Payroll Compliance 101: Here’s Everything You Need to Know

In a nutshell, payroll compliance essentially just means adhering to payroll legislation laid out by HMRC (things like payment of wages and taxes).

To be HMRC compliant, you’ll generally need to ensure your payroll is accurate, salary payments are made on time and that your PAYE deductions are error-free.

Keeping your organisation’s payroll compliant doesn’t necessarily have to be difficult - especially if you’re using a payroll solution like Pento - but any breaches can come with fairly hefty fines.

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Non-compliance penalties can add up

Depending on the size of your organisation, payroll-related fines can range from a few hundred to millions of pounds…

In 2018, for example, Pizza Hut was fined £12,000 after an HMRC investigation found that they failed to pay the National Minimum Wage to over 2,500 workers.

And in 2016, Tesco was fined an eye-watering £129 million by the Serious Fraud Office (SFO) for accounting irregularities.

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Here are the payroll compliance penalties you’ll want to steer clear of:

Late filing - if you don’t submit your Real Time Information (RTI) - FPS/ EPS on time

If you have up to 9 employees, the penalty starts at £100 for the first missed deadline. For larger employers, the penalty increases depending on the number of employees, ranging from £200 to £400 for subsequent missed deadlines.

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Late payment - if you fail to pay any PAYE to HMRC on time

The penalty amount can vary depending on the length of the delay and the amount of tax owed. For example, if you are one to three months late in paying, the penalty can be 1% of the outstanding amount.

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Inaccurate reporting - if there are any mistakes or inaccuracies in your payroll reports (like employee details, earnings, or payroll deductions)

The penalty is based on a percentage of the tax underpaid, which can range from 15% to 100%, depending on the severity of the inaccuracy.

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Not providing accurate records - you’re required to keep up-to-date payroll records - which the HMRC may request

The penalty amount can be up to £3,000 depending on the number of employees and the duration of non-compliance.

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Note: If you’re a first-time employer: you’ll need to actually register as an employer if you want to avoid being fined.

Before hiring employees, you’ve got to register as an employer with HMRC.

You’ll then be able to get an employer reference number, which you’ll need for payroll operations.

‍You’ll also need to register for the Pay-As-You-Earn (PAYE) system, so you can calculate and deduct income tax and National Insurance contributions from your employees' wages.

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Your payroll compliance checklist: here’s everything you need to know to stay on top of your payroll 

1. The basics: make sure personal data is accurate and up-to-date

Do you have up to date and accurate employee records?

First off, the basic stuff: is all of the data you have on your employees up to date?

As obvious as this sounds, if you’re still manually processing payroll, small but costly details are easily overlooked, especially when you’re overseeing payroll for a larger team.

Since this personal data encompasses so many different factors, we’d strongly recommend updating employee records as-and-when changes occur.

Common changes to employee records include:

• Address changes
• Promotions
• Marriage status
• Salary changes
• Tax code changes
• Sick pay

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Regularly review and reconcile data

To make sure your payroll data is error-free, try scheduling regular reviews to spot any discrepancies or mistakes that might land you in trouble.

You should also reconcile your payroll records with bank statements to make sure everything is accurate.

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Double-check data entries

Before submitting payroll, it's always worth double-checking your data entries - things like hours worked, deductions, employee benefits, and tax withholdings.

Make sure that all calculations are accurate and that you haven't missed any updates or changes.

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🔑 Key takeaway: Update employee records as soon as changes occur and always double-check before finalising your payroll

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2. Create a calendar

 With PAYE and RTI reporting to keep track of, managing payroll can get pretty complicated, pretty quickly.

To avoid missing any deadlines, we’d recommend creating an annual calendar with all of the most important dates.

Other than payday (if you’re new to payroll, this is usually the last working day of the month), here are some of the most critical deadlines you’ll want to add to your calendar…

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22nd (every month)

If you pay electronically, you need to submit your payment of PAYE and NICs to HMRC by this date - or by the 19th if you pay by paper/non-electronically

31st May

By 31st May each year, employers must give a P60 form to every employee and for whom they have submitted an FPS. This includes anyone who was employed by you on 5th April of that tax year.

5th July

This is the deadline if you’re submitting a PAYE settlement agreement (PSA)

6th July

The deadline for Expenses & Benefits Forms P11D and P11D(b). This is also the deadline for giving P9D and P11D forms to relevant employees.

22nd July

PAYE and Class 1 A NIC payment due date if paying by electronic method - or by the 19th if you pay by paper/non-electronically

22nd October

This is the due date if paying for any tax or national insurance owed under a PSA by electronic method - or by the 19th if you pay by paper/non-electronically

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🔑 Key takeaway: Add paydays and HMRC deadlines to your calendar to avoid late submission penalties

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3. Stay on top of payroll legislation

Check directly on the HMRC website

If you want to stay up to date with any changes in legislation, your first port of call should be the HMRC website.

Whilst perhaps not the prettiest source of information, you’ll be able to see any major changes that might affect how you do payroll via their employer bulletins.

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Join a community

If you’re looking for a less manual way to keep up with legislation, you can also join specialist communities and forums. 

Here are a few popular UK payroll communities: 

1. The Chartered Institute of Payroll Professionals (CIPP) Community: The CIPP offers a dedicated online community for payroll professionals, with discussion forums, blogs, events, and industry updates.
2. The Payroll Centre Community: The Payroll Centre provides payroll training and resources as well as a community section where you can connect with other payroll professionals.
3. LinkedIn Groups such as “UK Specific Payroll” and “Payroll Forum UK”
4. UK Business Forums - UK Business Forums has a dedicated payroll section, where payroll professionals can interact, seek advice, and share insights.

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Use payroll software

If you’re using reputable payroll software (we’ll break down how Pento takes care of your payroll compliance at the bottom of this article👇), things like legislation and tax rate changes and reporting requirements will be automatically applied to your payroll to ensure you’re always fully compliant.

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🔑 Key takeaway: Payroll legislation changes a lot… so be sure to monitor HMRC’s website and join online communities to stay up to date with payroll legislation changes if you’re not using any automation software.

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4. Know your way around workplace pensions

No matter how big or small your business is, all employers have a duty to enrol eligible employees into a pension scheme introduced in 2012.

This basically just means that you need to offer your employees the opportunity to pay into a pension which you, as an employer, will also contribute towards.

Automatic enrolment was introduced to help people save for retirement. Employers must offer a workplace pension scheme to their staff, and automatically enrol anyone who meets certain criteria.

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Assess your workforce to determine who is eligible

You’ll firstly need to determine which employees are eligible for auto-enrolment. Assess their age, earnings, and employment status to identify who must be automatically enrolled into a workplace pension scheme.

When it comes to auto enrolment, most employees will fall into one of the following three categories:

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Eligible Jobholders

Employees who are between 22 and state pension age and earn over £10,000 per year. Eligible jobholders can opt out of the pension scheme once they have been automatically enrolled. They have a 1 month window in which to opt out if they want their pension contributions refunded

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Non Eligible Jobholders

Employees aged between 16-21 or State Pension Age and 74, who earn over £10000 per year, or are between 16 and 74 and earn over £6240 per year but under £10000.

Entitled Workers

Employees earning below £6240 a year and are aged between 16 and 74. Entitled workers have a right to join the scheme, but you don’t have to make a contribution (although most employers generally do).

Familiarise yourself with the minimum contribution levels

Qualifying earnings basis: The minimum employer pension contribution is a set percentage of an employee's qualifying earnings. These qualifying earnings are a specific portion of an employee's earnings (including things like their salary, wages, commission, and bonuses).

The minimum employer contribution is 3% of an employee's qualifying earnings.

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Total minimum contributions: In addition to the employer contribution, there is also a minimum total contribution that includes both the employer and employee contributions.

The minimum total contribution is 8% of an employee's qualifying earnings, with you, the employer contributing at least 3% and the employee contributing the remaining 5%

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*The numbers above are for banded earnings pension schemes - other types of auto enrollment schemes may have different minimum contribution rates.

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Choose a qualifying pension scheme

When choosing a pension provider, you’ll need to pick a qualifying pension scheme that meets the requirements set by the Pensions Regulator.

Whatever scheme you go for, it needs to be registered with HM Revenue and Customs and provide a default investment option for employees who do not make an active choice.

Not sure where to start? Here are a few of the most popular schemes:

• National Employment Savings Trust (NEST)
• The People's Pension
• Smart Pension
• Aviva Workplace Pension
• Royal London
• Standard Life

*These are just some of the most commonly used providers, we’d always recommend seeking professional advice when it comes to choosing a pension scheme.

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Checking opt in and opt out requests

You’ll be required to keep up-to-date records of all opt in/out requests as well as evidence of any communication regarding pensions that you may have with your employees.

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Upload contribution files to pension providers

You’re also expected to calculate and deduct the correct contributions from wages and make your contributions to the pensions scheme.

Contribution file uploads have to be sent over by the 22nd of each month - and can’t be corrected once submitted!

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Don’t forget about re-enrolment

Every three years, you’ll need to re-assess employees who were previously opted out or ceased active membership. You can then re-enrol eligible employees back into the pension scheme and inform them of their rights.

🔑 Key takeaway: make sure eligible employees are enrolled into your pension scheme, keep your records/requests up-to-date and be sure to submit your contribution file by the 22nd of each month!

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5. Make use of audit trails to minimise risk

Audit trails are essentially records of events, procedures and operations that allow you to monitor and verify the accuracy and compliance of your processes.

If HMRC does come knocking, an audit trail will give you all the relevant documentation to prove you‘ve gathered the right personal data for employees, you put them on the correct tax code and that they’re being paid National Minimum Wage etc.

Think of it as an extra layer of safety that allows you to see who changed what and when, so that if you do happen to fall short anywhere you can show exactly what was done and who by.

Note: a routine HMRC audit can happen once every 5 years or so, depending on the industry you’re in.

If you do happen to be subject to an audit, you’ll want to be sure you’ve been doing the following…

Have established audit trail procedures: Develop clear procedures for documenting and tracking changes in your payroll processes - are dates, user identification, nature of changes, and reasons for changes all explicitly recorded?

Processes for data capture and storage : Do you have software or tools in place to collect and store audit trail data? If not you can also use more manual methods like paper-based logs or spreadsheets.

Ensuring data integrity and security: Your audit trail data needs to be kept safe and secure. If you haven’t already, implement access controls, authentication or encryption to protect this data from unauthorised access.

Maintaining documentation: If you are audited, be sure to keep detailed documentation of the audit trail processes, procedures, and findings. Document any actions taken based on the audit trail results. This documentation is crucial for demonstrating compliance and responding to any inquiries that might rear their head.

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🔑 Key takeaway: have all of your audit trail data in order and practise regular reviews so that you can show exactly what changes were made if HMRC conducts an audit.

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6. Double check expenses  

Business expenses can potentially cause problems with payroll compliance… So here's what you’ll need to keep an eye on…

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Are your tax deductions correct?

Expenses claimed by employees need to comply with HMRC regulations for tax deductions.

If business expenses are not properly documented or do not meet the criteria set by HMRC, this could result in you under or overpayment of taxes, leading to compliance issues… which needless to say, is not good for compliance. 

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Make sure you keep receipts

To claim expenses, employees will generally need to provide receipts of some kind. Without these, you’ll have trouble verifying the legitimacy of expenses during audits or compliance reviews.

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Have a process for approval and authorisation

Expenses should be properly approved and authorised before being reimbursed.

Lack of proper approval processes can result in unauthorised or excessive expenses being paid, which can lead to compliance issues.

So, be sure to implement a clear approval workflow and keep authorisation records to keep your organisation compliant.

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Don’t drop the ball on expense reporting and record keeping

Accurate recording and reporting of expenses are absolutely vital for payroll compliance.

If expenses are not promptly recorded or maintained, it’ll become pretty challenging to reconcile payroll data and ensure compliance during audits or reviews.

We’d strongly recommend setting up a proper process for expense management or managing it using payroll software like Pento.

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🔑 Key takeaway: Expenses can get messy, so make sure you have clear processes and policies in place and that all expenses are properly recorded.

Want to take the stress out of payroll? Here’s how Pento handles payroll compliance

We know that keeping on top of payroll compliance requires serious manual legwork…

This is why we built Pento - a payroll management solution that provides automation and payroll expertise to help remove human error and tedious admin work.

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Automated compliance calculations

Pento automates payroll calculations, so you can be sure all records are accurate and compliant across wages, taxes, and deductions. We’ll adjust for all the latest tax rates, employment regulations, and statutory requirements.

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Real-time compliance monitoring

We’ll provide real-time compliance monitoring by flagging potential issues and errors as they occur.

Pento performs extensive validations and checks on payroll data to identify discrepancies, inconsistencies, or violations of legal requirements so you can quickly address any potential risks.

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Regulatory updates and compliance reporting

Want to take the hassle out of payroll compliance? We’ll keep you up to speed with any regulatory changes and updates relevant to you… whether it be the latest tax laws, employment regulations or reporting requirements.

Pento will generate accurate compliance reports, such as RTI filings, P60s, and other statutory reports, so you never miss a deadline.