Payroll compliance is a critical aspect of running a business in the UK and one that requires a great deal of attention on the part of mindful HR managers. Failing to comply with payroll legislation can result in costly penalties and legal disputes, as well as negative publicity.
The HMRC, which operates as the UK’s tax authority, frequently “names and shames” businesses that fall short of its compliance requirements. So beyond the fines and employee relationship damage involved with non-compliance, it can also harm your company’s reputation, compromising your ability to attract talent.
Unfortunately, even the basics of payroll compliance in the UK can be highly challenging. Doing it right goes beyond simply issuing paychecks on time to include a range of obligations, from accurately calculating income tax and National Insurance contributions to meeting pension auto-enrolment requirements and filing both real-time and year-end reports on time.
For all these reasons, understanding the importance of payroll compliance and learning how to achieve it can save your organization from headaches and financial losses. By staying up to date with the latest regulations and implementing the right strategies to gather, store, and report information, you can safeguard your company’s financial health and foster a positive workplace culture.
Here are three tips to help HR departments of every size to comply with UK payroll legislation.
1. Stay Updated with UK Payroll Legislation
Payroll legislation can be a hassle all over the world, but particularly so in the UK, where requirements are complex and regulations can change relatively often. National Insurance (NI) rates, income tax rates, and other employee taxes and contributions usually change every year, so you need to keep on top of these formulas.
The government also changes minimum wage amounts every year, on April 1st. National Minimum Wage (NMW) laws are complicated, since the minimum wage is calculated according to take-home pay and not base pay. Each year’s new announcement could require you to recalculate employees’ compensation amounts.
Although payroll laws themselves don’t change as often as tax rates, they can also be updated or overhauled if the government feels it’s necessary. When this happens, companies only have a limited amount of time to get up to speed and comply with the new requirements. It’s important that you keep up to date with all new regulations, to give yourself as much time as possible to make any changes necessary.
2. Maintain Accurate Employee Data
Employee data is the foundation of payroll compliance, so it’s vital to keep all your records up to date and ensure they cover all the relevant details. You’ll need to keep on top of information like whenever a worker ages into the next pay-bracket for NMW, when their pension contributions change or they become eligible for pension auto-enrolment, and their use of statutory entitlements like sick pay, maternity pay, paid holiday allocations, and more.
It’s also important to track how many hours each employee worked each month, especially for those working on a shift basis or putting in overtime. You’ll also need to record deductions for purposes like buying uniforms, and time spent on activities that are considered “working time”, such as traveling or mandatory training. Otherwise, you might miscalculate take-home pay and fall foul of NMW laws.
Accurate employee data is also crucial for pension compliance. As well as tracking compensation to ensure accurate pension contributions, you’ll need to keep records about each employee who opts out of your workplace pension. Every three years, you’ll have to contact them again to remind them about the option to join your pension scheme.
3. Ensure Timely Filing and Reporting to HMRC
Last but not least, filing and reporting obligations play a major role in payroll compliance. In the UK, businesses have to file real-time information (RTI) about the payments you make to employees, as well as year-end reporting.
RTI has to be submitted on the day before or the day of paying employees. This can create a lot of pressure around payday every month, especially since the information can’t be corrected if you make a mistake. At the end of every tax year, you’ll also need to submit a Full Payment Submission (FPS) and an Employer Payment Summary (EPS). These are important for reconciliation purposes.
On top of that, every company has to make a “declaration of compliance”, stating that you’ve adhered to all relevant pension regulations. This report includes details about how many employees you have, how many have enrolled in your pension scheme, your workplace pension provider, and more. You need to make your first declaration within five months of hiring your first employee, and then within five months of the third anniversary of that date.
UK Payroll Compliance Is Within Your Grasp
Although UK payroll regulations are famously complex, it’s entirely possible for companies of every size to comply with all the requirements. With careful planning to record and update employee data, keep on top of changing rules, and meet reporting times, your business can achieve payroll compliance and avoid penalties and fines.
