The ultimate guide to payroll legislation

Payroll legislation are the policies and procedures set out by the government to ensure that every employer in the UK runs their payroll consistently and legally. This payroll legislation guide contains all the information you need to stay compliant.

There have been a number of critical changes to payroll legislation in the UK within the past few years, so keeping up to date with what is expected of you will help your payroll team remain compliant and save you from a stern talk with HMRC.

The law is pretty simple here. If you employ people from the Pay As You Earn (PAYE) system, you need to adhere to payroll legislation.

If you don’t, you could be liable for fines or even having your PAYE scheme closed.

Off-payroll legislation is a set of payroll policies and procedures that ensures contract workers pay roughly the same tax and National Insurance as a traditional employee. You will need to consider these rules closely if you use agency workers or are an agency yourself.

You may also hear these rules referred to as ‘IR35’.

In the UK, payroll is regulated by HMRC - that means all your payroll needs to go through them. They’ll also be the ones responsible for auditing you.

The key reason why it is important to remain compliant with payroll legislation is to protect your payroll team and your business from any penalties that they may incur. These can be costly fines, but it can also be bad press or reduced employee goodwill.

Regardless of the shape of your business, the below are the key factors that your payroll will need to consider to ensure you’re meeting HMRC’s compliance requirements.

The critical purpose for any payroll process is to ensure your employees get paid and are provided with accurate payslips to reflect their pay.

For more information on employee payslips and what they should contain, check out our guide to payslips.

There are numerous deductions that may be made to an employee’s pay. Typically, these are shown on the employee’s payslip, but you are also able to provide this information on a sperate document if this works better.

The most common deductions include but are not limited to:

• National insurance contributions

• Tax

• Pension contributions

• Workplace benefits paid for through salary sacrifice

• Sick pay

• Court orders

• Student loan deductions

Every employee you hire must be paid at least the national minimum wage. The exact pay rate will depend on the age of the employee, as well as whether they are an apprentice. These rates change periodically to match inflation.

You must make sure that salary sacrifice schemes and other deductions don’t cause your employees salary to fall below minimum wage.

Since 2012, every business that has at least one paid employee has certain duties under pensions law. You are, for example, required to enrol your workers into some form of Workplace Pension Scheme, unless those employees choose to opt out.

For more information on your legal requirements regarding pensions, the Pensions Regulator can provide useful advice.

There are multiple different statutory payments that employees are entitled to. The most famous example is earning statutory sick pay after four days off work. Others include maternity, paternity or adoption pay.

FPS in payroll stands for a Full Payroll Submission. This is a document that employers must submit to HMRC when they pay their employees, which tells them about payments you have made and what deductions you have made. You should send the FPS on or before your employees’ payday.

EPS in payroll stands for an Employer Payment Summary. You should send this in addition to an FPS if any of the following apply:

• Reclaim statutory maternity, paternity, adoption, bereavement or shared parental payments

• Claim Employment Allowance

• Claim Construction Industry

• Pay the Apprenticeship Levy if you have an annual pay bill of more than £3 million

You can also send an EPS instead of an FPS if you haven’t paid anyone for a tax month.

You don’t just have to pay your employees correctly; you also need to make sure you’re accurately reporting to HMRC. If your processes can’t stand up to an audit, it doesn’t matter what the results are, you’ll still be liable to fines for noncompliance.

There have been a number of changes to payroll legislation in the UK of late. A combination of factors from the aftermath of the COVID pandemic to the cost-of-living crisis have caused shifts in policy. Here are some of the most important changes for you to consider.

As of April 2023, the national living wage has increased by 9.7%, from £9.50 to £10.42. Younger people will also see their minimum wage increase. This was off the back of advice from the Low Pay Commission (LPC) and designed to account for the cost-of-living crisis. It is thought that the living wage will need to increase again in 2024, so keep an eye out for any developments.

Student loan thresholds have always varied depending on when the employee started their course. Courses that started before 1st September 2012 will repay 9% of their income over the repayment threshold, which is £22,015 a year. After 1st September 2012, that threshold is £27,295. As of August 2023, there is a new threshold to consider.

For students who start an undergraduate course after 1st August 2023, the repayment is 9% of their income over £25,000.

Postgraduate and doctoral courses are still repaid at a rate of 6% of your income over a £21,000 repayment threshold.

You only pay income tax on any earnings above £12,570. This has normally increased slightly every single year, but for 2023/24 the threshold has been frozen.

In 2023/24 there have been small increases to statutory parental payments. All statutory parental pays have increased from £156.66 to £172.48. This is to keep things in line with inflation.

There are two major changes to statutory sick pay (SSP). The first is that the rate is rising to £109.40 per week for most workers. Employees must still earn an average of £123 per week to qualify, and do not earn money for the first three days of sick leave.

It can often feel like payroll legislation is constantly shifting around. How are you supposed to keep up and stay compliant? Luckily there are a number of good habits you can get into place now, and this will pay off in the long run.

Giving your payroll employees the time to train themselves up thoroughly on the latest developments in payroll will pay off. Consider using a learning management system (LMS) to help guide their development in a structured way, as you can set up learning material that is designed around compliance.

If payroll is being done manually, your team may not have time to spend keeping track of new legislative developments. Payroll software can help massively speed up their day-to-day, through a combination of automation and improved accuracy, often reducing processing time by as much as 50%.

Keeping accurate data is key to a successful payroll process. Making sure your data can be tracked and won’t get lost in silos will make the pay cycle process a lot less painful.

Audit trails will also help you if there’s an investigation. These ensure each transaction is linked with supporting invoices. In addition to letting you provide evidence to the HMRC, this can also protect you from fraud and provide insights into the general financial health of your company.

HMRC will regularly put out news on payroll legislation and will usually provide in-depth guides as to how any changes they make will impact your business. They even provide FAQs and manuals to help support your employee training.

Employee self-service can take a lot of the burden of payroll logistics from your payroll team, letting their daily queries get handled with a minimum of fuss.

You’ll also want to compile a list of policies and direct employees to them. This will help them understand their own responsibilities in regard to payroll legislation. For example, a clearly stated overtime and expenses policy will minimise the risk of errors that can throw your payroll process out of sync.

If you want to change how you handle payroll while remaining completely compliant with HMRC requirements, MHR’s payroll solutions are ideal.

Our solutions are cloud-based, which means we can roll out key updates to keep you HMRC compliant as quickly as possible, without having to organise an on-site visit. Likewise, our use of real-time payroll ensures you can spot and correct issues quickly without having to trawl through mounds of data, saving your payroll team an incredible amount of time.