Payroll compliance – employment overview for UK businesses

As an employer, it is your responsibility to ensure that your employees are paid correctly and on time. This includes ensuring that you withhold the correct amount of tax and National Insurance from their wages – payroll compliance is essential.

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Failure to comply with payroll regulations can result in heavy fines from HM Revenue & Customs (HMRC). To avoid any problems, it is essential that you understand the rules and keep up to date with any changes.

This guide will explain everything you need to know about payroll compliance in the UK, including:

• Your responsibilities as an employer
• The different types of taxes and National Insurance that need to be deducted from employees’ wages
• How to register with HMRC and set up a PAYE scheme
• The deadlines for submitting payroll information and paying taxes
• How to calculate employees’ pay correctly
• What records you need to keep

By following the tips in this guide, you can be confident that you are complying with all of the relevant regulations. This will help to avoid any problems with HMRC and ensure that your employees are paid correctly.

Your responsibilities as an employer

As an employer, you have a number of responsibilities in relation to payroll. These include:

• Registering with HMRC and setting up a PAYE scheme
• Calculating employees’ pay correctly
• Deducting the correct amount of tax and National Insurance from employees’ wages
• Setting up a pension scheme where required, and paying into it
• Submitting payroll information to HMRC on time
• Paying taxes to HMRC on time

If you fail to meet any of these responsibilities, you may be liable for heavy fines from HMRC.

See our guide on how to employ someone for more details.

The different types of taxes and National Insurance that need to be deducted from employees’ wages

There are two main types of taxes that you will need to deduct from your employees’ wages: income tax and National Insurance.

Income tax is a tax that is payable on all earnings over a certain amount. The amount of tax that an employee pays depends on their tax code.

National Insurance is a compulsory insurance scheme that is paid by employees and employers. The amount of National Insurance that an employee pays depends on their earnings and their employment status.

Use our tax and NICs calculator to get an estimate of these.

Pension scheme requirements

Since April 2019, all employers are required to provide a pension scheme for their employees. Employees should be automatically enrolled into the scheme, and pay into it through deductions from their wages. Employers must also contribute to the scheme.

What types of pension scheme can an employer provide?

There are three main types of pension scheme that employers can provide:

• A workplace or occupational pension scheme
• A personal pension scheme
• A stakeholder pension scheme

Workplace and occupational pension schemes are set up by employers, and employees pay into them through deductions from their wages. Employers must also contribute to the scheme. Personal pension schemes are set up by individuals, and they make contributions from their own money. Stakeholder pension schemes are a type of personal pension scheme, but with some additional regulations to protect consumers.

How much do employees and employers have to contribute?

The minimum amount that must be contributed to a workplace or occupational pension scheme is currently 8% of an employee’s qualifying earnings. Of this, 3% must be paid by the employer and at least 5% must be paid by the employee. For a personal or stakeholder pension scheme, there is no minimum contribution requirement.

How do employees pay into a pension scheme?

Employees usually pay into a pension scheme through deductions from their wages. The amount that is deducted depends on the employee’s earnings and the pension scheme rules.

How to register with HMRC and set up a PAYE scheme

To comply with payroll regulations, you must register with HMRC and set up a PAYE scheme.

You can register online at the HMRC website. Once you have registered, you will be given a unique payroll reference number.

See our separate guide to setting up and running payroll for the first time.

What to do with your payroll reference number?

Once you have registered with HMRC and been given a payroll reference number, you will need to use this number when sending in your payroll information.

What information do you need to send to HMRC?

You will need to send the following information to HMRC:

• The names, addresses and dates of birth of all employees
• The National Insurance number of each employee
• The amount of pay that each employee receives
• The tax code for each employee
• The dates of payment for each employee
• The pension scheme details, if you have one

You will also need to send HMRC information about any deductions that you have made from employees’ wages, such as income tax and National Insurance.

When and how to pay HMRC

You will need to pay HMRC the taxes that you have deducted from your employees’ wages on a regular basis. This is usually done through a PAYE scheme.

You will also need to pay any employer’s National Insurance contributions that are due.

You can pay HMRC online, by phone or by post.

What happens if you don’t comply with payroll regulations?

If you don’t comply with payroll regulations, you may be liable for fines and penalties. You may also be required to pay back any taxes that you have not paid.

The deadlines for submitting payroll information and paying taxes

Once you have registered with HMRC and set up a PAYE scheme, you will need to submit payroll information to them on a regular basis. This includes details of your employees’ wages and the taxes that have been deducted.

The frequency of payments depends on the size of your business. If you have 50 or fewer employees, you will need to make payments to HMRC every month. If you have more than 50 employees, you will need to make payments to HMRC every week.

The deadlines for submitting payroll information depend on the frequency of your payroll. For example, if you run a monthly payroll, you will need to submit information to HMRC by the 19th of each month.

How to calculate employees’ pay correctly

Calculating employees’ pay correctly is essential to complying with payroll regulations. There are a number of factors that you need to take into account, including:

• The employee’s tax code
• The employee’s National Insurance category
• The employee’s salary or hourly rate
• Any overtime or bonus payments
• Any deductions for things like pension contributions

To calculate an employee’s pay correctly, you will need to use a payroll calculator.

What records you need to keep

As an employer, you are required to keep a number of payroll records in relation to your payroll. These include:

• Records of your employees’ wages and the taxes that have been deducted
• Records of your PAYE scheme
• Copies of your payroll submissions to HMRC
• Copies of your tax payments to HMRC

You must keep these records for at least 3 years.

What are the penalties from HMRC for payroll errors?

If you make errors in your payroll, you may be liable for penalties from HMRC. The amount of the penalty depends on the severity of the error and whether it was deliberate or accidental.

For example, if you fail to submit payroll information to HMRC on time, you may be liable for a penalty of £100 per month.

If you make a deliberate error in your payroll, you may be liable for a penalty of up to £3,000.

If you are found to have deliberately withheld information from HMRC, you may be liable for a penalty of up to 100% of the tax due.

How to avoid penalties from HMRC

There are a number of ways that you can avoid penalties from HMRC. These include:

• Submitting your payroll information on time
• Making sure that your payroll calculations are accurate
• Keeping accurate records of your payroll

If you are unsure about any aspect of your payroll, you should seek professional payroll advice. This will help you to avoid any penalties from HMRC.

10 tips to running a successful payroll

1. Comply with the law – There are a number of laws and regulations that govern payroll in the UK. To avoid penalties, it is essential that you comply with these laws.
2. Register with HMRC – To comply with payroll regulations, you must register with HMRC and set up a PAYE scheme. You can register online at the HMRC website.
3. Set up a payroll schedule – Once you have registered with HMRC, you will need to submit payroll information to them on a regular basis. This includes details of your employees’ wages and the taxes that have been deducted. The deadlines for submitting payroll information depend on the frequency of your payroll.
4. Use a payroll calculator – To calculate an employee’s pay correctly, you will need to use a payroll calculator. These are available from HMRC and from a number of online sources.
5. Keep accurate records – As an employer, you are required to keep a number of records in relation to your payroll. These include records of your employees’ wages and the taxes that have been deducted. You must keep these records for at least 3 years.
6. Submit information on time – To avoid penalties from HMRC, it is essential that you submit your payroll information on time. The deadlines for submission depend on the frequency of your payroll.
7. Make sure your calculations are accurate – It is important that you make sure your payroll calculations are accurate. If you make errors in your payroll, you may be liable for penalties from HMRC.
8. Keep up to date with changes – The law and regulations governing payroll are subject to change. To avoid penalties, it is essential that you keep up to date with any changes.
9. Seek professional advice – If you are unsure about any aspect of your payroll, you should seek professional advice. This will help you to avoid any penalties from HMRC.
10. Use software – There are a number of software packages available that can help you to run your payroll effectively. Using payroll software can help to reduce the risk of errors and save you time.

Frequently asked questions