What is payroll compliance?

As a small business owner, it’s crucial you stay on top of your payroll. One of your core responsibilities as an employer is ensuring you calculate your workers’ pay correctly and pay the correct amount in deductions such as National Insurance and income tax.

But it can be complicated - especially when payroll legislation changes. Luckily, payroll software makes it easier than ever to stay on top of any changes and run payroll correctly.

In this article, we’ll explain what payroll is, why compliance is so important and what you can do to ensure you stay up to date and compliant.

What is payroll?

Before we get into payroll compliance, here’s a quick refresher on what payroll is.

Payroll refers to the process of calculating how much a worker is paid. This includes not just their salary and wages, but any bonuses, allowances and benefits the worker is entitled to. It also covers any deductions you make from their pay - things like income tax, pensions and National Insurance contributions (NICs). 

HMRC collects Income Tax and National Insurance through the Pay as You Earn (PAYE) system. If your business employs people, you should be operating PAYE.

The payroll process can be broken down into three simple steps: 

• Calculating how much your workers get paid and paying them 

• Calculating any deductions payable to HMRC 

• Accurately collecting this information and reporting it to HMRC

What is payroll compliance?

Payroll compliance, then, refers to ensuring you’re following all the right rules and meeting your responsibilities as an employer. 

There are two main reasons why payroll compliance is important.

• First, it ensures your workers are getting paid the correct amount at the correct time.

• Secondly, it helps you avoid any possible penalties you may incur for non-compliance.

If you incorrectly calculate the amount of National Insurance or Income Tax you have to pay, for instance, HMRC will seek to determine whether the error was due to a lack of reasonable care, deliberate or deliberate and concealed. 

If the error is found to have been deliberate and concealed, you could be facing as much as 100% of the extra tax due on top of what you already owe in penalties.

You can read more about the risks of non-compliance and the possible penalties it can earn you on the government’s website.

Recent changes to payroll

Payroll legislation and processes are frequently tweaked, adjusted and updated by the government. It’s crucial that you stay on top of these changes to remain compliant with the current payroll rules.

In the government’s 2022 spring statement, for instance, the following changes to National Insurance were announced: 

• From this April, both employees’ and employers’ NICs will increase by 1.25p per pound

• In April 2023, these temporary increases will be lifted and National Insurance will return to its pre-spring statement rate

• The increase will instead shift into a separate Health and Social Care Levy, which must also be paid by any pensioners who are still working

• This July, the point at which workers start paying National Insurance will increase from £9,880 a year to £12,570. This change will affect the deductions employers make from their workers’ pay packets

All this is just an example of the sorts of changes that HMRC can make to payroll, and there is no guarantee that any changes will be final.

A good payroll system will help you make any necessary adjustments to your processes that new legislation entails.

Keep accurate records

It may sound obvious, but a key part of proper payroll accounting is keeping accurate records.

You should work together with your HR team for this, as having the right personal information on file for each employee can affect their payroll. For example, changes such as promotions, pay rises or extended periods of leave can affect the benefits they’re entitled to and, therefore, the deductions you need to include in each payroll run.

Having one system or software, such as QuickBooks, can help you stay on top of this. It’ll be easier to ensure changes recorded in one area are automatically carried over and included in any payroll calculations so you don’t have to worry.

Manage workplace pensions 

In 2012, the government introduced a new system of workplace pensions. Since then, every business that employs even one employee has duties under pension legislation.

Every UK worker and business owner is still entitled to the basic state pension, which is funded through National Insurance. 

The precise details of pension arrangements may differ greatly between businesses and pension providers, and different workers in the same business will have varying levels of pension contributions, depending on their individual pay grades and circumstances. It’s crucial, then, that businesses stay on top of their statutory duties.

Automatic enrolment

One key element of private pension schemes is automatic enrolment. As of February 2018, all employers are required to offer and comply with auto-enrolment to all eligible workers. 

This is when workers are automatically enrolled on the workplace pension scheme, and you’ll also have to contribute towards the protected pension pot.

You’ll have a duty to enrol your employees to your chosen workplace pension from the day they begin employment.

Again, you need to pay attention to these rules to ensure you’re automatically enrolling all the workers that you need to. HR should be able to help with this as they onboard any new employees.

Protect your business with audit trails

One of the main benefits of payroll software is the protection it can offer you in case of investigation.

It does this by providing clear and accurate audit trails: detailed records of relevant transactions and payments, including supporting information such as invoices and purchase orders. 

These can be helpful in protecting your business (and your reputation) if you find yourself under investigation for discrepancies or errors.

If any transaction gets flagged as suspicious, a clear audit trail allows you to prove that any errors were unintentional. Automating your payroll with software also reduces any risks of human error and miscalculations, protecting you against any potential penalties.

Audit trails also mean you can: 

• Ensure your bookkeeping is accurate

• Provide detailed insight into your business

• Protect you against fraud

Stay transparent with your employees

We’ve talked a lot about what you need to do as a business owner. But it’s also important that your employees understand their responsibilities - not least because any mistakes they make will also reflect on you and your business. 

Workers’ payroll responsibilities can include things like: 

• Filling out regular timesheets to accurately record their working hours 

• Understanding and following your company’s expenses policies

• Informing you of any relevant changes to their working status 

In addition to helping protect you from penalties, encouraging your workers to stay aware of their payroll duties can help keep them engaged in their position as part of the company.

Submit payroll on time

Finally, as with all elements of small business accounting, it’s crucial that you stay aware of your deadlines and meet your responsibilities on time. 

We’ve already talked about the penalties you can face from HMRC if you make any errors in your reporting, but you could also face harsh penalties for late or missed submissions.

You need to stay aware of things like regular tax deadlines and paydays as well as any shifts that might affect when these deadlines fall on irregular days, like bank holidays.

You could use an integrating calendar and itemising the individual tasks you need to complete to keep you organised and running on time.

We hope you’ve found this guide to payroll compliance helpful. As you’ll no doubt noted by now, there’s a lot to stay on top of, from understanding your reporting responsibilities to keeping track of your pension duties. 

The penalties for late or misreporting can be potentially severe, and can significantly harm your business’s reputation. 

Thankfully, payroll software lets you easily handle all of this, so you’re not left feeling stressed when payday comes around. The best payroll software will integrate with your existing accounting software to streamline your workflow and ensure you’re completing all your key tasks correctly and in good time.

On top of this, shifting to a solid, software-based payroll management system can also provide key insights into your business, enabling you to make informed plans for your future.

Feel like you’re prepared to deal with payroll? Let QuickBooks help keep you on track and automated so you’re not left caught out.

Discover more helpful guides with the QuickBooks blog.