Importance of payroll compliance and practical considerations
Running payroll correctly is not just about paying your staff – for small businesses in the UK, it is a legal obligation. Compliance ensures social contributions (NICs) are made properly, employees are taxed correctly, pension requirements are met and penalties are avoided from HMRC. But, it’s also worth noting good payroll practices help maintain staff trust and morale, reduce administrative issues, and protects your small business from possible disputes or audits.
Registering as an Employer - Legal obligation and steps
You will need to register as an employer with HM Revenue and Customs when you start employing staff for your company and set up a PAYE scheme. Even if you are employing yourself – being the only director of your own limited company, you’re still expected to register. Once you have registered, you will receive an Employer PAYE reference (will be shown on a letter sent by HMRC) and Accounts Office reference (available online), which will help identify your business in all your correspondences with HMRC.
You’ll then need to choose how to run payroll. You can either pay a payroll provider to do this for you or you can do it yourself using payroll software.
If you choose to use a payroll provider, you will be responsible for gathering and maintaining accurate records of your employee’s details, as these are required for your payroll provider to run payroll on your behalf.
If you wish to run payroll yourself, you’ll be expected to complete certain tasks to set up payroll such as registering employees and informing HMRC about your employees.
Understanding PAYE and Tax Deductions - How PAYE works, NICs, legal duties
Income tax and National Insurance Contributions (NICs) must be subtracted from employee pay under PAYE, and employer NICs must be calculated and paid where applicable.
A Full Payment Submission (FPS) detailing employee pay and deductions must be submitted to HMRC each time an employee is paid. You should file an Employer Payment Summary (EPS) if you don't pay anyone during a tax month. If you are using payroll software, this usually is included as part of the package.
Ensuring accurate calculations and timely submissions are crucial, as inaccurate or late PAYE/NIC reporting can lead to your business incurring penalties or interest charges.
Workplace Pensions - Legal requirements and employee guidance
Employers in the UK are expected to automatically enrol eligible employees into a qualifying workplace pension scheme or the National Employment Savings Trust (NEST).
By law, employers are expected to keep two types of records, according to The Pensions Regulator. These are:
1. Employee details – for example, their name, National Insurance number, and any opt in or joining forms.
2. Pension scheme details – such as the scheme name, address, and the employer pension scheme reference.
This record must be kept for 6 years either electronically or in paper format.
I’ll quickly cover notices too, which act as formal instructions and help employers stay compliant with The Pensions Regulator. These notices are important as they provide clear evidence of the employee’s choice, shows that the employer is staying compliant and helps payroll and pension systems apply the correct contributions and protects the business in case The Pensions Regulator audits or requests records.
Joining Notice – used when an employee has the right to join in a pension scheme but is not eligible for automatic enrolment, which is usually because they earn less than the auto-enrolment threshold. Once you receive this notice, you must enrol them.
Opt-in Notice – used when an employee is eligible for automatic enrolment but is not currently enrolled. This is usually when their re-enrolment date has not come around yet or they’ve opted out before. Once you receive this notice, you must enrol them.
Opt-out Notice - used when an employee has been automatically enrolled but decides they do not want to stay in the pension scheme.
Find out more about company pensions!
Payroll Record-Keeping - Legal obligations
You need to keep detailed payroll records for your business. HMRC requires that these include:
- Payments to employees - both gross and net pay, including all deductions
- HMRC reports - such as Full Payment Submissions (FPS), Employer Payment Summaries (EPS), and any payments made
- Employee records - including leave, sickness absences, statutory payments, benefits, and taxable expenses or benefits-in-kind
- Other documentation - tax code notices, payslips, and any other payroll-related paperwork
You should keep records for at least three years after the end of the tax year that they relate to. HMRC may estimate the amount you owe and apply a penalty of up to £1000 if your records are incomplete or missing.
Conclusion
Compliant payroll administration is a must for any small business in the UK. You must register as an employer as soon as you hire someone, manage NICs and pensions, run PAYE correctly, submit reports to HMRC on time, and keep records for years.
You can minimise administrative burden and risk while meeting all legal obligations by adopting dependable payroll software (or outsourcing), establishing clear internal processes, and maintaining organisation and accurate records.
For more informative articles on running your business smoothly, have a look at our knowledge base!
