What payroll regulation changes mean for your small business

Since the pandemic small businesses in the UK have experienced even more turbulence than usual and have weathered new challenges, from The Great Resignation to staff shortages and the cost-of-living crisis. These challenges have meant that almost all businesses have had to make sizeable and rapid changes to their employment structures, and many have implemented hybrid or even remote working.

At the same time as business owners are looking to manage their employees through these new ways of working, changes to legislation around payroll, including National Insurance contributions and the payrolling of benefits, are set to come in. Staffing costs are generally one of small businesses’ biggest outgoings – so it is vital that leaders get their heads around what they need to do to comply.

Payroll regulation changes

In a nutshell, here is a summary of the changes:

In the Chancellor’s Spring statement, it was announced that from April 2022 National Insurance contributions increased to include the Health and Social Care Levy, which is set at 1.25%.

Ahead of 6 April 2023, all employers who use payroll to tax benefits will need to officially register online to continue. By registering with HMRC, employers can payroll almost all benefits and expenses without the need to submit a form P11D after the end of the tax year.

The income threshold at which employees must pay national insurance was increased by £3,000 from £9,568 a year to £12,570 from 6 July 2022.

Finally, from April 2022 the employment allowance, designed for smaller businesses, came into effect. This provides tax relief on the first £5,000 of annual Class 1 National Insurance Contributions, which are typically paid at the end of July each year.

We recently undertook a study which found that more than three quarters (76%) of small business owners agree that payroll has become more complex in the past year. While for many all the changes to legislation may seem daunting to comply with, in the long term they actually have significant benefits. It’s important to think of the changes as opportunities rather than obstacles, and there are several ways to do this.

Seek support

Our study found that one of the biggest areas that small business owners seek support in is managing payroll, with over 60% looking for guidance from an accountant. Accountants are uniquely positioned to manage the nuts and bolts of payroll, as well as giving strategic advice around the financial impact of hiring decisions for their clients.

One of the things many small businesses worry about with these changes is how time-consuming complying can be when a lot of the process (data collection) is manual. However, there is an answer – investing in software tools can simplify the process and assist business owners through the changes.

Digital tools can flag changes from HMRC automatically and help small business owners to comply. For example, when the National Insurance Contribution threshold increase came into play, QuickBooks software gave employers the option of turning on an automatic message that would appear on employee payslips explaining the change^[1]. By removing this additional step of communication, small business owners can save time which they can then put back into running their business.

Payroll as a revenue driver

Many small businesses are currently in survival mode and don’t necessarily see complying with these payroll legislation changes as a top priority – for many they are seen as simply another addition to their ever-increasing to-do list. However, in reality there are a multitude of benefits to strong payroll management. It is key to empowering employees, and once compliant with the legislative changes, small businesses will be able to increase clarity for their employees around pay.

The National Insurance contribution threshold increase, for example, should help lower paid employees navigate the cost-of-living crisis by increasing their take home pay. Also, payrolling benefits means less bureaucracy and better transparency for business owners and employees.

As a practical step, small business owners should be encouraging employees to check their payslips and tax codes on a regular basis to help to identify any mistakes early, and avoid costly errors later on. If an employee checks their tax code and thinks it is incorrect, then it is their personal responsibility to contact HMRC directly.

There are a multitude of benefits to prioritising complying with the upcoming payroll legislation changes, from driving business growth to improving employee retention rates. The important thing to remember is don’t try to struggle through alone – seek help, explore digital tools and software and prioritize employees. With the right support, complying with changes and improving payroll processes is less daunting than it seems!

[1] N.B: The option of turning on an automatic message that would appear on employee payslips explaining the change was only available on QuickBooks advanced. For the QuickBooks standard, the message was added automatically, with no option to turn it off.