Payroll Compliance: Setting Up and Reporting

Getting payroll compliance right isn’t just about paying staff on time — it’s a legal obligation that can trip up even the most organised UK small business. From PAYE registration to Real Time Information (RTI) submissions, HMRC expects precision and punctuality at every stage. This guide gives you the full, honest picture: what you must do, when, how to avoid expensive mistakes, and how to keep your business on the right side of the law. If you’re about to run payroll for the first time — or want to check you’re doing it right — this is the practical, up-to-date advice you need.

Employing staff in the UK triggers a set of core legal duties around payroll. These apply whether you’re a limited company, sole trader, or partnership. The moment you pay someone above the National Insurance Lower Earnings Limit (£123 per week for 2026/27), provide them with employee benefits, or have a pension scheme, you’re likely required to operate PAYE (Pay As You Earn) and report to HMRC.

Payroll compliance isn’t optional: HMRC enforces strict rules on registration, calculation of deductions, reporting, and record keeping. This includes making correct deductions for income tax, National Insurance Contributions (NICs), student loans, and workplace pensions. Failing to comply can result in penalties, interest charges, and — in serious cases — criminal prosecution.

It’s not just about paying tax. Payroll compliance covers statutory payments (like statutory sick pay and maternity pay), providing legal payslips, keeping up to date with minimum wage law, and fulfilling your auto-enrolment pension duties. The rules change each tax year, so you must keep up to date with thresholds, rates, and new HMRC guidance.

• Registering as an employer with HMRC before your first payday
• Operating PAYE on all payments (including bonuses and benefits)
• Deducting and paying Income Tax, NICs, and other statutory deductions
• Submitting payroll information to HMRC on or before each pay date
• Providing statutory payslips and annual P60s to employees
• Keeping accurate payroll records for at least 3 years

Many small business owners underestimate the complexity of UK payroll. Even if you have only one employee, the rules are the same as for large companies. Outsourcing to a payroll provider can help, but you remain legally responsible for compliance — HMRC will fine you, not your provider, if errors occur.

Before you pay anyone, you must register as an employer with HMRC. This process can take up to two weeks, so it’s crucial to start early. You’ll need your business’s Unique Taxpayer Reference (UTR), Companies House number (if a company), and details of your first pay date. After registering, you’ll receive a PAYE reference and Accounts Office reference — these are essential for all payroll correspondence and payments.

Next, decide how you’ll run payroll. You can use commercial payroll software (like Sage, BrightPay, or Xero), HMRC’s free Basic PAYE Tools (for businesses with fewer than 10 employees), or outsource to a payroll bureau/accountant. Your choice will affect cost, compliance risk, and how much control you retain. Most small businesses find commercial software or outsourcing easiest, as HMRC’s free tool is basic and lacks some essential features for growing businesses.

You’ll also need to choose your pay frequency — weekly, fortnightly, or monthly. This must be consistent and reported accurately to HMRC. Irregular pay schedules can create compliance headaches, especially for part-time or zero-hours staff.

• Decide pay frequency and make it clear to employees
• Register for PAYE using your Government Gateway account
• Choose and set up payroll software before your first pay run
• Collect employee details (full name, address, NI number, P45 or starter checklist)
• Check if your business needs to enrol staff in a workplace pension

Delays in PAYE registration can cause headaches. If you pay staff before registering, you can’t submit RTI on time, leading to automatic penalties. Plan your first payroll run at least a month in advance to avoid this common pitfall.

Running payroll in the UK means getting every calculation right — every time. This includes gross pay, tax-free allowances, all statutory deductions (Income Tax, employee NICs, student loans, pension contributions), and any other withholdings (such as court orders). You’re also responsible for calculating and paying employer NICs and pension contributions. Errors here are the most common source of HMRC penalties and employee disputes.

You must also process statutory payments: Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), and Statutory Adoption Pay (SAP). These are paid to eligible employees and must be reported via your payroll, even if you can reclaim them from HMRC. Each has strict eligibility rules and rates that change annually.

Minimum wage compliance is non-negotiable. The National Living Wage for 2026/27 is £11.44 per hour for workers aged 21 and over. Failure to pay at least the legal minimum — even due to payroll errors — risks public naming, fines up to 200% of arrears, and repayment to staff. Always check current rates on GOV.UK before every pay run.

• Apply correct tax codes and update for new starters/leavers
• Use HMRC’s latest rates and thresholds every tax year
• Check eligibility and process statutory payments via payroll
• Deduct and pay over employee NICs, pay employer NICs too
• Enrol eligible staff in a workplace pension and process opt-outs

It’s vital to keep up with rate changes each tax year. Most payroll software updates automatically. If you run payroll manually or use Basic PAYE Tools, you must update these figures yourself. Out-of-date calculations are a red flag for HMRC and often lead to underpayments.

Since 2013, HMRC has required most UK employers to report payroll data every time they pay staff — not just annually. This is Real Time Information (RTI). You must submit a Full Payment Submission (FPS) on or before every payday, detailing every employee, all payments, and deductions. If you pay anyone late or fail to submit on time, you risk automatic penalties.

If you make adjustments after payday (for example, a correction or late payment), you may need to file an additional FPS or an Employer Payment Summary (EPS). The EPS is also used to claim statutory payments (like SMP or CIS deductions) or declare no employees paid in a period. All RTI submissions are made electronically, either via your payroll software or HMRC’s Basic PAYE Tools.

RTI allows HMRC to match payroll data against tax payments, Universal Credit claims, and pension contributions in real time. This means errors are quickly flagged, and discrepancies often trigger compliance checks. Always double-check reports before submitting, as amendments can be time-consuming and increase audit risk.

• Submit an FPS for every pay run, on or before payday
• Send an EPS if you have statutory payments, no employees paid, or need to reclaim CIS deductions
• Check for RTI submission receipts from HMRC to confirm acceptance
• Correct errors promptly with an amended FPS or EPS
• Keep digital and paper records of all RTI submissions

Common mistakes include missing the submission deadline, reporting incorrect pay dates, or failing to report leavers. Payroll software usually prompts you to submit RTI, but it’s your responsibility to ensure it goes through. Always confirm receipt and action any error messages from HMRC immediately.

Submitting RTI is only half the battle — you must also pay the PAYE and NICs due to HMRC, on time, every month or quarter. The default deadline is the 22nd of the month after the payroll month if you pay electronically (or the 19th if by post). Small employers can pay quarterly if their average monthly PAYE/NIC bill is less than £1,500.

You’ll need to pay all deductions (Income Tax, employee and employer NICs, student loans, and any other payroll liabilities) in one payment, quoting your Accounts Office reference. Missing payment deadlines triggers interest charges and automatic penalties — even if you submitted RTI on time. HMRC will also chase underpayments aggressively, so don’t assume small errors will be ignored.

The amount due is based on your RTI submissions, so any errors will feed through to your payment demands. Always double-check your payroll reports against your payments due, especially after corrections or if you have starters/leavers. Setting up a Direct Debit or standing order can help avoid missed deadlines, but you must still reconcile figures each month.

• Check your payment amount matches your RTI-reported liabilities
• Pay electronically for fastest processing and reliable records
• Set reminders for the 22nd of each month (or quarter, if eligible)
• Reconcile your payroll software reports against HMRC receipts
• Contact HMRC’s Employer Helpline (0300 200 3200) for payment queries

Don’t be tempted to skip payments or hope HMRC won’t notice small errors. Even minor underpayments or late payments can escalate quickly, with daily interest and penalty letters. If you’re struggling to pay, contact HMRC early — they may agree a Time to Pay arrangement for genuine hardship, but ignoring the problem never ends well.

Payroll compliance doesn’t stop at payday. You must keep detailed payroll records for at least three years from the end of the tax year they relate to (HMRC recommends six years to be safe). This includes payslips, RTI submissions, P60s, P45s, payroll reports, and records of all deductions and statutory payments. You must also provide employees with a payslip every pay period, showing gross pay, deductions, and net pay.

At the end of each tax year (5 April), you must provide a P60 to every employee still on payroll by 31 May. If an employee leaves, issue a P45 showing pay and tax up to their leaving date. You’ll also need to submit a final FPS or EPS to HMRC, confirming the last payroll run of the tax year. These year-end duties are non-negotiable — missing them can result in penalties and employee complaints.

If you provide benefits in kind (company cars, private health insurance, etc.), you must also complete P11D forms for each relevant employee by 6 July, and pay any Class 1A NICs due by 22 July. Benefits reporting is complex and often missed by small businesses, so seek advice if you’re unsure.

• Retain payroll records for at least 3 years (ideally 6)
• Provide payslips with every pay run, showing required details
• Issue P60s by 31 May and P45s promptly for leavers
• Submit final FPS/EPS to HMRC after last payroll of the year
• Complete and submit P11Ds for benefits by 6 July

Failing to keep accurate payroll records is a serious compliance risk. HMRC can estimate your liabilities and charge penalties if you can’t produce records on request. Use payroll software that backs up data securely or, if running manual payroll, store paper and digital copies in a locked, fire-safe location.

Payroll errors are common among UK small businesses — and HMRC rarely accepts ignorance as an excuse. The most frequent mistakes are late or missing RTI submissions, incorrect tax codes, underpaid NICs, and failure to issue payslips or year-end forms. Many small firms also forget to auto-enrol eligible staff in a workplace pension, risking fines from The Pensions Regulator.

New starters and leavers are a particular danger zone. Failing to apply the correct tax code (using a P45 or starter checklist), missing student loan deductions, or not reporting a leaver promptly can cause underpayments that trigger HMRC investigations. Always obtain the right paperwork for every new joiner and leaver, and update your payroll records immediately.

Software helps, but it’s not foolproof. You must still check for updates, input data correctly, and review HMRC notifications. If you outsource, get clear written confirmation of who is responsible for each compliance task — you are still legally responsible for any mistakes.

• Always use the correct tax code for new starters (P45 or starter checklist)
• Check for software updates every April (new tax year)
• Don’t pay staff before registering for PAYE and setting up RTI
• Process leavers promptly and issue P45s without delay
• Double-check minimum wage compliance for all staff, every pay run
• Review HMRC notices and action any corrections immediately

Don’t assume payroll is ‘set and forget’. Laws, rates, and HMRC processes change regularly, so review your setup at least annually. If in doubt, get professional advice — the cost is usually far less than the price of getting it wrong.

Many UK small businesses choose to outsource payroll to accountants or specialist bureaus. This can save time and reduce compliance risk, especially as your business grows. Outsourcing is particularly attractive if you have variable staff, frequent starters/leavers, or lack in-house finance expertise. However, you must still understand your responsibilities and monitor your provider’s performance.

A good payroll provider will register you for PAYE, run your payroll, calculate deductions, submit RTI, provide payslips, and manage year-end returns (P60s and P45s). Some also handle auto-enrolment and benefits reporting. Fees are usually charged per employee per month, or as a fixed monthly rate. You’ll need to provide accurate, timely information to your provider — mistakes in your data will result in errors, no matter how good the provider.

Check your contract carefully. You are legally responsible for payroll compliance, even if you outsource. HMRC will pursue your business for any errors or penalties, not your provider. Ensure you receive regular payroll reports and RTI submission confirmations, and maintain your own payroll records as a backup.

• Choose a provider with proven UK payroll expertise
• Agree responsibilities in writing (including deadlines)
• Send payroll data (hours, starters, leavers) on time every pay period
• Check all payslips and reports for errors before approving payments
• Request regular compliance updates and RTI submission receipts

If you change provider or bring payroll in-house, ensure a smooth handover. Get full copies of all payroll records, RTI submission history, and year-end forms. Errors during handover are common and can trigger HMRC queries or underpayments, so double-check everything.