Payroll compliance: Your guide to hiring and paying employees

Published Friday 30 January 2026

Table of contents

• What is payroll compliance?
• Why payroll compliance matters from day one
• Key compliance requirements for new employees
• Record-keeping requirements
• Setting up pension enrolment
• Tax obligations and reporting
• Managing compliance details for your business
• Communicating with your new employee
• Staying compliant beyond day one
• FAQs on payroll compliance

Key takeaways

• Set up accurate payroll records from day one by verifying employee details, tax codes, and payment information to avoid penalties ranging from £100 to £3,000 per month.
• Submit your Full Payment Submission (FPS) to HMRC on or before each payday and pay tax obligations by the 19th (postal) or 22nd (electronic) of each month to prevent automatic penalties.
• Maintain comprehensive payroll records for three years including employee payments, deductions, HMRC reports, and leave records to prove compliance during audits.
• Implement automatic pension enrolment within three months for eligible employees aged 22 to State Pension age earning over £10,000 annually, with minimum 8% contributions to avoid fines starting at £400.

What is payroll compliance?

Payroll compliance covers multiple legal obligations beyond basic payment processing:

• Tax obligations: Pay As You Earn (PAYE) deductions, National Insurance contributions, and reporting deadlines
• Record keeping: Maintaining accurate employee data and payment histories
• Statutory payments: Holiday pay, sick leave, and overtime calculations
• Reporting requirements: Real Time Information (RTI) submissions to HMRC

Why compliance matters: Staying compliant helps you avoid penalties of £100 to £3,000 per month and the risk of prosecution for serious breaches.

Why payroll compliance matters from day one

Before your new employee starts, you must complete essential compliance tasks.

Key first-day requirements:

• Setting up payroll records
• Confirming tax codes
• Ensuring accurate personal details

Missing these steps can result in penalties and legal issues.

By setting up your payroll processes correctly from day one, you create a smooth, efficient system that supports your business as it grows.

Key compliance requirements for new employees

Adding new employees to your payroll system requires accurate data entry to ensure compliance from day one.

Essential setup requirements:

• Employee verification: Confirm employment status versus contractor classification
• Personal details: Verify date of birth, address, and marital status for tax purposes
• Tax information: Input correct salary details, tax codes, and contractual benefits
• Working arrangements: Record accurate hours (part-time, full-time, flexible schedules)
• Payment details: Verify bank account information in writing to prevent misdirected payments
• Start date activation: Set payment dates to align with your payroll schedule

Penalties for non-compliance

HMRC can issue penalties for mistakes in your payroll process. Understanding these risks helps highlight the importance of accuracy.

• Late filing: Send your Full Payment Submission (FPS) on time to avoid monthly penalties of £100 to £400, depending on the number of employees.
• Late payment: Pay your tax and National Insurance bill to HM Revenue and Customs (HMRC) on time to avoid late payment penalties and interest.
• Inaccurate reporting: Check the information you submit carefully so you avoid penalties, even for honest mistakes.

Essential compliance deadlines

Meeting deadlines is a critical part of payroll compliance. Missing them can result in automatic penalties, so you need to know the key dates.

• On or before payday: You must report your employees' pay and deductions to HMRC in an FPS on or before each payday.
• By the 19th of the month: You must pay HMRC for the previous tax month if paying by post.
• By the 22nd of the month: You must pay HMRC for the previous tax month if paying electronically.

Record-keeping requirements

You are legally required to keep certain payroll records. These records prove you are paying the correct amount of tax and complying with employment law.

You must keep records for three years from the end of the tax year they relate to. These records should include:

• what you've paid your employees and the deductions you've made
• reports you've made to HMRC
• payments made to HMRC
• employee leave and sickness absences
• tax code notices

Setting up pension enrolment

Automatic pension enrolment is a legal requirement in the UK for eligible employees. You must enrol new employees within three months of their start date.

UK enrolment requirements:

• Eligible employees: Aged 22 to State Pension age, earning over £10,000 annually
• Minimum contributions: 8% of qualifying earnings (3% employer, 5% employee minimum)
• Timing: Enrolment must occur by the employee's automatic enrolment date
• Penalties: £400 initial fine, escalating to £10,000 for continued non-compliance

Tax obligations and reporting

A major part of payroll compliance involves managing tax obligations through the Pay As You Earn (PAYE) system. This is how you pay income tax and National Insurance to HMRC on behalf of your employees.

You must send reports to HMRC every time you pay an employee through Real Time Information (RTI). This ensures that HMRC has up-to-date information and can calculate the correct tax liabilities for your business and your employees.

Managing compliance details for your business

Your compliance needs will vary based on your industry and how your team works.

Key compliance variables:

• Employee turnover rates: High turnover requires streamlined onboarding and accurate final pay calculations
• Expense policies: Travel and entertainment expenses must comply with HMRC guidelines for tax deductibility
• Cash payments: These are rare but legal and require stronger security measures and detailed record keeping.
• Overtime calculations: Weekend and holiday pay must follow statutory minimum requirements
• Multi-location operations: Different countries require compliance with local employment laws and tax rates

If you are unsure about any aspect of payroll compliance, get professional advice from a business advisor, your local chamber of commerce, or an accountant.

Getting professional support

Professional accounting support ensures compliance accuracy and reduces penalty risks. Accountants stay current with changes in employment legislation. A recent report found that more than half of finance professionals believe flexible career paths will replace traditional ones by 2035. That expertise means you can focus on running your business.

How accountants help with compliance:

• Monitor changes in tax codes, rates, and reporting requirements
• Review payroll setups to identify and fix potential compliance gaps
• Submit information on time and calculate pay accurately to avoid penalties
• Prepare documentation and represent you during HMRC reviews

Choosing compliance-friendly payroll software

Compliance-friendly payroll software automates legal requirements and reduces error risks. Choose software that handles UK-specific obligations automatically.

Essential compliance features:

• Automatic calculations: Real-time PAYE, National Insurance, and pension contributions
• RTI integration: Direct submission to HMRC with error checking
• Record management: Secure storage of employee data and payment histories
• Update management: Automatic tax code and rate updates
• Audit trails: Complete transaction histories for compliance verification

Ask for recommendations from business associates, accountants and suppliers. Don't rush the decision, because good payroll software will stay with you as your business grows.

Communicating with your new employee

Employee compliance communication ensures your new hire understands their legal responsibilities from day one.

Essential compliance discussions:

• Personal data updates: Requirement to notify you of address, marital status, or bank detail changes
• Expense documentation: Obligation to maintain receipts for all business-related expenses
• Time recording: Responsibility to accurately report overtime and working hours
• Contract compliance: Understanding of all employment terms and statutory obligations

Staying compliant beyond day one

Payroll compliance protects your business from penalties while building efficient systems for growth. Proper first-day setup creates accurate records that simplify ongoing obligations like RTI submissions, year-end reporting, and employee queries.

Long-term compliance benefits:

• Avoid costly HMRC fines with accurate, reliable systems
• Save time by using automated processes instead of manual administration
• Stay ready for audits with complete, well-organised records
• Support business growth with systems that scale as your team expands

Modern payroll software handles compliance automatically, letting you focus on growing your business. Try Xero for free to see how cloud-based payroll simplifies compliance from day one.

FAQs on payroll compliance

Here are answers to some common questions about payroll compliance.

How do you ensure payroll compliance?

To ensure payroll compliance, you should keep accurate employee records, calculate pay and deductions correctly, report to HMRC on time using RTI, make payments to HMRC by the deadline, and stay updated on changes in employment law. Using compliant payroll software can automate many of these tasks.

What is a payroll system compliance check?

A payroll system compliance check is a review of your payroll processes to ensure they meet all legal requirements. This involves checking that you are correctly calculating wages, deducting the right amount of tax and National Insurance, and meeting all reporting and payment deadlines set by HMRC.

What are the main components of payroll?

The main components of payroll include calculating gross pay, deducting income tax (PAYE) and National Insurance, accounting for statutory payments like sick pay or maternity pay, making pension contributions, and issuing payslips to employees. It also includes reporting all of this information to HMRC.