Tax and legal compliance when hiring employees in the UK: what companies must know

Expanding into the UK and hiring local talent brings significant responsibilities. Beyond finding the right candidates, international employers must navigate a complex web of UK regulations, including PAYE and pension auto-enrolment, as well as statutory employee rights.

Failing to comply exposes businesses to fines, reputational damage, and uncertainty. This guide unpacks the essential UK tax and legal obligations for employers. If managing payroll, contracts, and regulations seems overwhelming, British Employer of Record can handle it all, without requiring you to set up a UK entity.

Registering as an employer with HMRC

Registering as an employer with HMRC is a legal requirement for any company, whether foreign or UK-based, that employs staff working in the United Kingdom.

As soon as your business engages even one UK-based employee, you must register with HMRC (Her Majesty’s Revenue and Customs) to set up a PAYE (Pay As You Earn) system. PAYE is the UK’s payroll tax mechanism used to withhold income tax and National Insurance contributions (NICs) from employee salaries.

Non-British employers need to register online and obtain a PAYE reference number before the employee’s first payday. You’ll also need to issue tax codes to employees and submit all pay data to HMRC using Real Time Information (RTI). This means reporting salary payments, deductions, and any taxable benefits each time you process payroll.

Missing RTI submission deadlines can trigger automatic fines, even if the amounts owed are small. HMRC may also charge interest on late payments. For international companies unfamiliar with UK payroll processes, even minor errors can lead to compliance issues. That’s why it’s vital to either set up internal payroll correctly or partner with a local payroll expert or Employer of Record (EOR) to manage PAYE registration, calculations, and submissions on your behalf.

Employment contracts and statutory requirements

UK law mandates that all employees receive a written statement of employment particulars by their first pay day. This document must outline:

• Their job title, duties, working hours, salary, and pay frequency
• Holiday entitlement, sick pay, notice periods, and pension arrangements

These details safeguard both parties. Beyond the contract, you must provide statutory employment rights, including 5.6 weeks of annual leave, statutory sick pay, parental leave, and fair notice periods.

The notice required depends on service length, but must be clearly stated. You should also comply with equality, anti‑discrimination, and health and safety regulations to ensure a fair and compliant workplace.

Payroll, tax, and benefit compliance

Running payroll in the UK entails several critical steps. Employers must correctly calculate employee income tax and NICs, plus employer-level NICs. In addition, companies with more than one employee must adopt pension auto-enrolment, enrolling eligible staff into a workplace pension and contributing monthly alongside the employee.

Payslips must be issued each pay period and include gross pay, deductions, and net pay. HMRC requires that employee earnings are reported accurately through RTI.

Even minor oversights can lead to serious consequences. Underpaying tax or NICs, missing pension contributions, or failing to send RTI filings can result in financial penalties, enforcement actions, and disputes. That’s why having a structured payroll process and staying up to date with HMRC and pension provider requirements is essential.

Penalties for non-compliance

Penalties for non-compliance with UK employment laws and tax regulations can be severe and costly. HMRC issues automatic fines for failing to register as an employer, missing Real Time Information (RTI) submission deadlines, or submitting incorrect PAYE data. These penalties can increase with repeated offences and may include interest charges on overdue payments.

Beyond tax obligations, employers must also meet mandatory pension requirements. The Pensions Regulator can impose significant fines for failing to auto-enroll eligible employees or for making late or insufficient contributions.

On the employment law side, violations such as unfair dismissal, breach of contract, or discrimination can lead to employment tribunal claims. If found liable, companies may be ordered to pay compensation of up to 52 weeks’ gross salary.

Publicly listed or high-profile companies risk not only legal and financial consequences but also reputational damage. For foreign businesses operating without in-country HR or legal teams, the risk of unintentional non-compliance is even higher. To avoid these pitfalls, many choose to work with a UK-based Employer of Record (EOR) that ensures every aspect of tax and employment compliance is handled correctly.

How British Employer of Record ensures full tax and legal compliance

A British Employer of Record (EOR) takes on all compliance responsibilities while you manage day‑to‑day work. The EOR becomes the legal employer in the UK and handles:

1. PAYE registration and RTI reporting: ensuring HMRC standards are met from day one.
2. Payroll and NICs calculations: accurate deductions, including employer NICs.
3. Pension auto-enrolment: managing enrolment, contributions, and communications.
4. Employment contracts: drafting UK‑compliant contracts that include all statutory entitlements.
5. Statutory benefits: ensuring staff receive sick pay, leave, and holiday entitlements correctly.

For example, a US-based tech startup wanted to hire a UK developer but had no local entity. By partnering with a British Employer of Record, they were able to avoid setting up a UK company.

The EOR handled PAYE registration, drafted a compliant employment contract, managed tax and pension contributions, and ensured all reporting to HMRC was submitted on time, allowing the startup to focus on growth while staying fully compliant.

With an EOR, there’s no need to open a UK company; you avoid legal setup costs, banking challenges, and entity-related risk. Instead, you gain a trusted partner who knows HMRC, Employment Law, and pension regulations thoroughly.

Why using EOR is ideal for international employers

For international businesses hiring UK staff, working with a British Employer of Record offers clear advantages:

• Rapid onboarding of UK talent with no legal entity required
• Full compliance with tax, payroll, pensions, and employment standards
• Responsibility for HMRC and pension scheme liaison was handled seamlessly
• Protection from penalties, audits, and employment disputes
• Focus on core business operations while compliance is professionally managed

Stay compliant

Bringing employees into the UK is not just a hiring decision; it’s a commitment to comply with a complex array of tax and legal regulations. Failing to comply with PAYE, NICs, pension auto-enrolment, employment contracts, and statutory benefits can result in unexpected costs and legal exposure.

Choosing to work with a British Employer of Record is a smart way to manage these obligations without needing a UK entity. They take responsibility for payroll, HMRC reporting, pensions, contracts, and statutory compliance so that you can hire UK staff quickly, legally, and with confidence.

Contact us to learn how partnering with a British Employer of Record can simplify compliance and support your growth in the UK.