Understanding The Difference Between US And UK Payroll
While the United States and the United Kingdom have many shared societal and cultural customs and practices, their economic and workplace regulations often diverge significantly, and may pose challenges for businesses trying to expand their footprint across the pond.
With that in mind, payroll processing should be one of the most important business priorities for companies operating in both the US and the UK. We understand the complexity of the challenge: payroll journal entries are one of the most common accounting reconciliations that we deal with. Understanding how to manage the unique requirements of each jurisdiction, such as the US’ Social Security and the UK’s National Insurance systems, is just as important as understanding fundamental concepts, such as income tax, minimum wage levels, pension schemes, and entitlement to sick pay.
If you need to get to grips with the differences between the US and the UK’s payroll systems for global payroll purposes, check out our guide below.
US Payroll vs UK Payroll
The principal challenge of US payroll is the need to understand how federal-level and state-level regulations affect the process. While the US federal government imposes a progressive federal income tax, for example, most US states also impose their own income taxes on earnings at different rates, and these must be integrated into payroll alongside the government taxes and withheld at source. Similarly, different states impose a range of additional payroll taxes (such as student loan repayments), or provide employees with unique tax deductions and benefits. Beyond federal income tax, the US government also imposes contributions on employers and employees in the form of Social Security and Medicare withholdings. US payroll teams must include all this information on an employee payslip.
The UK does not have the same level of payroll tax regulatory diversity as the US. UK income tax is progressive, and imposed by the government across England, Scotland, and Northern Ireland, with employees all paying the same rate depending on their level of income. The only variation to income tax rates occurs in Scotland, which imposes different rates than the rest of the UK. The UK’s social tax is National Insurance, which, like the US, is paid by both employer and employee. Like the US system, UK payroll regulations require pay information to be reflected on employees’ payslips.
Let’s look more closely at the differences between US and UK payroll:
Federal income tax: The US federal income tax is progressive, which means that it is imposed at different rates depending on an employee’s earnings, with higher rates applicable to earnings that exceed certain thresholds. Federal income tax must be withheld at source by payroll, and businesses must file federal tax returns with the Internal Revenue Service (IRS) on a quarterly basis, using Form 941. The US tax year runs on a calendar basis, from January 1 to December 31.
Other forms of federal payroll tax in the US include Social Security and Medicare – both of which are also withheld at source.
Currently, there are seven federal income tax rates in the US for 2022:
|Taxable income||Income Tax Rate|
|$0 to $10,275||10%|
|$10,275 to $41,775||12%|
|$41,775 to $89,075||22%|
|$89,075 to $170,050||24%|
|$170,050 to $215,950||32%|
|$215,950 to $539,900||35%|
|$539,900 or more||37%|
Note: These rates are based on single-filer status. The income brackets vary based on filing status, with Heads of Household and Married Joint filers able to earn more at the same income tax rates. Note: For more specific questions about taxes, such as student loan repayments, please consult a tax specialist.
State income tax: Most individual states in the US also tax income. Some states impose a flat rate of income tax and others tax progressively, while some impose no income tax at all. Tax rates for individual US states are imposed as follows:
States with progressive income tax (including District of Columbia)
- Alabama – 2% to 5%
- Arizona – 2.59% to 4.5%
- Arkansas – 2% to 5.5%
- California – 1% to 13.3%
- Connecticut – 3% to 6.99%
- Delaware – 2.2% to 6.6%
- Georgia – 1% to 5.75%
- Hawaii – 1.4% to 11%
- Idaho – 1% to 6%
- Iowa – 0.33% to 8.53%
- Kansas – 3.1% to 5.7%
- Louisiana – 1.85% to 4.25%
- Maine – 5.8% to 7.15%
- Maryland – 2% to 5.75%
- Minnesota – 5.35% to 9.85%
- Mississippi – 4% to 5%
- Missouri – 1.5% to 5.4%
- Montana – 1% to 6.75%
- Nebraska – 2.46% to 6.84%
- New Jersey – 1.4% to 10.75%
- New Mexico – 1.7% to 5.9%
- New York – 4% to 10.9%
- North Dakota – 1.1% to 2.9%
- Ohio – 2.765% to 3.99%
- Oklahoma – 0.25% to 4.75%
- Oregon – 4.75% to 9.9%
- Rhode Island – 3.75% to 5.99%
- South Carolina – 0% to 7%
- Vermont – 3.35% to 8.75%
- Virginia – 2% to 5.75%
- West Virginia – 3% to 6.5%
- Wisconsin – 3.54% to 7.65%
- District of Columbia – 4% to 10.75%
States with flat rate income tax:
- Colorado – 4.55%
- Illinois – 4.95%
- Indiana – 3.23%
- Kentucky – 5%
- Massachusetts – 5%
- Michigan – 4.25%
- New Hampshire – 5% (dividends and interest only)
- North Carolina – 5.25%
- Pennsylvania – 3.07%
- Utah – 4.95%
States with no income tax:
- South Dakota
The UK’s income tax is imposed progressively and, like the US, with different tax rates applicable to different levels of employee salary. UK income tax is also withheld at source by payroll. Income tax is collected on a Pay As You Earn (PAYE) basis in the UK and must be reported to HM Revenue and Customs (HMRC) each month as a Full Payment Submission. The tax year in the UK runs from 6 April to 5 April.
The UK’s social insurance tax is known as National Insurance – and employees must make National Insurance contributions (NIC) from their earnings which go towards healthcare and the state pension. Like income tax, NIC is deducted at source. If UK employees have taken out a student loan, repayments for that loan are also made via payroll tax.
In 2022, UK income tax is imposed at the following rates:
|England and Northern Ireland|
|Taxable income||Income tax rate|
|Up to £12,570||0%|
|£12,571 to £50,270||20%|
|£50,271 to £150,000||40%|
|Over £12,571 to £14,732||19%|
|Over £14,733 to £25,688||20%|
|Over £25,689 to £43,662||21%|
|Over £43,663 to £150,000||41%|
Key Payroll Legislation
The US’ principle article of payroll tax legislation is the Federal Income Contributions Act (FICA) which mandates the collection of payroll taxes from employees. FICA also mandates the collection of Social Security and Medicare. While different laws are applicable in different states, there are a number of additional federal laws which US businesses should take into account when processing payroll, these include:
- The Fair Labor Standards Act: Establishes a federal minimum wage and overtime pay.
- The Civil Rights Act: Prohibits discrimination in the payment of wages on the grounds of race.
- The Equal Pay Act: Prohibits discrimination in the payment of wages on the grounds of sex.
- The Americans With Disabilities Act: Prohibits discimination in the payment of wages on the grounds of disability.
- The Family Medical Leave Act: Provides an entitlement for employees to take unpaid, protected leave per year for family or medical reasons.
Like income tax, US businesses should take into account state-level legislation that might affect payroll. State laws might affect pay for employee holidays or types of leave such as national holidays.
The UK’s main payroll legislation is the Employment Rights Act, which was implemented to ensure that employees receive fair treatment in the workplace, including protection from unfair dismissal. The Act involves a number of payroll-specific details, including entitlements to sick pay and holiday pay, and what deductions may be made from an employee’s salary.
Other UK laws relevant to payroll include:
- National Minimum Wage Act: Establishes the minimum wage for workers across the UK.
- Part-Time Workers (Prevention of Less Favourable Treatment) Regulations and Agency Workers Regulations: Protects part-time workers from pay discrimination.
- Income Tax (Earnings and Pension) Act: Sets out progressive income tax rates against employee earnings.
- National Insurance Contributions Act: Sets out rules for making contributions to the UK’s National Insurance.
- Pensions Act: Sets out the rules for auto-enrolling UK employees in a pension fund.
The US does not have a legal requirement for employers to provide employees with a written contract of employment. Typically, however, US employers will issue employees with a written contract that sets out the terms of their employment including the employee’s duties and responsibilities, working days, their compensation package, entitlement to sick pay, paid leave and holiday pay, and any benefits that they have negotiated with their employer.
Unlike the US, under UK law, employers must provide their employees with a written contract, before their first day of work, setting out the terms and conditions of their employment. The contract should include the employee’s duties and responsibilities, hours of work, salary, and any other benefits that the employee has negotiated with their employer.
US employment law does not require employers to give their employees paid holidays, even in the case of federal holidays such as Independence Day or Thanksgiving. Typically, paid holidays in the US are a benefit that is set out in the agreement between an employer and employee, and codified in an employment contract. In the US it is typical for employers to offer 10 vacation days per year.
Most employees in the UK that work 5 days a week are entitled to 28 days of paid leave per year, which amounts to 5.6 weeks. Part-time workers are entitled to the same amount of paid leave, but in proportion to the time they work. Like their US counterparts, employers in the UK may offer a greater number of paid holiday days as a benefit and set that arrangement out in the employment contract.
The US’ only statutory social program is Medicare, which is mandated by FICA. Medicare is a federal health insurance for people over 65 and some younger people with disabilities. Employees contribute 1.45% of their salary to Medicare, which is matched by their employers for a collective 2.9% contribution.
Most healthcare in the US is provided via private insurance programs (about 2 to 1 compared to public coverage). Employers that employ more than 50 employees must provide a private healthcare plan for their business. Accordingly, businesses that offer private healthcare must accommodate the relevant contributions as part of their payroll.
There is no obligation for employers to offer employees paid sick leave in the US – but many do offer paid leave as a benefit, usually around seven days per year. There is also no obligation for US employers to offer maternity and paternity leave, however, like sick leave, most do as part of their social benefits program.
The UK offers residents universal healthcare through its National Healthcare Services (NHS), which is free at point of use and funded by national insurance contributions. UK employers may offer their employees private healthcare through their business as a benefit. UK employees are entitled to statutory sick pay (SSP) of £99.35 a week for up to 28 weeks.
UK employees also receive statutory paid maternity and paternity leave. The length of the maternity and paternity leave, and the pay that the employee receives, will depend on the length of their service with their employer.
Key considerations for completing US and UK payroll:
|Income tax||Progressive federal income taxState income taxes vary||UK-wide progressive income taxDifferent rates for Scotland|
|Social program||Medicare contributions||National Insurance contributionsAuto-enrollment pension|
|Health insurance||Employer-provided private insurance scheme||No obligation for employers to offer health insurance|
|Sick leave||No statutory paid sick leaveSick leave entitlement set out in employment contractEntitlement to maternity/paternity leave set out in employment contract||Entitlement to SSP for up to 28 weeks. Entitlement to statutory maternity/paternity leave|
|Holiday leave||No entitlement to statutory holiday pay Paid holiday entitlement set out in employment contract||Entitlement to 28 days paid holiday per year Additional entitlement set out in employment contract|
The complexity of US and UK payroll can make the payroll process a significant administrative burden for employers with footprints that span the two regions. With this in mind, outsourcing payroll to an accounting or payroll provider is a way to free up resources and ensure that your company avoids any unnecessary, and potentially costly compliance problems.
FloQast enables your business to speed up the most common accounting process to help take the pressure off payroll. To find out more about how we can help you streamline your workflows and work smarter at every level of business, get in touch today.