Payroll compliance describes the requirement for businesses to meet certain payroll regulations, as stated by the UK government department HM Revenues & Customs (HMRC). It’s an important feature of running a company in the UK, so that employees receive the protections they’re entitled to, and companies meet their legal obligations

The UK government periodically reviews and amends tax laws, employment regulations and other relevant legislation. These updates are crucial to keep up with shifting economic conditions, to meet societal needs, to close loopholes and promote fairness and equality. As a result, payroll regulations must be also adjusted to align with the changing legal requirements. Here are the payroll compliance changes happening in 2023.

Autumn Statement Summary November 2023

Chancellor of the Exchequer Jeremy Hunt presented his Autumn Statement 22nd November 2023. The HM Treasury Autumn Statement 2023 document can be found here. Consult our summary of key points that affect PAYE and UK Payroll.

National minimum wage and national living wage increase

To maintain fair pay for workers, the UK government regularly reviews and adjusts the National Minimum Wage (NMW) and National Living Wage (NLW). From April 2023, the NLW became:

  • £10.42 per hour for those aged 23+
  • £10.18 for 21 - 22
  • £7.49 for 18 - 20
  • £5.28 for 16 - 17
  • £5.28 for apprentices in their first year
  • The London living wage was set at £11.95

New weekly Statutory Payment rates for 2023/24

  • Statutory Sick Pay (SSP) became £109.40 (previously £99.35)
  • Statutory Maternity, Paternity, Parental, Adoption and Bereavement Leave Pay became £172.48 (previously £156.66)
  • The weekly rate of statutory paternity pay (SPP) will be £172.48 (previously £156.66)

Real-Time information (RTI)

HMRC announced the BACS Hash is no longer required to be submitted from 2023/24. Unfortunately, this decision was made too late to remove it entirely from the 2023-24 RTI FPS and any supplied values will not be processed.

Payroll tax compliance

Payroll tax compliance in the UK contributes to a fair and functioning tax system while supporting the wellbeing of businesses and their employees. Here we outline the key steps a company must take to be payroll compliant, from the basics onwards.

  • Register as an employer if you hire one or more employee
  • Set up a strong payroll system
  • Determine the employment status of workers
  • Deduct and report taxes
  • Ensure payroll compliance
  • Maintain accurate records
  • Submit real-time information (RTI) reports
  • Stay informed of legislative changes

UK Employment Rights Act

The UK’s Employment Rights Act is a crucial piece of legislation that governs the rights of employees in the workplace. Established in 1996, the act provides a comprehensive framework, setting out the obligations and responsibilities of employers and employees.

The Employment Rights Act covers employee protection, contracts, the minimum wage, protection against unfair dismissal, redundancy rights, family-friendly policies and the employment tribunal system.

Within each of these areas, the act outlines the standards that employers need to abide by to fulfil employee rights. For instance, when it comes to protection against unfair dismissal, the Employment Rights Act sets out the conditions under which dismissal may be considered fair, such as misconduct, poor performance, redundancy, or statutory restrictions. It also establishes the rights of employees to claim compensation or challenge unfair dismissals through employment tribunals.

The cost of non-compliance

At the end of June 2023, the Department for Business and Trade (DBT) published round 19 for failing to pay the minimum wage.

HMRC reported that 202 companies including big high street brands to small organisations and sole traders had broken the law by leaving approximately 63,000 workers short on pay.

The UK government report stated how the businesses paid a combined £7 million in penalties, along with around £5 million in arrears.

Outsourcing payroll to a specialist software company can help companies to meet their legal requirements and avoid penalties, by automating many of the necessary processes, building in compliance and integrating with HMRC systems.

Common payroll compliance mistakes in the UK

Avoiding common payroll compliance mistakes is crucial for businesses in the UK to treat their employees fairly, and to avoid fines and penalties. Here are the most common mistakes being made.

Misclassification of workers
Misclassifying employees as self-employed or contractors can lead to errors in tax deductions, National Insurance contributions, and other employment benefits, resulting in non-compliance with employment laws.

Inaccurate tax calculation
Errors in calculating income tax, National Insurance contributions, and other statutory deductions can result in underpayment or overpayment, leading to potential penalties and financial discrepancies.

Late or incomplete reporting
Failing to submit accurate and timely payroll reports to HM Revenue and Customs (HMRC) is another common mistake. This includes Real-Time Information (RTI) reporting, which requires employers to report payroll information on or before the date of payment. Late or incomplete reporting can result in penalties and may trigger HMRC investigations.

Insufficient record keeping
Failure to maintain accurate records of employee earnings, tax deductions, and other payroll-related information can make it difficult to demonstrate compliance during audits or investigations.

Non-compliance with minimum wage regulations
Employers must ensure that they pay their employees at least the National Minimum Wage (NMW) or the National Living Wage (NLW) if applicable. Incorrect wage calculations or failure to adjust wages according to legal requirements can result in penalties and legal repercussions.

Incomplete or inaccurate pensions auto-enrolment
Auto-enrolment into workplace pensions is a legal requirement for eligible employees in the UK. Failing to implement and administer auto-enrolment correctly, including inadequate contributions or omitting eligible employees, can lead to non-compliance with pensions regulations.

Lack of awareness of legislative changes
Employment laws often evolve, with new regulations introduced, requiring businesses to adapt their payroll processes accordingly. Failure to stay informed can lead to non-compliance and potential penalties.

Poor integration of payroll systems
Using outdated or inefficient payroll systems that lack integration with those of HMRC can result in errors and non-compliance. It’s important to invest in robust payroll software that enables accurate calculations, timely reporting, and seamless integration with regulatory systems.

How to avoid payroll compliance mistakes

Payroll software can be instrumental in avoiding payroll compliance mistakes. Firstly, reputable payroll software is designed to automate calculations, reducing the risk of human errors in tax calculations, deductions, and other payroll-related calculations.

Additionally, this software is often designed to integrate with HMRC’s systems, enabling seamless and accurate reporting, including Real-Time Information (RTI) submissions. By automating these processes, the software helps ensure timely and complete reporting, minimising the risk of penalties for late or inaccurate submissions.

Built-in compliance checks and updates are often included in payroll software, keeping businesses informed of changes in employment legislation and payroll regulations. This proactive approach helps organisations stay compliant with evolving requirements. By streamlining processes, reducing errors, and providing compliant features, payroll software can significantly contribute to meeting payroll compliance rules, avoiding penalties, and upholding employee rights. 

This note contains guidance only and is not a substitute for obtaining legal or tax advice on the specific situation.