Understanding payroll compliance: what every business needs to know
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As businesses everywhere adapt to digitisation, automation, and technological advancement, a core facet of their operations and stability has arguably not changed much.
Payroll – and by extension, payroll compliance – remains a fundamental principle of business, and for many, navigating UK government and HM Revenue and Customs (HMRC) regulations is an obligatory, tick-box exercise.
Achieving stable and reliable payroll processes and staying compliant with UK employment laws is a vital aspect of maintaining a healthy and productive workforce. This, you can argue, is pivotal to a business trying to scale in this tech-led economy.
As the UK government regularly reviews and amends tax laws, employment regulations, protections, and other relevant legislation, keeping on top of updates is vital. Payroll regulations must be adjusted to align with new legal requirements, economic conditions, societal needs, and other changing factors.
This article gives you all you need to know regarding payroll compliance and how, with the help of automation and innovative tech, you can unlock even more potential for your business to grow in a tough economic time.
The foundations of payroll compliance
Payroll compliance essentially involves adhering to all relevant laws and regulations concerning employee pay, tax obligations, and pensions. In the UK, this primarily revolves around the Pay As You Earn (PAYE) system, overseen by HMRC.
Think of payroll compliance as a crucial business component that proves to the government that it’s meeting its legal requirements. Much like how a RICS Homebuyers Survey ensures a UK property meets its legal criteria and minimum structural standards before it’s sold, payroll regulation compliance confirms that your business meets all relevant, necessary financial and legal requirements in paying your employees.
Key payroll acronyms and concepts
To navigate payroll compliance effectively, firstly, it’s important to understand these vital key terms which will crop up regularly whether you deal with payroll in-house or outsource to a third-party provider.
- HMRC (Her Majesty’s Revenue and Customs): The UK’s tax authority responsible for enforcing payroll, along with tax and employment regulations.
- PAYE (Pay As You Earn): The system used to collect Income Tax and National Insurance (NI) from employees’ salaries. A typical cycle of PAYE runs from the 6th of one month to the 5th of the following month.
- RTI (Real Time Information): The method by which employers report up-to-date payroll, tax and NI information to HMRC in real-time.
- NIC (National Insurance Contributions): Taxes paid in the UK by employees, employers, and the self-employed to support various government benefits. Determined based on age, earnings, and employment status.
- FPS (Full Payment Submission): An employer-submitted report submitted to HMRC detailing payments and deductions made to employees.
- EPS (Employer Payment Summary): A report which lists deductions which are taken from the FPS data, including NIC holiday and statutory payments.
- SSP (Statutory Sick Pay): The minimum amount employers must pay eligible employees who are off work due to illness.
- EAS (Employee Alignment Submission): Used by large employers to align employee data with HMRC.
Understanding tax brackets
Tax years run from the 6th of April in one year to the 5th of April the next. Each year, the rates of income tax can change, as can the various limits and allowances that reduce the amount collected by HMRC.
For the 2024/2025 tax year, the main brackets of income tax (excluding Scotland) are:
- Personal Allowance: Up to £12,570 (0%)
- Basic Rate: £12,571 to £50,270 (20%)
- Higher Rate: £50,271 to £125,140 (40%)
- Additional Rate: Over £125,140 (45%)
There are different tax rates for dividend income, personal savings allowance, Capital Gains Tax (CGT) allowance, ISAs, pensions, and inheritance tax. However, as a starting point, the above income tax rates are all you need to know concerning payroll. Employers must apply the correct tax code for each employee to ensure accurate deductions.
National Minimum Wage (NMW) and National Living Wage (NLW)
Employers have a responsibility to stay on top of the NMW and NLW rates, ensuring that their employees are compensated the correct amount. The NLW has increased following pressure on the former Chancellor, who articulated plans in his Autumn Statement in 2023.
As of April 2024, the rates are as follows for NMW and NLW:
- 21 and over: £11.44 per hour (NLW)
- 18-20: £8.60 per hour
- Under 18: £6.40 per hour
- Apprentice: £6.40 per hour
These rates are subject to annual review and change.
Penalties for payroll non-compliance
HMRC issues penalties when an employer has not done something that they should have with their PAYE system.
Under RTI, most employers must submit information electronically to HMRC every time an employee is paid. But sometimes errors can occur, for example:
- Sending employee information late (or not at all): After a brief grace period to correct filings after the deadline, a minimum penalty of £100 is applied per month if failures continue, plus additional tax-geared penalties for delays exceeding 3 months.
- Paying PAYE taxes and NICs late: Interest and penalties are applied when employers are late in making PAYE tax and class 1/1A/1B NIC payments in a given tax year. The amount will depend on the number of defaults, and additional percentages will be added to outstanding payments of more than 6 or 12 months.
- Sending incorrect employee information: HMRC issues penalties for deliberate or careless errors in pay and tax submissions, depending on the severity and method of disclosure. HMRC does recognise that mistakes can happen and will give employers the benefit of the doubt, invariably.
HMRC can also charge penalties for failing to keep proper records and for filing inaccurate returns. Of course, it’s recommended to keep fully up-to-date on HMRC’s official guidance concerning penalties, returns and appeals.
Staying on top of payroll compliance
Employers are obliged to keep on top of all relevant tax and income regulations in the UK, otherwise, they run the risk of not just financial penalties but tax investigations and disciplinary or legal action. Some employers entrust a full-service accountancy, bookkeeping, and payroll provider to oversee all of this for them, which is understandable, but others prefer to keep this process in-house.
If you fall into the latter bracket, remember the following key steps to make payroll compliance easier:
- Maintain detailed payroll records, including transactions, wages, deductions, and benefits.
- Stay up-to-date on all relevant tax laws and regulation changes.
- Utilise reliable, enterprise-grade payroll software that can handle RTI submissions and automatic calculations, reducing the risk of human error.
- Regularly audit your payroll processes to identify any issues and rectify them as much as possible.
- Seek professional advice for complex payroll situations from trusted, reputable tax advisors and accountants to ensure compliance.
The role of automation in payroll compliance
The UK tax system is fairly confusing and overwhelming for some employers, which is why entrusting a third-party accounting and bookkeeping firm is often their go-to solution. However, leveraging automation and advanced payroll systems can also be a cost-effective option which gives them plenty of control and oversight.
These systems can do the following (but not limited to):
- Automatically calculate NICs and tax deductions based on employer role and category
- Generate and submit RTI reports to HMRC by specified deadlines
- Ensure accurate and timely employee compensation within specific tax years
- Track employee absences and SSP contributions
Document management is also crucial for payroll compliance, with solutions capable of storing and managing employment contracts, tax forms, payslips, performance reviews, and more. eSignatures (electronic signatures) like Signable’s best-in-class solution can play a vital role in both of these tech-led solutions, allowing for the secure signing and storage of digital documents and tax forms, ensuring their validity and integrity.
Payroll compliance isn’t explicitly about avoiding penalties; it’s about maintaining the financial integrity of your business. Achieving and maintaining payroll compliance may seem complex, but it’s crucial for running a successful and profitable business that prospective employees want to come to work in.
Prioritising compliance and embracing the processes outlined above can help you streamline the process, ensuring you meet your legal obligations and building a foundation for long-term business success and employee satisfaction.
Stay compliant with Signable
Ensure your business stays compliant with UK payroll regulations while streamlining your processes. With Signable’s eSignature solution, you can securely manage and sign all necessary documents, from tax forms to employment contracts, helping you maintain financial integrity and avoid costly penalties.
Sign up for a 14-day free trial today and discover how Signable can simplify your payroll compliance, giving you more time to focus on growing your business. Don’t miss out on this opportunity to make compliance effortless!
Dakota Murphey
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