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Payroll compliance for business owners

Updated: Sep 18, 2023

As a small business owner, it’s essential you stay on top of your payroll as it can be minefield .

payroll compliance for business owners

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.

Easier said than done when you're wearing many hats and payroll can be complicated - especially when payroll legislation changes.

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? 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

Payroll refers to the process of calculating how much a worker is paid, including any bonuses, allowances and benefits they’re entitled to and any deductions you need to make from their pay packet 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. There are two main reasons compliance is important: ensuring your workers are paid the right amount on time and helping you avoid penalties for noncompliance 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 accountant will help you make any necessary adjustments to your processes that new legislation entails.

Keep accurate records You should have 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 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 this 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.

Protect your business with audit trails A clear and accurate audit trail details 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

Payroll software can help protect your business by providing clear and accurate audit trails 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 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.

If you need help to take care of all your payroll and auto enrolment, Purple Accounts are small business payroll experts.

Get help to ensure you are not caught out and also get key insights into your business, enabling you to make informed plans for your future.

Get in touch today on 01925 97500 or email:

article from an extract from Quickbooks


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