What Is Payroll Compliance In UK – Complete Guide For Employers

Payroll compliance is one of the most important responsibilities for any UK employer. When done correctly, it keeps your staff paid on time, ensures your business follows the law, and helps you avoid penalties from HMRC. This guide explains everything you need to know in simple, clear terms so you can run payroll with confidence.

What is payroll compliance?

Payroll compliance means meeting all the legal rules that apply when paying employees. This includes calculating tax and National Insurance correctly, submitting Real Time Information to HMRC, paying the right wage rates, keeping full records, and following workplace pension rules. Any employer who pays staff has payroll duties, even if they only have one employee.

Why payroll compliance is important?

Good payroll compliance protects both your business and your employees. If you get things wrong, HMRC can issue penalties, charge interest, or carry out a review of your records. Mistakes can also cause frustration for staff and damage trust in your business. Staying compliant helps you run things smoothly, avoid extra costs, and keep your team happy.

Obligations of an employer

As an employer, you need to:

• Register as an employer with HMRC
• Set up and run PAYE
• Calculate and deduct Income Tax and NI
• Report payroll information to HMRC on time
• Pay your staff correctly and on schedule
• Keep detailed payroll records for at least three years
• Follow holiday pay and minimum wage rules
• Meet workplace pension duties
• Provide payslips and P60s
• Submit year end information
• Pay HMRC what you owe

These duties apply whether payroll is run weekly, fortnightly, four weekly, or monthly.

Understanding the PAYE system

What is PAYE?

PAYE stands for Pay As You Earn. It is the system HMRC uses to collect Income Tax and National Insurance Contributions from employees. Employers deduct the right amounts from each employee’s pay and send the money to HMRC.

How PAYE works

PAYE works by applying a tax code to each employee. The tax code tells you how much tax-free income they can have before tax is deducted. PAYE also includes National Insurance, student loan repayments, pension contributions, and other deductions. Most calculations are done through payroll software, but it is still important to understand what is happening behind the scenes.

Monthly tasks in the PAYE cycle

Every pay period, employers must:

• Run payroll
• Calculate employee pay and deductions
• Provide payslips
• Submit a Full Payment Submission to HMRC
• Pay employees
• Pay HMRC what is owed by the 22nd of the next month if paying electronically

These steps repeat every month or each time you run payroll.

Year end reporting

At the end of the tax year, you need to:

• Run the final payroll of the year
• Submit your final FPS or EPS
• Provide P60 forms to all employees who worked for you on the last day of the tax year
• Prepare P11D forms for any benefits in kind
• Review tax codes for the new year

Most year end tasks must be completed by 31 May or 6 July, depending on the form.

Core Payroll Processes

Payroll processes are the tasks you must complete each time you run payroll. They include handling tax codes, calculating National Insurance, reporting to HMRC, and applying statutory payments. These steps must be consistent and accurate every pay period. Understanding the core processes helps you stay compliant, avoid mistakes, and maintain smooth payroll operations.

Employee tax codes and their significance

Tax codes tell you how much tax-free earnings an employee can receive in a year. For example, 1257L is the standard code for most people. If the tax code is wrong, the tax deductions will be wrong. Using correct tax codes is one of the most important steps in payroll compliance. HMRC usually sends notice of new tax codes directly to your payroll software.

National Insurance Contributions

National Insurance Contributions, also called NICs, help employees qualify for benefits such as the State Pension. Employers deduct employee NICs and also pay employer NICs. Rates depend on the employment category, earnings, and whether the employee has reached State Pension age.

Real Time Information reporting

Real Time Information, also called RTI, is the system used to report payroll to HMRC. Instead of reporting once a year, employers submit information every time they pay staff.

RTI includes:

• Full Payment Submission
• Employer Payment Summary
• Earlier Year Update
• Employee Alignment Submission

Each type of report serves a different purpose.

Full Payment Submission

An FPS is sent on or before each payday. It shows employee earnings, tax, NICs, and other deductions. It is usually the most common form sent in RTI.

Employer Payment Summary

An EPS is used when adjustments are needed, such as claiming statutory payments, recovering overpayments, or reporting that no employees were paid in a month.

Earlier Year Update

If you need to correct payroll information from a previous tax year, you send an EYU. Some software now uses an FPS instead, but many systems still support EYUs.

Employee Alignment Submission

An EAS is used when HMRC needs to check employee information before RTI starts. It helps match employee records with HMRC’s system.

Statutory payments

Statutory payments include:

• Statutory Sick Pay
• Statutory Maternity Pay
• Statutory Paternity Pay
• Statutory Shared Parental Pay
• Statutory Adoption Pay

You must calculate these according to HMRC rules and pay employees the correct amount. Some payments can be recovered from HMRC depending on your business size.

Payroll exemption, how it works in the UK

Companies with no employees may not need to run payroll. This is called exemption from PAYE. You can ask HMRC for exemption if:

• No one is paid
• Pay is always below the Lower Earnings Limit
• There are no deductions to be made

If anything changes, you must tell HMRC so your PAYE scheme can be reactivated.

Payroll Legislation and Regulatory Updates

Payroll legislation changes often, and employers must keep up with new rules. Updates may affect tax rates, holiday pay, minimum wage, and pension responsibilities. Missing these changes can lead to incorrect payroll calculations and HMRC penalties. Staying informed helps you meet your legal duties and ensures your business remains compliant throughout the tax year.

Monitor for legislative updates

Payroll rules change often. You should check for updates at least once every tax year, and ideally before each new budget. The safest source for updates is the UK government website, for example:
https://www.gov.uk/paye-for-employers

Changes to Holiday Pay for Irregular Hours Workers and Part Year Workers

There have been changes to how holiday pay is calculated for workers with variable hours or seasonal work patterns. The new approach allows rolled up holiday pay and a simpler calculation method for irregular roles. It is important to follow the updated rules to avoid underpaying holiday entitlement.

National Minimum Wage regulations

Every year, the minimum wage rates change in April. You must ensure no employee is paid below their correct rate. Rates depend on age and whether the employee is an apprentice. HMRC can issue heavy penalties for minimum wage breaches.

Devolved nations tax rates and thresholds

Income tax is different in Scotland and Wales. The tax codes begin with S or C to show this. If you have employees living in different nations, you must apply the right tax rates and thresholds.

The Employment Allocation of Tips Act 2023

This law sets out rules for how tips must be shared and recorded. Employers must pass tips to workers fairly and keep records for at least three years. If your business receives tips, you need a clear and fair process.

UK Employment Rights Act

This Act sets the rules on contracts, pay, working conditions, and employee rights. Payroll teams must understand areas like holiday pay, notice periods, and deductions to stay compliant.

Spring and Autumn Budget updates

The UK government announces tax changes twice a year, in the Spring Budget and Autumn Statement. These can affect tax codes, thresholds, NIC rates, and allowances. Payroll teams should check the details as soon as they are released.

Taking ‘reasonable care’

HMRC expects employers to take reasonable care when running payroll. This means using accurate information, keeping records, correcting mistakes, and following guidance. If you can show you took reasonable care, penalties may be lower.

Common Payroll Compliance Mistakes to Avoid

Even small errors can lead to compliance problems. Many businesses struggle with late filings, wrong tax codes, or poor record keeping. These issues can cause penalties, unhappy employees, and extra admin work. Understanding the most common mistakes helps you put the right checks in place and avoid costly problems.

Outdated records

Using old or incomplete records can cause errors in tax and NI deductions. Always make sure employee information is up to date.

Late filings or late payments

Submitting FPS reports late or paying HMRC after the deadline can lead to penalties. Set reminders so you never miss a deadline.

Incorrect or inaccurate tax calculations

Wrong tax codes or outdated settings in payroll software can lead to incorrect deductions. Always double check calculations, especially after a new tax year.

Inaccurate reporting

Errors in RTI reports can cause problems for both HMRC and employees. Make sure data is accurate before sending submissions.

Insufficient or inaccurate record keeping

HMRC expects employers to keep payroll records for at least three years. Good records make audits easier and help resolve queries.

Misclassification of workers

Treating someone as self employed when they should be an employee can lead to penalties. Always check employment status carefully.

Non compliance with minimum wage regulations

Paying below minimum wage, even by accident, is a serious breach. This can happen if you do not track working hours correctly or make deductions that reduce pay below the minimum.

Incomplete or inaccurate pensions auto enrolment

You must enroll eligible employees and pay the correct contributions. Missing this requirement can lead to fines from The Pensions Regulator.

Lack of awareness of legislative changes

Payroll rules change every year. Not keeping up to date can cause errors and penalties.

Poor integration of payroll systems

When payroll software does not match other systems like HR or time tracking, errors can occur. Good integration reduces mistakes.

Dated practices

Using manual spreadsheets or outdated software increases the risk of errors. Modern payroll software helps reduce mistakes and improves accuracy.

Not providing accurate records

Employees have the right to payslips and year end documents. Missing or incorrect documents can cause issues and complaints.

Workplace Pensions and Auto Enrolment

All UK employers must follow workplace pension rules and auto enrol eligible staff. This includes assessing employees, enrolling them in a qualifying pension scheme, and making the correct contributions every pay period. Pension duties are a key part of payroll compliance, and failing to follow them can lead to enforcement action from The Pensions Regulator.

Understanding workplace pensions

Workplace pensions are a legal requirement for most employers. You must assess your workforce, enrol eligible employees, and make contributions. This is called auto enrolment.

Assess your workforce for eligibility

You must check each employee’s age and earnings to decide if they must be enrolled.

Eligible jobholders

Employees aged 22 to State Pension age who earn at least £10,000 a year must be auto enrolled.

Non eligible jobholders

Employees who earn less than the threshold or are outside the age range can ask to join and you must contribute.

Entitled workers

Employees who earn below a lower limit can join, but you do not have to contribute.

Minimum contribution levels

Qualifying earnings basis

Contributions are based on earnings between set lower and upper limits. These limits change yearly.

Total minimum contributions

The current total minimum contribution is 8 percent. This includes both employer and employee contributions. Employers must pay at least 3 percent.

Choose a qualifying pension scheme

You must choose a scheme that meets legal requirements. Many employers use a standard pension provider that supports auto enrolment.

Check opt in and opt out requests

Employees can opt out within a set period. You must stop contributions if they opt out and refund any contributions made in that window.

Upload contribution files to pension providers

Each pay period, you must send pension information to your provider and ensure contributions are paid on time.

Re enrolment duties

Every three years, you must re-enroll eligible employees who previously opted out. This is a legal requirement.

Payroll Compliance Checklist for UK Businesses

A clear checklist helps you manage payroll tasks and stay compliant throughout the year. It sets out what to check, when to check it, and how to keep your records accurate. Businesses that follow a structured checklist reduce the risk of errors, missed deadlines, and HMRC penalties.

The basics

Regularly review and reconcile data

Check payroll data against HR records, timesheets, and previous payroll runs. Reconciliation helps you catch mistakes early, such as incorrect hours, wrong tax codes, or missing starters and leavers.

Double check data entries

Simple typing mistakes can cause big problems. Always review employee names, NI numbers, pay rates, and deductions. Even one incorrect digit can create reporting issues with HMRC.

Create a payroll calendar

A payroll calendar helps you track all payroll tasks, including:

• Payday dates
• Deadlines for FPS and EPS submissions
• HMRC payment due dates
• Pension contribution deadlines
• Re enrolment dates
• Holiday periods when staff might be unavailable
• Year end reporting dates

Keeping a clear calendar reduces the risk of missing anything important.

Stay on top of payroll legislation

Payroll laws change every year. You should check for updates regularly so you stay compliant.

Check directly on HMRC

The safest and most accurate place for updates is the UK government website. You can check payroll updates here:
https://www.gov.uk/paye-for-employers

Join a community

Local business groups and professional forums often share timely updates about tax, payroll, and workplace laws. Being part of a community helps you stay aware of changes that affect your business.

Use payroll software

Most modern software updates tax codes, NIC thresholds, and minimum wage rates automatically. This reduces the risk of using outdated rules.

Make use of audit trails to minimise risk

Audit trails track who made changes, when they were made, and what was changed. They help identify errors, support HMRC reviews, and protect against fraud.

Double check expenses

Expenses must meet HMRC rules. Incorrect claims can lead to penalties.

Are your tax deductions correct?

Check whether expenses are taxable or non taxable. Some items, such as travel to a temporary workplace, may be allowable. Others, such as home to work travel, are usually not.

Keep receipts

Employees should submit receipts or proof for all expenses. Missing receipts increase the risk of incorrect claims.

Process for approval and authorisation

Have a clear process for reviewing and approving expenses. This helps prevent unauthorised or incorrect payments.

Expense reporting and record keeping

Keep organised records of approved expenses. This makes audits easier and ensures compliance with HMRC rules.

How to Ensure Payroll Compliance

Payroll compliance requires consistent processes, accurate information, and strong internal checks. Businesses must stay on top of tax laws, review payroll regularly, and make sure all data is correct. Putting simple systems in place makes it easier to meet legal duties and run payroll smoothly.

Ensure all personal information is accurate

Tax codes, NI numbers, dates of birth, and addresses must be correct. Incorrect details can cause issues with HMRC and employee pay.

Regularly review pay structures

Check that pay rates meet minimum wage rules and reflect any changes to contracts or job roles. If responsibilities change, pay should be reviewed.

Schedule frequent audits

Regular internal audits help you catch mistakes before HMRC does. These can include checking:

• Tax codes
• NI categories
• Pension status
• Hours worked
• Overtime and bonuses
• Expense reimbursements

Be aware of deadlines

Missing deadlines can lead to penalties and interest. Use reminders or software alerts to stay on track.

Use payroll management software

Payroll software helps you stay compliant by automating calculations, updating tax rules, and submitting RTI reports. It also reduces human error.

Conduct regular payroll audits

A deeper audit once or twice a year helps you review processes, check compliance with legislation, and ensure correct internal controls.

Outsource payroll responsibilities

If payroll becomes too complex or time consuming, outsourcing payroll is a reliable option. A professional service ensures compliance, offers expert support, and reduces the risk of penalties.

Costs and Risks of Non Compliance

Non compliance can be expensive and damaging. Penalties, interest, and back payments can build up quickly if mistakes go unnoticed. Beyond financial costs, errors can affect employee trust and the reputation of your business. Understanding these risks helps you take steps to prevent them.

Non compliance penalties can add up

HMRC can issue penalties for incorrect filings, late submissions, and poor record keeping. If errors continue, penalties can increase over time.

Late payroll tax penalties

Late FPS submissions and late payments to HMRC can result in:

• Monthly penalties
• Interest charges
• Additional reviews by HMRC

These charges can grow quickly if deadlines are missed repeatedly.

The cost of non compliance

Non compliance can cost a business in many ways:

• Financial penalties from HMRC
• Damage to your reputation
• Loss of employee trust
• Additional admin time spent fixing errors
• Legal costs if disputes arise

Correcting mistakes is often more expensive than getting things right from the start.

Maintaining financial health

Accurate payroll helps your business manage cashflow, forecast future costs, and maintain a healthy financial position. Mistakes can impact your accounts and cause budgeting problems.

Protecting employee rights

Payroll is closely linked to employee rights such as sick pay, holiday pay, and pensions. Mistakes can affect these rights and may lead to legal claims.

Improving trust and morale

When employees are paid correctly and on time, it builds confidence and reduces stress. Good payroll processes help create a supportive workplace.

Choosing Payroll Software

Choosing the right payroll software is a key part of staying compliant. Good software reduces errors, updates tax rates automatically, and helps you manage submissions to HMRC. The right system saves time and makes payroll easier to run, especially for small businesses.

Choosing the right UK payroll software

Good payroll software should:

• Support RTI submissions
• Update tax codes and thresholds automatically
• Handle pensions auto enrolment
• Produce payslips and P60s
• Track holidays and absences
• Allow easy corrections
• Offer audit trails
• Keep data secure

The best choice depends on your business size, number of employees, and the level of support you need.

Payroll software for businesses in the UK

Most UK payroll software is cloud based, easy to use, and designed for small businesses. Look for software that integrates with accounting systems, supports HMRC reporting, and offers clear pricing.

Additional HR and Compliance Topics

Payroll compliance links closely with HR responsibilities such as notice periods, employee checks, and record keeping. Employers should understand these connected areas to keep their wider compliance duties in order. Good HR practices support accurate payroll and help reduce risks across the business.

Notice periods and enforceability in the UK

Notice periods are set out in employment contracts and backed by employment law. Statutory notice is one week for employees who have worked at least one month. Employers and employees may agree to longer contractual notice periods. You must pay staff correctly during notice periods and follow all legal steps when ending employment.

Criminal record checks and background search services

Some roles require background checks, such as DBS checks. Employers must follow the rules on storing and handling sensitive information. Background checks must be relevant to the job and carried out fairly.