee’s tax code correctly, accounting for personal allowances and tax bands.
Income tax is deducted either cumulatively or month‑by‑month, depending on the code.
Scottish employees follow different tax bands, which the EOR must apply.
Each pay event is reported to HMRC through Real Time Information (RTI).

Incorrect PAYE management causes underpayment of tax, with HMRC holding the employer responsible, including potential penalties.

2. National Insurance: employee and employer contributions

National Insurance contributions (NICs) fund state benefits, including pensions and unemployment support. Both employees and employers contribute, with thresholds and rates updated each tax year.

Employee NICs

Employees pay Class 1 employee NICs on earnings above the lower threshold.
For example, 8% NICs apply to earnings above the lower band, and 2% on income above the upper threshold.
The EOR deducts these contributions alongside PAYE.

Employer NICs

Employers (the EOR) pay Class 1 employer NICs on earnings above the secondary threshold, generally around 13.8%, though rates can change annually.
Additional NICs may apply for benefits in kind or under PAYE Settlement Agreements.

Employer NICs are an additional cost above gross salary. An EOR handles accurate calculation and remittance of both employee and employer NICs.

3. Reporting obligations: RTI, FPS, EPS

The UK uses Real Time Information (RTI) to report payroll events to HMRC. Since 2013, almost all payroll must be reported at each pay event rather than at year-end.

Full Payment Submission (FPS)

FPS reports are submitted on or before each payroll payday.
Reports include employee earnings, tax and NIC deductions, statutory pay, student loan deductions, pension contributions, and starter or leaver information.
EORs submit FPS for each pay run, including adjustments where needed.

Employer Payment Summary (EPS)

EPS is used for adjustments or additional declarations, such as reclaiming statutory payments, declaring Employment Allowance, or reporting no payments during a period.

Year-end reporting

Employers must also produce:

P60 forms summarise annual earnings and deductions.
P11D/P11D(b) forms for reporting benefits in kind.
Reconciliation and other HMRC-required submissions.
Reporting for auto-enrolment pensions, Apprenticeship Levy, and statutory payments.

Timely and accurate reporting is critical; errors can lead to interest, penalties, and HMRC investigations.

4. Recordkeeping and audit readiness

Employers must maintain payroll records for at least three years from the end of the relevant tax year. Records should include:

Employee earnings, deductions, and payments
Submitted HMRC reports (FPS, EPS, P11D)
Leave, sickness, and absence records
Notices, benefits, and expense claims
Tax code notices and forms (P45, P60, P11D)

Incomplete records may result in HMRC estimating liabilities and imposing penalties. A quality employer of record UK provider, such as Multiplier, maintains audit-grade records and transparency, ensuring compliance during reviews or inspections.

5. Compliance risks and how a good EOR protects you

Even with an EOR handling payroll and compliance, organisations should be aware of potential risks:

Misapplied tax codes leading to over- or underpayment
Late or missed FPS/EPS submissions triggering penalties
NIC or benefits misreporting
Poor recordkeeping is affecting audit readiness
Lack of transparency in payroll and deductions

A reliable EOR like Multiplier mitigates these risks by:

Maintaining updated UK payroll and tax expertise
Automating FPS/EPS submissions and validation
Archiving full payroll history and audit logs
Reviewing benefit deductions, NICs, and tax codes proactively
Providing clear documentation and reconciled payroll summaries

The client organisation should still review compliance summaries to ensure proper alignment with UK rules.

Conclusion

Using an employer of record UK arrangement allows businesses to employ UK staff without establishing a local entity. Understanding PAYE, National Insurance, and reporting obligations ensures compliance, reduces penalties, and builds employee trust.

EORs like Multiplier handle payroll, statutory deductions, and reporting, providing transparency and reliability. This makes them an efficient solution for companies expanding into the UK market while ensuring legal compliance.

FAQs

Who is liable if there’s an error in PAYE deductions or NICs under an EOR arrangement?

The EOR is legally responsible for errors, late filings, or underpayments. Clients should confirm that reporting processes are accurate and records are properly maintained to avoid penalties.

Can I directly engage an employee in the UK and still use Multiplier’s EOR for only payroll and compliance?

Directly hiring employees transfers some compliance obligations to the client. Full EOR responsibility ensures accurate payroll, tax, and statutory compliance handled entirely by the provider.

Do I still need to worry about pensions, statutory leave, or benefits when using an EOR?

Yes, while EORs manage statutory benefits, auto-enrolment pensions, and leave, clients should review contracts to confirm alignment with policies and compliance with UK employment law.

Does RTI reporting mean I lose flexibility in payroll timing?

No, RTI requires timely reporting on or before paydays. EORs manage weekly, fortnightly, or monthly pay cycles while ensuring accuracy and compliance for each reporting event.

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