How much can you pay someone before putting them on payroll?

Are you wondering, how much can you pay someone before putting them on payroll? In the UK, the practice of compensating individuals for their work without formally adding them to a payroll is a topic of nuanced regulations that businesses must navigate carefully. This approach may be considered for various reasons, including short-term engagements, freelance work, or trial periods.

Understanding the threshold for when an individual must be formally added to the payroll is critical for compliance with tax laws and employment legislation.

Defining the threshold

The key threshold for determining when someone should be put on payroll in the UK is linked to the Personal Allowance and the Lower Earnings Limit for National Insurance Contributions (NICs). As of the latest tax year, the Personal Allowance—the amount of income one can earn before they are required to pay Income Tax—stands at £12,570. However, for NICs, the threshold is lower.

Employers must consider both Income Tax and National Insurance implications when paying someone. If an individual’s earnings from a job exceed the Lower Earnings Limit (£6,396 annually for the 2024/25 tax year), the employer is responsible for reporting their earnings and paying Employer’s National Insurance Contributions, even if the employee does not owe any NICs themselves.

Short-term work and freelancers

For short-term workers or freelancers, determining whether they need to be on the payroll depends on their earnings and the duration of their engagement. If their compensation for the work does not exceed the thresholds mentioned above, formal payroll inclusion may not be immediately necessary. However, businesses must keep accurate records of all payments made to such individuals.

The PAYE system

When an individual’s earnings surpass the thresholds, or if they work for a company in a manner that resembles traditional employment, they must be added to the Pay As You Earn (PAYE) system.

Through PAYE, Income Tax and National Insurance Contributions are deducted from their wages before they are paid. Registering an employee with HM Revenue and Customs (HMRC) is a legal requirement and ensures compliance with UK tax laws.

Exceptions and considerations

It’s important to note that certain exceptions and specific circumstances may alter the requirement for adding someone to payroll.

For instance, genuine freelancers or contractors who operate under their own business might never need to be on your payroll if they invoice for their services and manage their own tax liabilities.

However, the distinction between employees and contractors has been the subject of increased scrutiny, especially with the introduction of IR35 regulations, which aim to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.

So – How much can you pay someone before putting them on payroll?

In conclusion, while there is flexibility in compensating individuals without adding them to the payroll for work that falls below specific thresholds, UK businesses must exercise caution and ensure they fully understand and comply with tax and employment laws.

How much can you pay someone before putting them on payroll?

The decision to place someone on the payroll should not be taken lightly and must consider the legal obligations towards both the HMRC and the individual being paid.

For businesses unsure about their responsibilities, consulting with a financial advisor or accountant is highly advisable to avoid potential legal and financial penalties.