UK Payroll Compliance – What Do Financial Directors Need to Know?

UK Payroll Compliance

To begin with, financial directors of UK-registered firms need to have their eyes on all sorts of regulatory issues, not just those pertaining to payroll. However, it should also be said that it is not just financial directors who ought to be well-versed in the latest payroll regulations these days. Of course, payroll managers at least need to keep abreast of the changing regulatory environment in the UK – especially since the departure from the European Union. More widely, operations directors, human resources managers and even chief operating officers, in some cases, need to understand what UK payroll compliance really entails these days. If not, then they could be under-resourcing this vital part of the way any commercial entity operates today.

To put this another way, if your organisation isn’t meeting all its obligations under payroll regulations, then the issue could be much worse than simply allocating extra resources to put things right. HMRC could, in theory, take a very dim view of failings and want to audit the entire company’s accounts if it thinks deliberate actions have been taken to circumvent regulations. In some cases, fines and reputational damage can be so extensive that they place an entire organisation under strain. Indeed, firms can even go out of business because of neglect in this area.

Of course, it should also be stated that outsourcing payroll to an organisation that has its eye on the ball when it comes to the UK’s regulatory framework with pay and remuneration packages is often the best way to go if you don’t have the resources in-house. After all, many SMEs – and even some bigger businesses – fall into this category. By using a contractor to manage payroll, you will also often benefit from greater data security, another big area of regulatory control. That said, what are the primary areas that have an effect on payroll regulations in the UK today? Read on to discover exactly the sort of areas that reputable managed payroll service providers are looking after on numerous British firms’ behalf.

Off-Payroll Employment and Employees

This is a big area of regulatory compliance that has caused British businesses a headache for many years. The basic this to note about off-payroll workers that are not treated as employees is that HMRC now takes a very dim view indeed of any business that tries to bend the rules. In the past, any business that had large numbers of employees – such as retail groups, manufacturing companies and logistical operators, for example – was at a relative disadvantage compared to firms with low numbers of employees but which outsourced much of their work.

For example, construction companies would often be able to get away with claiming that a worker who worked almost exclusively for them was, in fact, a self-employed freelancer. The same was frequently the case in the information technology sector where contractors would often be put on to rolling six or nine-month contracts to make it seem as though they were not directly employed even though their contracts often prevented them from undertaking any other professional work in the sector. This is the so-called IR35 phenomenon which effectively gave a tax break to employers who engaged in wide-ranging off-payroll employment, not least because it meant avoiding employer’s national insurance contributions.

These days, the rules surrounding who is an IR35 tax-coded contractor and who is a genuine employee are much stricter. However, this is not the only issue for those responsible for payroll management to take on board. Even in the grey areas that exist between employment and contracting, HMRC tends to take a much tighter view of what is what. Therefore, if your company genuinely uses contractors who are entitled to call themselves self-employed, there is a much greater onus on businesses to demonstrate this is the case than ever before.

Statutory Sick Pay Entitlements

Another key area that lets some organisations down with respect to their payroll management relates to the regulations in place in the UK that deal with sickness. In fairness, many British firms have quite generous sickness policies that go well beyond what the law specifies. However, some organisations simply have no clue about how much they should pay employees who are off sick, especially those who have been away from the workplace for some time.

The pandemic certainly brought a much greater focus to the rules surrounding sick pay standards in the UK as so many people were forced to self-isolate even if they didn’t feel particularly ill. In numerous cases, employers were found to be wanting without the systems in place with their legacy payroll systems to even cope with statutory sick pay, or SSP. It should be noted that SSP is the minimum requirement under UK law for sick pay and that these rules can be exceeded without penalty. Today, SSP kicks in on the fourth consecutive day that a worker is off sick. All employees who have the medical documentation to prove they are genuinely unable to work are entitled to a minimum of £96.35 per week, assuming they’re a full-time worker. Note too, that the three-day grace period before it kicks in does not – and never – related to sickness caused by Covid-19.

Student Loan Deductions and Regulatory Divergence

All employees who took out student loans in their life that have not been previously repaid to the Student Loans Company must have deductions from their payslips each week or month they are paid. However, the regulations state that this will only be applied to workers who have reached a certain threshold of earnings. As such, employers are under a regulation that states they must know when a worker has an outstanding student loan debt and that they must take action in their payroll function to forward sums to the lending body. Even more complex to manage, there are different regimes depending on where the employee studied. Simply put, the rules and thresholds for Scottish graduates differ compared to those from England, Wales and Northern Ireland.

To begin with, payroll managers are only allowed to deduct student loan repayments from employees’ salaries at the start of the financial year following the end of their studies. This can vary greatly from institution to institution. Equally, repayments must stop if their salary drops beneath the threshold, for example, because of a demotion or changing hours. Even more of a headache is the fact that there are now two plans within the student loan scheme. Plan 1 requires deductions that start at the equivalent of £1,682 a month in earnings while the corresponding figure for Plan 2 is £2,274 a month. These figures are recalculated at the commencement of every new financial year.

The National Minimum Wage in the UK

Another area of regulatory compliance that employers need to be aware of that changes each year is the national minimum wage. This impacts on pay rates for employees depending on their age. If you are paying someone at too low a rate, then you can face still penalties and even be taken to court. Importantly, the national living wage – which used to be for people aged 25 and over – now covers everyone in employment who is 23 or more. As such, the goalposts are constantly moving and require careful attention to detail if you are not to be tripped up.

If you’d like to find out more about how Snow’s technology can make payroll less of a hassle while also dealing with regulatory compliance, then feel free to get in contact with us.

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