How do UK and Canadian Payroll Taxes Work?
Previously, we’ve covered the similar holidays the UK and Canada celebrate as well as how each country handles paid vacations for full-time employees. In today’s blog, we will be comparing the payroll taxes in the UK and Canada.
But first, what exactly are payroll taxes? Payroll taxes are calculated as a percentage of the salaries employers pay their employees. They can be deductions from the employee’s wages or taxes paid by the employer calculated based on the wages of their employees. Is it the same as an income tax? Think of income taxes as a part of payroll taxes which are also deductions employers withhold out of each employees’ paycheque.
Canada Payroll Taxes
If you’re a Canadian employer, you must deduct income tax on every paycheque. Income tax is composed of federal, provincial, and territorial income taxes based on the province and territories where your employees are paid. Keep in mind that income taxes have no age limits and do not require employer contribution.
The federal tax rate is increases based on income:
|Annual Taxable Income ($) from – to||Federal Tax Rate|
|0.00 to $50,197||15%|
|$50,197 up to $100,392||20.5%|
|$100,392 up to $155,625||26%|
|over $155,625 up to $221,708||29.38%|
In contrast, provincial and territorial taxes vary. When selecting which tax table to use, you have to determine the province or territory of employment of your remote Canadian workers. This depends on whether or not you require the employee to report for work at your place of business.
On top of deducting the income taxes, Canadian employers must also withhold from the employees’ paycheque and contribute to Canada Pension Plan (CPP) contributions and Employment Insurance premiums if your employees are between the ages of 18 to 70. Additionally, if you’re operating in Quebec, you must also withhold for the Quebec Pension Plan (QPP). To calculate the deductions for CPP contributions, EI premiums, and amount of federal, provincial (not Quebec), and territorial income taxes, check out the CRA’s Payroll Deductions Tables.
For more details or any general information, please refer to this page on the Canada Revenue Agency (CRA) website.
UK Payroll Taxes
If you’re an employer in the UK, you must operate with PAYE (Pay as you Earn) as part of your payroll. It’s a system used by HM Revenue and Customs (HMRC) for the collection of Income Taxes and National Insurance from employment. As an employer, you need to remember that the PAYE is paid by the employee through a deduction from their payroll.
Now, you may be wondering how much should you deduct per employee every payroll? The amounts you deduct (employees pay) depend on their Tax code which is calculated based on the amount of income they earn, personal allowance, and how much tax they’ve already paid in the year. Every employee has a personal tax-free allowance of up to £12,500. The tax rates that follow depend on their employee salary, ranging from 0 to 45%.
If the employee’s earnings are between:
- £12,501 – £50,000 the tax is 20%
- £50,001 – £150,000 the tax is 40%
- Over £150,000 the tax is 45%
If you’ve employed students as employees, you must also deduct any student loan repayments from their payroll. According to the UK government’s website, student employees repay an amount based on their plan:
- Plan 1: 9% of their income above £19,390 a year
- Plan 2: 9% of their income above £26,575 a year
- Post Graduate Loans: 6% of their income above £21,000 a year
The UK also has National Insurance, a tax system paid by both the workers and their employers. Employers pay National Insurance on all earnings above £702.00 every month at a rate of 13.8%. While employees only pay, through payroll deduction, if they earn more than £702.00 per month.
But what about pensions? In the UK, pensions are deducted from employee payroll, but employers also make contributions into a workplace pension scheme. Employers must enroll for all employees who are between the ages of 22 and the State Pension age, earning at least £10,000 a year, and normally working in the UK (including those who travel abroad for work but are based in the UK).
Payroll taxes can easily get confusing – that’s why we’re here!