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Under the UK’s employment law, employees have certain rights. Fulfilling those as an employer requires a thorough understanding of your legal responsibilities and carrying them out on time and according to the latest laws.
This can be confusing, so we have created this short guide breaking down everything you need to know about UK payroll compliance services and requirements. Let us begin:
The basics
We will start by summing up the absolute basic requirements every UK employer must know:
- Every UK employee must have a contract of employment that details the rights, responsibilities, duties and conditions of their work. Both parties must agree to it – however, it need not be in writing.
- The UK time directive states that, on average, employees cannot work for more than 48 hours per week, measured over 17 weeks. However, if they want, they can voluntarily opt out of it.
- Payroll can be run either monthly or weekly.
- Employers must report payroll accounting data to HMRC through the Real-Time Information (RTI) online system.
- The first £12,570 of income is not taxed as it is deemed a personal allowance. Income after that is taxed at progressively higher rates depending on how much the employee is earning. In addition, employees older than 16 years who make more than £166 a week must pay National Insurance (NI).
- Employers deduct income tax and national insurance under the Pay As You Earn (PAYE) scheme.
- Employers must process statutory sick pay, statutory maternity leave pay and statutory adoption pay through the payroll. They can recover percentages of this statutory pay depending on how much NI they process in a year.
- At the end of the UK tax year, every employee must be given a form P60 detailing all their pay and deductions for the year. This is also when the employer must submit their final report to HMRC.
- UK national holidays include both religious holidays and “bank holidays,” which may be granted by the government for public events. While there is no automatic right to time off on these days, most working populations are granted time off or extra pay, depending on their contract.
- Statutory sick pay provides eligible employees with £94.25 per week for up to 28 weeks, while statutory maternity and adoption pay allows for up to 39 weeks of payment at 90% of average weekly earnings for the first six weeks and a lower rate for the remaining 33 weeks. Paternity leave is either one or two weeks, with pay at the same rate as the lower rate of maternity pay.
Payroll compliance checklist: an employer’s responsibilities
As a UK employer, you need to:
- Pay taxes to HMRC on time
- Register with HMRC and set up a PAYE system
- Share payroll accounting data with HMRC on time
- Set up and maintain pension schemes as relevant
- Deduct tax and national insurance accurately from employee wages
The two main types of deductions
The two main deductions you need to make from your employees’ paychecks are:
- Income tax – This is payable on all earnings beyond the personal allowance. The amount of tax each person must pay depends on their tax code.
- NI – This is a mandatory insurance scheme employers, and employees must pay into. The amount owed depends on the employee’s earnings and employment status.
Pension scheme
Since October 2012, all employers must automatically enrol their employees into a pension scheme, to which employers and employees must contribute. The three types of pension schemes include:
- Workplace/occupational pension scheme
- Stakeholder pension scheme
- Personal pension scheme
For workplace pension schemes, there is a minimum contribution level that must be met by both the employer and the employee. Currently (as of April 2023), the minimum contribution level is 8% of an employee’s qualifying earnings, of which the employer must contribute at least 3%, and the employee must contribute at least 5%.
The qualifying earnings are currently defined as the employee’s earnings between £6,240 and £50,270 per year. There is no minimum contribution level for personal and stakeholder pension schemes, although the government does offer tax relief on contributions made to these types of schemes.
Registering with HMRC/setting up a PAYE scheme
All employers must register online with HMRC, after which they will be assigned a unique payroll reference number. This will be used every time they send in payroll accounting data. For each employee they have, the employer needs to share the following:
- Tax code
- Amount of pay
- Dates of payment
- National Insurance number
- Name, address and date of birth
- Pension scheme details (if relevant)
- Any deductions made towards income tax and NI
When and how to pay HMRC
Employers with less than 50 employees must pay HMRC every month, while those with more than 50 must pay HMRC every week. In addition, employers need to submit payroll accounting information, the deadline for which depends on the payment frequency.
HMRC accepts payments online, by phone and by post. Failure to pay on time may attract fines and other penalties.
Calculating employee pay
Calculating your employee’s pay accurately is vital, which is why we recommend using a payroll accounting calculator. Factors to take into account include:
- Tax code
- Salary or hourly rate
- Any overtime/bonus pay
- National Insurance category
- Deductions, such as pension contributions
Records to be kept
Every UK employer must maintain the following for at least three years:
- Records of the PAYE scheme
- Records of all employee wages and taxes deducted
- Copies of tax payments and payroll submissions to HMRC
HMRC penalties for payroll accounting mistakes
Employers who make payroll errors may attract three types of penalties from HMRC depending on the nature and severity of the error:
1. Deliberate errors
If you deliberately make an error in your payroll accounting, such as underpaying your employees or not deducting the correct amount of tax, you may be liable for a penalty of up to £3,000.
2. Late submissions
If you fail to submit your payroll accounting data on time, you may be liable for a penalty of £100 per month, per 50 employees or part thereof. For example, if you have 52 employees and submit their data two months late, the penalty would be £400 (£100 x 4).
3. Withholding information
If you deliberately withhold information from HMRC, such as failing to declare all of your employees or not providing accurate information about their payroll, you may be liable for a fine of up to 100% of the tax due.
How to avoid HMRC penalties
UK employers can easily avoid attracting HMRC penalties by:
- Submitting payroll information on time
- Ensuring their payroll calculations are accurate
- Keeping complete and accurate payroll accounting records
We also recommend using any payroll software to simplify calculations and avoid unnecessary errors.
Over to you
If you are running your own business, handling payroll can become a tedious task, especially when you do not have the time to sift through the complex regulations or invest in costly software. Hopefully, this payroll compliance checklist will help you hit the ground running!
And in case of any uncertainty, we always recommend consulting a payroll accounting professional like Golding Accountancy. We will handle the function while you concentrate on growing your business. Outsourcing your payroll accounting to us is a smart move that pays off in the long run. Contact us today!
FAQs
1. I am a small business owner. Do I have to comply with HMRC regulations?
Yes, all UK employers must comply with HMRC regulations, including registering with HMRC and setting up a PAYE scheme.
2. What is the Employment Allowance?
The Employment Allowance is a scheme introduced by the UK government in 2014 to help small businesses and charities with their NI contributions. It allows eligible employers to reduce their annual NI bill by up to £5,000 per year.
3. What is Payroll Giving?
Payroll Giving is a scheme by which employees can donate money to charity directly from their wages before tax deduction. Employers who wish to offer this to their employees can set it up with HMRC and it must be paid through PAYE.
4. As an employer, do I need to provide employee benefits?
No, it is not mandatory to provide employee benefits. However, if you do, you must register with HMRC and provide relevant information about the benefits to your employees.
