Payroll compliance guide

Understanding and staying on top of payroll compliance, as set out by HM Revenues & Customs (HMRC), is an important task for anyone managing payroll. Payroll non-compliance can occur in several key areas and the consequences of getting it wrong can be severe for businesses, ranging from penalties to damaged relations with employees.   

In addition, because the government and HMRC regularly review and change employee laws and tax regulations, payroll professionals must stay on top of any changes. This adds a further layer of complexity to an already demanding and responsible position.  

Please keep reading for everything you need to understand about payroll compliance as of January 2024.

 

Key areas of compliance

Payroll is a big responsibility, there is no escaping that fact. There are a lot of deadlines to remember and calculations to make, and you ultimately hold responsibility for employees paying their bills on time, in your hands. There is also the responsibility of ensuring Income Tax and National Insurance contributions are sent to HMRC. 

Compliance ensures the payroll department, the business, and employees are all protected, plus everyone gets their money on time. 

The key areas of payroll compliance that must be considered are: 

• HMRC submissions and deadlines 
• Ensuring employee personal details are correct 
• Ensuring employees are paid correctly 
• Monitoring the accuracy of your payroll 

 

The consequences of non-compliance 

The most obvious reason for getting payroll right is that hard-working employees need to be compensated for the work they have done. Timely and accurate paydays are an important part of employee engagement and retention strategies; research suggests more than half of employees would lose trust in their employer if they were paid incorrectly even once. Based on this statistic any action to improve employee engagement should first and foremost involve the payroll team.

Penalties are a serious matter – HMRC doesn’t play around when it comes to enforcing employment taxes. Employment taxes cover a broad range of obligations employers must meet, including paying employees the National Living Wage - not technically a tax but punishments for non-compliance are administered by HMRC. 

Penalties are usually issued for mistakes such as not submitting reports on time, or failing to submit P11D information. Penalties are varied but range from £300 for late submission of FPSs (50 – 249 employees) to £20,000 per worker for failing to pay employees the National Living Wage. 

When you consider how often mistakes are made during payroll, financial penalties can soon add up and have a negative impact on businesses. It doesn’t pay to be careless when it comes to payroll! 

 

General/Basic Payroll Compliance

Starting with the basics, your business should register for PAYE (Pay As You Earn) to enable you to report payroll information. Once registered you will receive a PAYE reference and Accounts Office reference number. 

You will also need to gather accurate personal details from each employee such as their name, address, bank details, and National Insurance Number. This isn’t a one-time task either, you need to keep on top of maintaining accurate personal records for all employees, updating records whenever an employee reports any changes in their circumstances. 

Tasks like this are made much easier if your payroll solution is linked to your HR software. Using an HR solution, employees can enter their personal details, and update them when necessary. Having integrated HR and payroll solutions can save the payroll department a lot of manual work when it comes to maintaining employee details. 

Each employee needs a tax code for payroll reporting and to ensure they are taxed the correct amount each month. To get the correct tax code you should check an employee's P45, if you’re struggling, you can contact HMRC to confirm a tax code. You will need access to employee personal details to figure out their tax code which is why your first stop should be gathering the information mentioned above. 

At this point, you need to calculate gross pay for each employee, deduct income tax and National Insurance contributions, plus any other deductions including pension payments. This will give you your employee's net pay (take-home pay). 

With everyone's correct details and pay worked out, you need to stick to a routine payment schedule for compensating employees. Payroll cycles vary across businesses in the UK, many choose to pay employees monthly, usually on the last working day of the month.  In the financial year (April to April) that would mean employees are paid 12 times. However, businesses can also pay employees weekly, fortnightly, quarterly, or even annually. 

Whatever pay frequency you adhere to, employees should receive a payslip each payday. Payslips need to show gross pay, deductions, net pay, and a tax code. 

 

Steps For Ensuring Payroll Compliance 

With a better understanding of what getting payroll wrong can cost…here are the steps that can be taken to ensure compliance.

General/basic payroll compliance

Starting with the basics, your business should register for PAYE (Pay As You Earn) to enable you to report payroll information. Once registered you will receive a PAYE reference and Accounts Office reference number. 

You will also need to gather accurate personal details from each employee such as their name, address, bank details, and National Insurance Number. This isn’t a one-time task either, you need to keep on top of maintaining accurate personal records for all employees, updating records whenever an employee reports any changes in their circumstances. 

Tasks like this are made much easier if your payroll solution is linked to your HR software. Using an HR solution, employees can enter their own personal details, and update them when necessary. Having integrated HR and payroll solutions can save the payroll department a lot of manual work when it comes to maintaining employee details. 

Each employee needs a tax code for payroll reporting and to ensure they are taxed the correct amount each month. To get the correct tax code you should check an employee's P45, if you’re struggling, you can contact HMRC to confirm a tax code. You will need access to employee personal details to figure out their tax code which is why your first stop should be gathering the information mentioned above. 

At this point, you need to calculate gross pay for each employee, deduct income tax and National Insurance contributions, plus any other deductions including pension payments. This will give you your employee's net pay (take-home pay). 

With everyone's correct details and pay worked out, you need to stick to a routine payment schedule for compensating employees. Payroll cycles vary across businesses in the UK, many choose to pay employees monthly, usually on the last working day of the month.  In the financial year (April to April) that would mean employees are paid 12 times. However, businesses can also pay employees weekly, fortnightly, quarterly, or even annually. 

Whatever pay frequency you adhere to, employees should receive a payslip each payday. Payslips need to show gross pay, deductions, net pay, and a tax code. 

Additional payment & deduction considerations

Unfortunately for busy teams processing payroll, there is a lot more to consider than just how much an employee gets paid and how much tax needs to be deducted. There are multiple other considerations and the more employees you have, the more likely there is going to be differences between who has what deducted. 

Pensions

The first consideration is pension payments. Since 2012, all eligible employees need to be automatically enrolled in a pension scheme with employer contributions, employees can choose to opt out of making payments, but this must be done through the pension provider. However, you need to keep on top of pension contributions, who has opted out and enrolment eligibility changes within the workforce. By law, everyone has to be re-enrolled every three years too. 

In summary, payroll need to: 

• Enroll eligible employees into a pension scheme.
• Calculate pension contributions based on qualifying earnings.
• Maintain records of employee contributions.
• Maintain a record of employee opt-ins, opt-outs.
• Communicate pension scheme details to employees.
• Ensure accurate and timely submission of pension data to the pension provider.
• Re-enroll eligible employees who have opted out every three years.
• Communicate re-enrollment details to employees.

National Living Wage 

Every employer must ensure their staff are paid the National Living Wage (NLW) or National Minimum Wage (NMW). Not paying employees the NLW or NMW is a criminal offence so it’s vital that the payroll team keeps track of salary calculations and ensures everyone is being paid correctly. 

Statutory Sick Pay 

Payroll would be easy if everyone was paid the same every month but with large workforces, you’re bound to have people off sick each pay period. People who are sick need to have their salaries adjusted accordingly. Eligible employees are entitled to Statutory Sick Pay (SSP) if they are off sick for more than four days. 

Payroll should: 

• Administer SSP for eligible employees.
• Calculate and pay SSP for up to 28 weeks.
• Keep accurate records of SSP payments and durations.
• Submit SSP information accurately in payroll reports.
• Ensure SSP-related information is kept confidential

Paternity And Maternity Leave 

Don’t forget you will need to pay Statutory Paternity Pay (SPP) and Statutory Maternity Pay (SMP) to eligible employees who take parental leave. It’s down to payroll to: 

• Confirm eligibility of employees for SPP/SMP.
• Calculate and pay SPP/SMP for eligible employees.
• Keep records of SPP/SMP payments and durations.
• Provide employees with information about their SPP/SMP entitlements.
• Stay current on legislative changes to SPP/SMP rates.

Additional Deductions

The above are some of the most common deductions, you may have additional considerations such as student loan repayments that are paid via salaries once a person is earning enough money. Another deduction you may encounter is debt repayments – when a court has ordered you to repay a debt through an employee’s salary. Finally, you may have schemes or programmes that employees contribute to through their salaries. Known as salary sacrifice schemes, these are where employees are deducted set amounts of money from their pre-tax salary in exchange for benefits. 

It's the payroll team's responsibility to ensure additional deductions are taken from salaries, and in the case of student loans and debt deductions, payments go to the correct place. For debt repayments, also known as an ‘attachment to earnings’, payments must be made to the court that ordered the repayment. Student loan repayments are sent to HMRC. 

Payroll should keep accurate records of all deductions, including when the deductions started and ended. 

Additional Payments 

It's not just deductions you need to make to employee salaries, some employees will require additional payments every payday. Additional payments are usually overtime and expenses. You need to ensure these are received from employees before a ‘payroll cut off’ point. To ensure payments are processed promptly each month, communicate clearly with employees the date by which they need to submit expense and overtime forms.

Calculating overtime, expense and travel payments is much easier for payroll if there is an integrated HR solution in place. An automated expense management solution will help ensure employees submit expenses on time and payroll can process payments promptly. 

HMRC reporting requirements

For every pay cycle, you need to report payroll information regularly to HMRC using PAYE, for which you will have already registered. You also use PAYE to pay employee taxes and deductions. This electronic form of reporting is known as Real Time Information (RTI) because the information is reported in, you guessed it - real-time. Through PAYE you need to report each employee's pay and deductions using a reliable payroll software solution. 

There are also two main payroll reports that you need to send each month to HMRC. These are: 

Full Payment Submission (FPS) - An FPS provides HMRC with details about your employee's pay including their personal details, NIN, tax code, and information about Income Tax and National Insurance contributions. It needs to be submitted every payday, on or before the day you pay your employees.

Employer Payment Summary (EPS) -You may also need to submit an Employer Payment Summary each month. This summarises National Insurance contributions and what HMRC expect you to pay. 

Record keeping 

Record keeping is an important part of running a compliant payroll as there are multiple reasons you may need to access data in the future. From audits to forecasting future staffing requirements, you need to be able to recall payroll data easily. Plus…it’s the law! If HMRC need to access your records for any reason and you don’t have them, you could face a penalty of up to £3000.  

You should keep payroll records that show payslips, FPS and EPS submissions, and employee information. You also need to maintain a PAYE register with a record of employee pay and deductions. These should both be retained for at least six years. 

 

Measuring compliance & staying on top of regulations 

With payroll processed the work doesn’t stop there. You need to be able to monitor yourself and have systems in place to ensure mistakes are picked up before they become costly issues. 

The first step to organisation would be building a payroll calendar to ensure you don’t miss a thing. Include employee payday, expenses and overtime deadlines, and HMRC submission and payment. Getting it all down on your calendar will ensure you don’t miss anything.  

It’s also good practice to communicate key dates and payroll changes to employees too. This can be done via email or through department heads. It’s also important employees understand why and how they need to report details of any personal changes to payroll. From salary changes to bank details needing to be updated, don’t let employee detail changes stack up – change them as soon as you are notified. It can be helpful to have policies in place for anything relating to payroll changes so employees have clear guidance to follow. Ensure these are kept in an accessible place, such as your company handbook. 

You should also get into the habit of payroll reconciliation and do this each month. Payroll reconciliation is checking what you plan to pay employees matches your payroll register. Doing this ensures you can pick up any mismatches before payroll is finalised. 

You can also conduct internal payroll audits to ensure everything matches up, and you aren’t underpaying or overpaying wages. You can also use payroll KPIs to monitor mistakes and help identify weaknesses in how you process pay. 

Finally, and to round up this section on how to keep your payroll compliant, you should aim to stay on top of legislation changes. HMRC regulations and employment laws are subject to updates and changes that can have a big impact on those processing payroll, so make sure you are aware of new developments. 

Through HMRC you can subscribe to email updates, and access videos, webinars, and community forums. 

 

Let SD Worx Do It For You 

Having read through the above and wondering how on earth anyone manages to keep up with payroll, you can certainly start to see the benefits of outsourced payroll. 

With a payroll partner like us, there is no worrying about late submissions, updating employee details, or missing payment dates. Your employees get paid the right amount every time, and so does the tax man. 

Don’t hesitate to contact us to discuss how we can help you take the hassle out of payroll with our ISO 27001-certified solution.