Payroll compliance – employment overview for UK businesses

Last checked and updated on 15 September 2022

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.

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

What is payroll?

Payroll is the process of calculating and paying employees’ wages. This includes calculating tax deductions and employee benefits.

How often do I need to submit payroll information to HMRC?

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 your payroll information to HMRC by the 19th of each month.

How can I 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, and keeping accurate records of your payroll.

What records do I need to keep?

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.

Can I use software to run my payroll?

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.

What should I do if I am unsure about any aspect of my payroll?

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.

I am a small business owner. Do I need to comply with payroll regulations?

Yes, all employers must comply with payroll regulations. This includes registering with HMRC and setting up a PAYE scheme. You can find out more about payroll compliance at the HMRC website.

What is the National Living Wage?

The National Living Wage is a minimum wage that applies to workers aged 23 and over. The current rate is £9.50 per hour.

I am an employer. Do I need to pay my employees the National Living Wage?

Yes, if your employees are aged 25 and over, you must pay them at least the National Living Wage.

What is the National Minimum Wage?

The National Minimum Wage is the minimum wage that applies to workers aged under 23. The current rates are:
• £9.18 per hour for workers aged 21 to 22
• £6.83 per hour for workers aged 18 to 20
• £4.81 per hour for workers aged 16 to 17

I am an employer. Do I need to pay my employees the National Minimum Wage?

Yes, if your employees are aged under 23, you must pay them at least the National Minimum Wage.

What is Payroll Giving?

Payroll Giving is a scheme that allows employees to donate money to charity directly from their wages. The money is deducted before tax, so the employee pays less tax and the charity receives more money.

Do I need to set up a Payroll Giving scheme?

No, you do not need to set up a Payroll Giving scheme. However, if you would like to offer this scheme to your employees, you can register with HMRC.

What is the Annual Investment Allowance?

The Annual Investment Allowance is a tax relief that allows businesses to deduct the cost of certain capital expenditure from their taxable profits. The current allowance is £200,000.

Do I need to take advantage of the Annual Investment Allowance?

No, you do not need to take advantage of the Annual Investment Allowance. However, if you do make capital expenditure, it may be beneficial for you to claim the allowance.

What is the Employment Allowance?

The Employment Allowance is a tax relief that allows businesses to reduce their Employer’s National Insurance contributions by up to £3,000 per year.

Do I need to take advantage of the Employment Allowance?

No, you do not need to take advantage of the Employment Allowance. However, if you are eligible for the relief, it could reduce your Employer’s National Insurance contributions.

I am an employer. Do I need to comply with payroll regulations?

Yes, all employers must comply with payroll regulations. This includes registering with HMRC and setting up a PAYE scheme. You can find out more about payroll compliance at the HMRC website.

What is the Real Time Information (RTI) system?

The Real Time Information (RTI) system is a way of reporting payroll information to HMRC. The information is reported electronically, on or before the day that payments are made to employees.

Do I need to use the RTI system?

Yes, if you are an employer, you must use the RTI system to report payroll information to HMRC.

What is a PAYE scheme?

A PAYE scheme is a way of deducting tax and National Insurance contributions from employees’ wages. Employers are responsible for deducting these payments and paying them to HMRC.

Do I need to set up a PAYE scheme?

Yes, all employers must deduct tax and National Insurance contributions from their employees’ wages and pay them to HMRC. You can find out more about setting up a PAYE scheme at the HMRC website.

What is an employer pension contribution?

An employer pension contribution is a payment that an employer makes into an employee’s pension scheme. The payment is usually a percentage of the employee’s salary.

Do I need to make employer pension contributions?

No, you do not need to make employer pension contributions. However, if you offer a pension scheme to your employees, you may be required to make contributions.

I am an employer. Do I need to provide employee benefits?

No, you do not need to provide employee benefits. However, if you offer employee benefits, you must comply with the relevant regulations.

What are the requirements for employers who offer employee benefits?

If you offer employee benefits, you must comply with the relevant regulations. This includes registering with HMRC and providing certain information to employees. You can find out more about the requirements for employers who offer employee benefits at the HMRC website.

I am an employer. Do I need to provide a workplace pension?

No, you do not need to provide a workplace pension. However, if you employ staff, you may be required to automatically enrol them into a pension scheme.

What is automatic enrolment?

Automatic enrolment is a process whereby employers are required to automatically enrol eligible employees into a pension scheme. Employees can opt out of the scheme if they wish.

Do I need to comply with automatic enrolment?

Yes, if you employ staff, you must comply with automatic enrolment. This includes enrolling eligible employees into a pension scheme and making contributions to the scheme.

I am an employer. Do I need to provide health insurance for my employees?

No, you do not need to provide health insurance for your employees. However, if you offer health insurance as an employee benefit, you must comply with the relevant regulations.

What are the requirements for employers who offer health insurance as an employee benefit?

If you offer health insurance as an employee benefit, you must comply with the relevant regulations. This includes registering with HMRC and providing certain information to employees. You can find out more about the requirements for employers who offer health insurance as an employee benefit at the HMRC website.

I am an employer. Do I need to provide a workplace nursery?

No, you do not need to provide a workplace nursery. However, if you employ staff, you may be required to provide childcare vouchers.

What are childcare vouchers?

Childcare vouchers are a government-supported scheme that allows employers to provide employees with vouchers to help with the cost of childcare.

Do I need to provide childcare vouchers?

No, you do not need to provide childcare vouchers. However, if you employ staff, you may be required to provide them with childcare vouchers if they meet certain criteria.

I am an employer. Do I need to provide paid leave for my employees?

No, you do not need to provide paid leave for your employees. However, if you offer paid leave as an employee benefit, you must comply with the relevant regulations.

What are the requirements for employers who offer paid leave as an employee benefit?

If you offer paid leave as an employee benefit, you must comply with the relevant regulations. This includes registering with HMRC and providing certain information to employees. You can find out more about the requirements for employers who offer paid leave as an employee benefit at the HMRC website.

I am an employer. Do I need to provide a company car for my employees?

No, you do not need to provide a company car for your employees. However, if you offer a company car as an employee benefit, you must comply with the relevant regulations.

What are the requirements for employers who offer a company car as an employee benefit?

If you offer a company car as an employee benefit, you must comply with the relevant regulations. This includes registering with HMRC and providing certain information to employees. You can find out more about the requirements for employers who offer a company car as an employee benefit at the HMRC website.

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Important – The information provided in our articles is intended to be for general purpose use only, and not advice for you or your business. We strive to publish accurate information, but encourage you to fact-check and seek expert guidance. We recommend that you always speak to a qualified professional to get advice about how to operate your business under your specific requirements and circumstances.