Payroll Compliance Guide and Tips for UK Businesses

By alisonbarlow|Feb 3, 2025|11:53 am GMT

Article length: 12 minutes

Our payroll compliance guide for UK businesses

A flurry of legislative changes has hit the hospitality industry in the years since the pandemic. Updates to payroll and employment laws are among the most common and mean that, for HR and Payroll teams, keeping up with these changes can feel like a full-time job.

In this payroll compliance guide, we’ll explain the complexities of payroll compliance, highlight the areas where breaches most commonly occur, and suggest tips, tricks, and tools to help you avoid them.

What is payroll compliance, and why is it important?

Payroll compliance isn’t just about ensuring employees are paid accurately and on time. It covers everything from the secure storage of employee data and conforming to GDPR requirements to checking payroll numbers and ensuring the right amount of income tax and national insurance is deducted.

In 2024, the compliance requirements for payroll got stricter, increasing penalties for compliance breaches and expanding employer responsibilities around real-time information and reporting.

The government isn’t shy about ‘naming and shaming’ those who fail to comply with payroll regulations, either. It publishes an annual list of companies that fail to pay minimum wage. Last year’s list included 525 businesses in breach of national minimum wage (NMW) requirements, among them household names including EasyJet, Estee Lauder, and the high street bakery Greggs. The employers named were ordered to repay their workers nearly £16 million and all received a financial penalty that totalled 200% of their underpayment in some cases.

Common payroll compliance mistakes to avoid

The government’s annual ‘name and shame’ list proves how easy it is to fall foul of payroll errors and make costly mistakes––even for well-known brands. Errors in payroll and the resulting compliance issues aren’t just expensive from a financial point of view, either. They cost brand credibility and trust among your present and future workforce and your customers. 

The hospitality industry has some characteristics that make avoiding these errors particularly tricky. The sector relies on a seasonal or flexible workforce and is one of very few in the country where tipping is commonplace. This increases the complexity of payroll processing and compliance and adds to the number of places in the typical workflow where common payroll mistakes can be introduced. 

Outdated records

Out-of-date employee records are a compliance breach, and penalties range up to £3,000 depending on the number of staff affected and how long records are inaccurate. They’re also a liability that can lead to further errors––teams haven’t a hope of correctly calculating payments or deductions if the payroll information they have to start with is wrong. Mistakes are also difficult to detect (and rectify) with inaccurate data. 

His Majesty’s Revenue and Customs (HMRC) has the right to request payroll records, and they generally do so every five years or so. Poor data practices and outdated records make it difficult to show compliance during these audits and can lead to further penalties.  

Late filings

Employers must complete and submit Full Payment Submissions (FPS) to HMRC each time they pay their employees, regardless of how long an individual is likely to be employed or how much they’re paid. These are the main real-time information (RTI) submission requirements and must include who was paid what and any deductions made. 

FPS must be submitted shortly before or on payday. Late filings (i.e., those submitted after payday) could be subject to penalties ranging from £100 to £400 monthly, depending on the number of staff you have. 

Incorrect tax calculations

Pay-as-you-earn (PAYE) requires employers to calculate workers’ tax obligations as they earn, deduct them, and pay that amount to HMRC on the employee’s behalf each month. But getting PAYE right involves more than correctly calculating tax. 

Failing to operate the correct tax code from an employee’s start date, using the wrong tax code, not updating tax codes at the start of each year, or not following HMRC guides are all common PAYE errors.

Dated practices

Employers are responsible for staying up-to-date with changing legislation and regulations, however overwhelming that can sometimes feel. Outdated processes that don’t reflect new requirements will likely result in late or inaccurate reports or incorrect employee payments. 

Not meeting National Minimum Wage

In April 2025, the National Minimum Wage (NMW) will increase the hourly rate for those aged 21 and over to £12.21. This change means employers must review pay structures across the board, not just for those currently earning NMW.

Hourly rates alone don’t always tell the whole story. Additional costs like uniform expenses, salary sacrifices, and overtime could push employees’ pay below the new threshold, even if their base rate appears compliant. Businesses that fail to assess and correct for these factors risk being named and shamed by HMRC and could face significant fines.

Taking ‘reasonable care’

Any mistake can result in inaccurate reporting, which can lead to payroll errors. While HMRC acknowledges that mistakes can and will happen, it expects everyone within the payroll process to take ‘reasonable care’ to ensure the accuracy of any tax due.  

What qualifies as ‘reasonable care’ varies depending on the situation. For example, HMRC doesn’t hold self-employed individuals to the same standard as large multinational companies. Similarly, simple processes aren’t expected to be scrutinised to the same degree as more complex ones.

Penalties for inaccuracies depend on two factors: the reasons behind the error and the potential lost revenue. Penalties for errors resulting from a ‘lack of reasonable care’ range from 0% to 30% of any extra tax due. In the case of deliberate mistakes, penalties can hit 100% for deliberate and concealed errors.

How to ensure payroll compliance

Payroll compliance ultimately requires a process that’s agile enough to keep up with changing requirements and thorough enough to avoid common mistakes. 

Ensuring your business can meet the required payroll and hr compliance standards involves everything from enforcing data quality procedures to staying up-to-date with new legislation.

Ensure all personal information is accurate

Accurately recording factors like hours worked, deductions, benefits, and tax withholdings are critical to ensuring employees are paid correctly. Any errors in an individual’s personal information can lead to incorrect payments, which might materially affect employees and will likely result in financial penalties for your business. 

Regular audits of employee information are the easiest way to ensure its accuracy. Verifying personal data, benefits, and tax codes reduces the chances of inaccurate reports and mistakes later on. 

Monitor for legislative updates

Over the past two years, we’ve seen a flood of new legislation introduced—often at lightning speed. With each new update, the cost and resources needed to ensure compliance rise. Many employers now struggle to keep track of exactly what’s expected of them and implement new processes at scale.

Fourth’s Payroll software can help ease this burden. We track relevant legislative changes, automatically amending common workflows with the platform to ensure compliance and introducing new tools to help operators navigate changes. Our Level Up product release included updates to Fourth Payroll in time for the introduction of The Employment (Allocation of Tips) Act. These tools allow operators to automate tronc distribution at scale and in line with their agreed-upon policy, ensuring tips are distributed fairly.

Regularly review pay structures 

Employee situations change regularly. Workers may age out of the under-21 bracket, for example, or qualify for parental leave. Operators must routinely monitor every individual within the workforce, assessing them against any qualifying criteria to ensure they’re paid fairly and accurately. 

Fourth’s HR and Payroll platform simplifies this process by automating the monitoring of pay structures. Users can generate a comprehensive report for the entire workforce to check compliance with key criteria, such as minimum wage, with just one click. It also allows payroll teams to quickly batch-update all employees identified in the report to the correct pay rate, streamlining the process and making regular reviews more manageable.

Schedule frequent audits 

Similarly, regularly reviewing processes and staff information and reconciling payroll payments and deductions is good practice. It helps to identify errors early, allowing for quick corrections.

It also makes HMRC’s routine audits far easier to manage and reduces the risk of non-compliance and fines. Audit trails are particularly helpful on this front. They require documenting and tracking changes in your payroll processes, allowing your team to justify why certain workflows are in place and the reason for any updates. Having a clear audit trail is also valuable for showing that you’ve taken reasonable care in fulfilling your payroll responsibilities as an employer.

Be aware of deadlines

Tracking deadlines is one of the easiest ways to avoid breaches and late penalties. Fourth’s payroll solution automates processes and submissions in line with company policies, helping to ensure your team consistently meets deadlines with minimal stress. It also includes features that help prevent common submission errors, such as misordering tronc distributions or making zero fund allocations, further reducing the chances of inadvertent errors and compliance breaches. 

Understand workplace pensions

Employers (big and small) must provide a workplace pension scheme and automatically enrol any staff over the age of 22 who earn more than £192 per week, contributing at least 3% of the value of the employee’s qualifying earnings towards their pension. The Pensions Regulator monitors compliance, and employers who fail to meet their obligations can face penalty notices and fines ranging up to £50,000.

Fourth’s Payroll solutions streamline pension management, automatically calculating pension contributions for each employee to ensure accuracy and avoid non-compliance.

Use payroll management software

Ensuring payroll compliance can be tricky, particularly in the hospitality sector, which has several workforce characteristics and practices that complicate the process. Payroll and HR software can provide the tools and frameworks to remove administrative burdens from teams and simplify the process.

How Fourth’s payroll software can help your business stay compliant

Fourth’s solutions are tailored to meet the unique needs of hospitality operators. Whether you’re running a quick service restaurant or a hotel, a handful of sites or an international chain, automated payroll processing increases efficiency, reduces errors, and improves compliance.

Want more? Discover these resources:

• A Survival Guide to 2025 HR & Payroll Report
• 2025 HR & Payroll Legislation Checklist
• 3 Steps to Avoid Accidental Non-Compliance with National Minimum Wage
• What do you need to know about April’s new neonatal care leave?
• Employee Email Communication Template: Neonatal Care Leave Policy
• Employee Email Communication Template: National Minimum Wage Updates
• How operators can navigate the 2025 NIC reforms