Introduction Your US company has just hired its first employee in London. Or maybe it’s fifth. The contract is signed, the start date is set, and HR is asking how payroll will run. Suddenly, the picture gets complicated because payroll for US companies’ UK employees’ PAYE is not just about paying a salary into a […]
Your US company has just hired its first employee in London. Or maybe it’s fifth. The contract is signed, the start date is set, and HR is asking how payroll will run. Suddenly, the picture gets complicated because payroll for US companies’ UK employees’ PAYE is not just about paying a salary into a UK bank account. It triggers UK PAYE registration with HMRC, monthly Real Time Information submissions, employer National Insurance at 15%, auto-enrolment pension duties under the Pensions Act 2008, and a written statementof employment details within two months of the start date.
This guide is written for US companies hiring or already employing staff in the United Kingdom, US HR and finance leaders, and founders of US businesses scaling into the UK market. By the end, you will know exactly what UK PAYE requires, how Employer National Insurance works, which setup route fits your headcount, and how to stay compliant from day one. For broader context, see our cross-border service page at https://www.jungletax.co.uk/services/.
UK PAYE — Pay As You Earn — is the system HMRC uses to collect income tax and National Insurance from employees through their employer at each payday. When a US company employs someone physically working in the United Kingdom, the US company itself becomes a UK employer the moment that employee starts work, regardless of whether the US company has any UK office, subsidiary, or director. The full HMRC employer guidance sits at https://www.gov.uk/guidance/paye-and-payroll-for-employers.
The PAYE system requires the employer to register a PAYE scheme with HMRC, issue a UK tax code to each employee, deduct income tax at twenty percent basic, forty percent higher, and forty-five percent additional rate (Scotland operates separate intermediate and top rates), withhold employee National Insurance at eight percent on earnings between the primary threshold of £12,570 and £50,270 and at two percent above that, and pay employer National Insurance at fifteen percent on earnings above the secondary threshold of £5,000 per year from April 2025.
This matters in 2026 because the secondary threshold dropped from £9,100 to £5,000 in April 2025, and the employer National Insurance rate rose from 13.8 percent to 15 percent — a material cost increase for every US company employing UK staff.
Three reasons make this urgent for any US company with UK staff in 2026.
First, HMRC enforcement on overseas employers has stepped up. Nudge letters from HMRC’s Wealthy and Mid-sized Business Compliance team increasingly target US companies with UK staff but no UK PAYE scheme registered. Penalties for failing to operate PAYE start at 30% of unpaid tax for careless behavior, 50% for deliberate behavior, and 100% for deliberate and concealed conduct, plus interest at the current rate of around 7.75%. Current penalty bands are summarised at https://www.gov.uk/government/publications/compliance-checks-penalties-for-inaccuracies-in-returns-and-documents-ccfs7a.
Second, the April 2025 changes to Employer National Insurance materially increase the cost of UK payroll. The combined effect of the lower threshold and the higher rate adds roughly £900 per year per employee for staff earning £35,000, and proportionally more for higher earners. Budgeting accurately for this is essential before issuing UK employment contracts.
Third, auto-enrolment pension duties bite from the employee’s first day. Eligible jobholders aged 22 to State Pension Age earning above £10,000 must be enrolled into a qualifying workplace pension, with minimum employer contributions of three percent and total contributions of eight percent. Failure to comply with The Pensions Regulator’s rules attracts separate fines in addition to HMRC penalties. For a related deep-dive, see our analysis at https://www.jungletax.co.uk/jungle-tax-news-updates/.
Three components drive every UK payroll for a US-owned operation, and each needs to be set up correctly from day one.
Before the first UK payday, the US employer must register for PAYE with HMRC, either directly online or through a UK-based payroll agent. Registration typically takes two to three weeks and produces a PAYE reference number and an Accounts Office reference. Each new employee then provides either a P45 from a previous UK employer or a Starter Checklist if this is their first UK job. HMRC issues a UK tax code that the employer applies to all earnings — codes such as 1257L for the standard personal allowance, or BR, D0, D1, and NT for various special situations.
UK PAYE runs on Real Time Information. The employer must submit a Full Payment Submission to HMRC on or before each payday detailing every employee’s pay, tax, and National Insurance for the period. An Employer Payment Summary is submitted monthly when claiming statutory recovery or reporting nil pay periods. RTI submissions require HMRC-recognized payroll software or an authorized payroll agent. The full RTI guidance is published at https://www.gov.uk/running-payroll/reporting-to-hmrc.
Employer National Insurance at fifteen percent applies to earnings above the £5,000 secondary threshold for each employee. The Employment Allowance can reduce an employer’s annual National Insurance bill by up to £10,500. Still, the eligibility rules exclude single-director companies with no other employees and companies where over 50% of their work is in the public sector. Most US companies hiring multiple UK staff qualify. Apprenticeship Levy at 0.5 percent applies to employers with annual pay bills over £3 million.
The first step is to confirm whether the role creates a UK Permanent Establishment for the US parent, which would trigger UK Corporation Tax on attributable profits. A senior employee with contracting authority, or a UK Home Office used as a fixed base, is the highest-risk profile.
The second step is to choose the payroll route — Direct PAYE Scheme registered to the US entity, Employer of Record, where a UK third party formally employs the worker, or a UK subsidiary that employs the worker directly. Each carries different costs, control, and Permanent Establishment implications.
The third step is to register the PAYE scheme with HMRC and obtain the PAYE reference and Accounts Office reference. For a US entity without a UK address, this requires careful handling of HMRC’s overseas employer process.
The fourth step is to apply for a Certificate of Coverage from the US Social Security Administration if the employee is a US citizen secondee on a temporary UK assignment. The Certificate, available under the US-UK Totalization Agreement (see https://www.ssa.gov/international/agreements_overview.html for an overview), exempts both the employer and the employee from UK National Insurance for up to 5 years.
The fifth step is to set up auto-enrolment with a qualifying workplace pension provider such as Nest, Smart Pension, or The People’s Pension, complete the declaration of compliance with The Pensions Regulator within five months of the duties start date, and run monthly contributions through payroll.
The sixth step is to issue a Section 1 written statement of employment particulars to the employee on or before day one, run the first payroll cycle, submit the first RTI Full Payment Submission to HMRC on or before payday, and pay UK PAYE and National Insurance to HMRC by the 22nd of the following month if paying electronically.
A US software-as-a-service company expanded into the UK market in late 2025, hiring three London-based engineers at £75,000-£110,000 each. The US founders intended to keep the team on the US payroll and pay them as contractors, assuming that UK rules were similar to US 1099 contractor treatment.
Jungle Tax was engaged for an initial review. The position we identified was straightforward but expensive. Under UK employment status rules in the Employment Rights Act 1996 and HMRC’s Check Employment Status for Tax tool, all three engineers were clearly employees, not contractors, because they worked under direction, used US company equipment, had fixed hours, and were integrated into the company’s product team. Treating them as contractors would have triggered IR35 reassessment, back PAYE, employer National Insurance, and penalties.
The route adopted was a UK Direct PAYE Scheme registered to the US parent, supported by a UK payroll bureau running monthly Real Time Information submissions, an auto-enrolment pension through Smart Pension, and a written tax equalization policy for one engineer who was a US citizen requiring Form 1116 Foreign Tax Credit on her US returns. Annual UK payroll costs, including Employer National Insurance and pension contributions, were budgeted at roughly 20% above gross salaries. Penalty exposure avoided versus an HMRC inquiry into misclassified contractors was estimated at high five figures.
The first mistake is paying UK staff as contractors to avoid the PAYE setup. HMRC’s employment status rules, supported by the Check Employment Status for Tax tool at https://www.gov.uk/guidance/check-employment-status-for-tax, almost always treat full-time integrated UK workers as employees regardless of the wording of their contracts.
The second mistake is delaying PAYE registration until after the first UK payday. HMRC expects registration before the first payment of wages, and late registration triggers penalties.
The third mistake is failing to meet auto-enrolment pension duties under the Pensions Act 2008. The Pensions Regulator issues fixed-rate penalties of £400 per failure, plus escalating daily fines for ongoing non-compliance.
The fourth mistake is treating UK statutory entitlements as optional. The statutory minimum holiday is 5.6 weeks per year. Statutory Sick Pay applies after 4 qualifying days, and Statutory Maternity, Paternity, Adoption, and Shared Parental Pay are by law and must run through payroll.
The fifth mistake is failing to obtain a Certificate of Coverage for US-citizen secondees on temporary UK assignments. Without it, both US FICA and UK Class 1 National Insurance apply in parallel, doubling the social security cost.
The sixth mistake is operating a UK payroll in a US payroll system that is not designed for HMRC RTI. UK payroll requires HMRC-recognized software and specific data formats. Generic US systems do not satisfy these requirements.
Jungle Tax is a UK firm of Chartered Tax Advisers specializing in US-UK cross-border taxation. Our team holds combined UK CIOT and ATT qualifications, as well as US IRS Enrolled Agent and CPA credentials. Hence, a single engagement covers both sides of the relationship rather than routing you between two firms.
For US companies hiring in the UK we register Direct PAYE Schemes with HMRC, coordinate UK payroll bureau setup, advise on Permanent Establishment risk, manage Employer of Record relationships where appropriate, set up auto-enrolment pension schemes with The Pensions Regulator, apply for Certificates of Coverage under the US-UK Totalization Agreement, draft tax equalisation policies for US-citizen secondees, and run UK Self Assessment for any directors with UK obligations. Where compliance has slipped, we use HMRC’s unprompted disclosure framework to bring the position up to date, with materially reduced penalty exposure.
For a free initial cross-border assessment, contact us at info@jungletax.co.uk or visit https://www.jungletax.co.uk. You can also read our wider guidance at https://www.jungletax.co.uk/jungle-tax-news-updates/.
Three takeaways matter most for US companies running UK staff in 2026. First, payroll for US companies with UK employees requires PAYE registration before the first UK payday, with monthly Real Time Information submissions to HMRC and employer National Insurance at 15% on earnings above the £5,000 secondary threshold. Second, the setup route — Direct PAYE Scheme, Employer of Record, or UK subsidiary — should be chosen on Permanent Establishment risk, headcount, and strategic UK plans, not on convenience. Third, auto-enrolment, statutory entitlements, and Certificate of Coverage opportunities all need to be handled from day one, because retrospective fixes are slower and more expensive than proactive setup. Speak to a Jungle Tax adviser today by emailing info@jungletax.co.uk or visiting https://www.jungletax.co.uk/services/.
Yes, before the first UK payday. HMRC expects registration as soon as a UK employee is hired, regardless of whether the US company has a UK office or subsidiary.
Fifteen percent from April 2025, applied to earnings above the £5,000 secondary threshold. The Employment Allowance can offset up to £10,500 of annual Employer National Insurance for qualifying employers.
Yes. The US entity can register a Direct PAYE Scheme with HMRC and operate a UK payroll, or use a UK Employer of Record. A UK subsidiary is one option, but not a requirement, for hiring UK staff.
Yes. Any US employer with UK staff must comply with the Pensions Act 2008, automatically enroll eligible jobholders into a qualifying workplace pension, and make minimum employer contributions of 3% toward the total of 8%.
Yes. We register HMRC PAYE schemes for US employers, coordinate ongoing payroll bureau operations, set up auto-enrolment pensions, apply for Certificates of Coverage, and manage Permanent Establishment risk reviews. Contact us at info@jungletax.co.uk to book an initial assessment.
