American companies can benefit in several ways by hiring in the United Kingdom. Businesses can gain access to a booming economy within a country which has a strategic location that can facilitate further growth in the European market.
An employer of record in Britain can help guide you through the entire hiring process and ensure you’re following the rules at each step. Employers of record can also handle all the intricate aspects of hiring your international employees.
Expanding to the United Kingdom can provide your company with boundless growth opportunities. In this article, we'll tell you everything you need to know about UK hiring strategies, from the importance of an employment agreement to performance management, as an American company hiring in the UK.
Reasons to Hire in the United Kingdom
Access to European Markets
One of the major ways a company in the United States can benefit from hiring in the United Kingdom is by gaining access to other important markets. Even after the UK left the EU during Brexit, the country still has major international trade agreements like the EU-UK Trade and Cooperation Agreement that can help you expand your reach.
The UK’s strategic location also provides easy geographic access to the rest of the continent.
Large Economy
The United Kingdom is an excellent place to grow your business because of the country’s strong economy. The UK ranked as the sixth largest economy in 2022 by GDP, and it’s known as one of the world’s major financial and investment centers.
Hiring in the United Kingdom gives you access to a large consumer base of over 60 million people and 4 regional markets, including:
- England
- Scotland
- Wales
- Northern Ireland
The UK ranked as the 8th easiest country in the world to do business in, providing your company with ample opportunity to access investment opportunities. The region also has 48 operational enterprise zones, which are geographic areas where commercial and industrial businesses can access benefits like tax breaks for setting up or expanding operations.
Cultural Similarities
US companies hiring in the UK can avoid some of the challenges of hiring from other European nations. Both countries have similar business environments and professional standards. They also share a common language, making communication with your international team much easier.
Challenges for US Companies Hiring in the United Kingdom
Despite the many benefits for companies who want to expand their operations by recruiting overseas, there are also some challenges you may face when hiring employees. This can include the logistics of hiring such as the required notice period in the UK.
Cost of Living
The UK is home to a wide pool of workers, but the high cost of living can be challenging for international businesses hiring in the country. The region had the 18th highest cost of living and purchasing power related to the average income in 2022. This can impact the cost of doing business because your company will likely need to offer competitive compensation and benefits packages to recruit and retain skilled UK workers.
Taxation
While it's easy to set up and operate your business, the taxation system in Britain is also extremely complicated. There are more than 1,180 tax reliefs that can have a wide range of outcomes for your company. It’s important to know what you’re doing to ensure you receive all the benefits you can. Partnering with an Employer Of Record (EOR) like Borderless can help you follow the rules and avoid damages or penalties.
Local Employment Laws in the United Kingdom
In addition to the complicated tax structure, American companies must abide by certain local labor laws to remain compliant through the hiring process. A British EOR can help you navigate the entire process. Failure to comply with the regulations can result in harsh punishments such as fines and possible legal action.
Classifying Your Employees
Employers hiring in the United Kingdom can either hire individuals as employees or independent contractors. Both types of workers provide different benefits and can help your company grow in various ways.
An employee is a worker who does a job that’s defined by the employer in exchange for compensation. These workers are hired permanently and work under an employment contract that outlines the terms of the working arrangement. Additionally, they are entitled to certain benefits such as paid time off.
Contractors are not classified as permanent employees and are hired to complete a specific project or for an amount of time specified in the contract. However, the contractor is not entitled to certain benefits and is responsible for handling all tax deductions and social security contributions.
IR35 Rules
IR35 is a set of rules that companies hiring in the UK will need to know. It covers off-payroll working regulations. The policy ensures that contractors generally pay the same tax as an employee would and is meant to stop contractors who work as disguised employees. The rules might apply if:
- A worker provides their services through their intermediary to a client
- A client receives services from a worker through their intermediary
- An agency or other supplier provides workers’ services through their intermediary
This helps prevent employee misclassification and tax evasion. The rules are applicable on a contract-by-contract basis.
Employment Contracts
All employment agreements in the UK require a contract to be valid. While the contract does not legally need to be in writing, US employers hiring in the UK might find it beneficial to put important terms such as compensation and additional benefits in writing to avoid confusion between both parties. There are a few different types of contracts you can use to recruit skilled workers in the United Kingdom:
- Full-time employment contracts: These employees work for your company permanently. Full-time workers are covered by all labor laws and must receive statutory benefits like a minimum wage, time off, and protections against unfair dismissal. A notice period is also required in the UK.
- Fixed-term employment contracts: This type of contract is used to hire employees temporarily, and it has a specified end date. Workers can be kept on successive fixed-term contracts for a limit of four years. Employers must provide a notice period before ending the agreement before the set date.
- Part-time employment contracts: These agreements restrict the number of hours an employee can work. Workers are entitled to certain benefits such as a minimum wage and various types of leave.
- Casual contracts: These are used for situations where the hours of work may not be consistent and employees only work when needed by the employer. The employer does not have to guarantee a minimum amount of hours and the employee may refuse work.
Costs of Hiring in the UK
Now that you have a better understanding of some of the employment rules and regulations, your company will need to know some of the costs associated with hiring UK workers. In addition to your employee salaries, you’ll be responsible for payroll, taxation, benefits, and more. Employees in the UK are also accustomed to comprehensive benefits packages, which will have to be factored into your cost of hiring.
Wages
United Kingdom workers are entitled to a statutory minimum wage that depends on the employee’s age. The minimum rates are:
- £5.28 for workers under 18
- £7.49 for workers aged 18 to 20
- £10.18 for workers aged 21 and 22
- £10.42 for workers 23 and over
Overtime
Employers are not obligated to pay workers for any overtime hours worked. Overtime rates and payments will typically be outlined in an employment contract, and employees are only required to work overtime if stated. Workers cannot work more than an average of 48 hours per week unless an agreement is made with the employee in writing.
While there’s no legal requirement to pay employees for working extra hours, it is the responsibility of the employer to ensure that the average pay for the total hours worked does not fall below the national minimum wage. Overtime rates depend on the industry and company.
Payroll
US companies hiring in the UK are also required to set up a payroll system to provide payments and maintain records. The employer is also responsible for handling employee income tax, social security and pension contributions. Implementing effective payroll processes is vital for businesses, as 49% of American workers will begin looking for a new job after only two paycheck issues.
An employer of record like Borderless can help you pay your international employees on time and accurately process data.
Employers are responsible for deducting the appropriate amounts for social security programs from each employee’s paycheck. Your company will need to withhold:
- Minimum 3% for the Pension Fund
- 15.05% for the National Insurance Rate
- £60 for Employer Liability Insurance
- 0.5% for the Monthly Apprentice Levy
Employees must contribute a minimum of 5% on their own for the Pension Fund.
Companies are also responsible for all income tax deductions for their UK staff. Income tax brackets in the United Kingdom are calculated based on how much the worker makes:
- 0%: up to £12,570 (Personal Allowance)
- 20%: up to £50,270 (Basic Rate)
- 40%: up to £125,140 (Higher Rate)
- 45%: over £125,140 (Additional Rate)lovesong
Employers hiring in the United Kingdom must follow the region’s Her Majesty’s Revenue and Customs (HMRC) system to remain compliant with taxation laws. It’s also important to know that income tax brackets can vary for workers in Scotland. It is not a legal requirement to pay your employees bonuses like in some other European countries.
Additional healthcare costs are not something that employers will need to consider, as the UK offers national health insurance (NHS) to anyone residing in the country.
Termination, Severance, and Notice Periods
In contrast to the United States, the United Kingdom does not follow at-will employment procedures. This means that an employer cannot terminate an employee without giving the worker a valid reason for dismissal and adequate notice before ending the agreement.
A notice period in the UK depends on how long the employee has worked for your company:
- You must give 1 week’s notice if the worker was employed between one month and two years.
- You must give an additional week’s notice for every year the worker was employed between 2 and 12 years of service.
- You must give 12 week’s notice for employees who have worked for you for 12 or more years.
Employers in the UK must give a valid reason for termination within the notice period. Failure to do so could result in legal action for unfair dismissal and compensation for the employee. As an employer hiring in the UK, fair grounds for dismissal include:
- Misconduct (theft, discriminatory behavior, poor timekeeping)
- Illness or poor employee performance
- Redundancy and other economic reasons
- Breach of a statutory restriction (when continuing to employ an individual would break a law)
- Other substantial reasons (expiry of a fixed-term contract, personality clashes)
- Retirement
Employees are entitled to statutory redundancy pay if they’ve been employed by a company for at least 2 years. The amount of severance pay required for dismissed employees depends on their length of service. In the United Kingdom, workers can get:
- Half a week’s pay for each full year the employee worked under 22
- One week’s pay for each full year the employee worked between 22 and 41
- One and a half week’s pay for each full year the employee was 41 or older
It’s important to know that the length of service is capped at 20 years. Weekly pay is the average amount earned per week over the last 12 weeks before termination.
Annual Leave
Leave entitlements are statutory benefits workers in the UK are entitled to, and almost all individuals who are classified as workers are legally entitled to 5.6 weeks paid holiday per year. This includes agency workers, workers with irregular hours, and workers on casual employment contracts.
Part-time workers are also entitled to 5.6 weeks off prorated for the amount of hours they work per week.
When hiring in the UK, it’s also important to know that workers may receive up to 28 weeks of paid sick leave. There are also 8 national holidays in most of the United Kingdom:
- New Year’s Day
- Good Friday
- Easter Sunday
- May Day
- Late May Bank Holiday
- Summer Bank Holiday
- Christmas Day
- Boxing Day
Employees may take up to 52 weeks for maternity leave, with the first 26 weeks as ordinary leave and the remaining 26 weeks as additional leave. Mothers can begin maternity leave up to 11 weeks before the expected due date and are required to take at least 2 weeks after the birth. Statutory paternity leave can be either one or two consecutive weeks, and the leave cannot start before the birth. New parents can take up to 18 weeks of unpaid parental leave for each child.
Employees are also entitled to receive statutory sick pay of £109.40 a week for up to 28 weeks. If eligible, employees will be paid for all days they are off sick that normally would have been worked, excluding the first three.
How Can You Hire an Employee in the United Kingdom?
Companies who want to hire in the UK will need to abide by several labor laws and regulations. Recruiting skilled workers in the United Kingdom can help your company grow in many ways, but the process can be somewhat complicated. Employers generally have two options.
Setting Up a Local Entity
US companies who want to hire in the UK can set up a local entity to legally hire international employees. New entities in the United Kingdom must register with the Companies House, which handles incorporation for global companies. Your company will also need to register with HM Revenue and Customs for taxation.
A company that sets up its own local entity in the country it wishes to hire from is responsible for understanding all employment requirements, such as payroll, benefits administration, and more. Companies will need to know the required labor laws or risk facing noncompliance penalties from local tax authorities. You will also be responsible for withholding the appropriate amount of taxes from each employee.
Setting up your local entity is expensive and can take a lot of time to fulfill all the requirements.
Engage a Legal Employer of Record
Companies who want to hire in the UK can also partner with an employer of record. An employer of record acts as your local entity in the area you want to hire from and can handle complicated processes such as administering payment to your staff and deducting the required amounts of tax.
An employer of record in the UK has expertise in the local labor laws and can help you remain compliant through all stages of the hiring process.
Why Borderless?
Borderless is an employer of record that can help connect you with top talent from almost anywhere in the world and guide you through the hiring process. This ensures that you follow the rules and regulations throughout each step. Book a demo today to see how we can help you hire skilled workers from over 170 countries around the world.
Disclaimer
Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
