Payroll compliance: your complete guide for UK employers

Published Friday 15 May 2026

Table of contents

• What is payroll compliance?
• Why payroll compliance matters
• Key payroll compliance requirements
• Common payroll compliance mistakes
• Payroll compliance penalties
• 2026 payroll compliance changes
• Worker classification and employment status
• How to stay payroll compliant
• Choosing payroll software
• Simplify payroll compliance with Xero
• FAQs on payroll compliance

Key takeaways

• PAYE and RTI deadlines are strict. You must submit Full Payment Submissions on or before each payday, and late filing penalties start at £100 per month.
• April 2026 brought significant legislative changes. Statutory sick pay is now payable from day one, the national living wage rose to £12.71 per hour, and the Fair Work Agency launched with expanded enforcement powers.
• Pension auto-enrolment carries escalating penalties. You must enrol eligible employees within three months of their start date, and non-compliance penalties range from £400 to £10,000.
• Record keeping requirements have expanded. HMRC requires you to keep payroll records for three years, and from April 2026, holiday pay records must be retained for six years.

What is payroll compliance?

Payroll compliance means meeting all legal obligations when you pay your employees. It covers everything from calculating and deducting the right amounts to reporting accurately and on time.

In the UK, payroll compliance spans several areas: Pay As You Earn (PAYE) tax deductions, National Insurance contributions (NICs), workplace pensions, statutory payments such as sick pay and maternity pay, and Real Time Information (RTI) reporting to HMRC.

Getting payroll wrong can be costly. Penalties for late RTI filing range from £100 to £400 per month depending on the number of employees, and persistent non-compliance can result in fines of up to £3,000 per month.

Why payroll compliance matters

Payroll compliance isn't just a one-off setup task; it's an ongoing responsibility that directly affects your business reputation and financial health.

HMRC actively enforces payroll rules and publishes the names of non-compliant employers. In recent enforcement rounds, HMRC named 389 employers who underpaid the national minimum wage, with £7.3 million in arrears owed to workers and £12.6 million in penalties issued.

Enforcement is increasing further. The Fair Work Agency, established on 7 April 2026, brings together multiple enforcement bodies under one organisation. It has the power to look back six years into your payroll records and issue penalties of 200% of underpayment, with a minimum of £100 and a maximum of £20,000 per individual affected.

Staying compliant protects your employees, your reputation, and your bottom line. It also ensures you can focus on growing your business rather than dealing with HMRC investigations.

Key payroll compliance requirements

UK payroll compliance involves several interconnected obligations. Understanding each one helps you build a reliable payroll process from the start.

PAYE and tax obligations

PAYE is the system HMRC uses to collect income tax and NICs from employees' pay. As an employer, you're responsible for calculating and deducting the correct amounts each pay period.

You need to register as an employer with HMRC before your first payday. Once registered, you'll receive a PAYE reference number and access to HMRC's online services. You then report each employee's pay and deductions through a Full Payment Submission (FPS) on or before every payday.

National Insurance contributions

Both you and your employees pay NICs on earnings above set thresholds. As an employer, you're responsible for deducting employee NICs from their pay and paying your own employer NICs on top.

You need to apply the correct NIC category letter for each employee and calculate contributions accurately each pay period. Getting NIC calculations wrong can lead to underpayments or overpayments, both of which create compliance issues with HMRC.

Real Time Information (RTI) reporting

RTI is the system that requires you to report payroll information to HMRC every time you pay your employees, rather than at the end of the tax year. You submit an FPS on or before each payday, detailing every employee's pay, tax, and NIC deductions.

You may also need to send an Employer Payment Summary (EPS) to report any statutory payments you've recovered or to claim employment allowance. Late or inaccurate RTI submissions trigger automatic penalties.

National minimum wage and national living wage

You must pay your employees at least the legal minimum rate for their age group. From April 2026, the rates are:

• National living wage (21 and over): £12.71 per hour.
• 18 to 20 year olds: £10.85 per hour.
• 16 to 17 year olds: £8.00 per hour.
• Apprentices: £8.00 per hour.

Be careful with salary sacrifice arrangements. If an employee's pre-sacrifice pay meets the minimum wage but their post-sacrifice pay falls below it, you could breach minimum wage rules. Always check that deductions don't push effective pay below the legal floor.

Statutory payments

You're responsible for administering several statutory payments when employees are absent from work. From 6 April 2026, statutory sick pay (SSP) rules changed significantly: SSP is now payable from day one of absence, the lower earnings limit has been removed, and the rate is the lower of 80% of average weekly earnings or £123.25 per week flat rate.

You also need to manage statutory maternity pay (SMP), statutory paternity pay (SPP), shared parental pay (ShPP), and statutory adoption pay (SAP). Each has specific eligibility criteria, notice periods, and payment calculations you must follow.

Pension auto-enrolment

You must automatically enrol eligible employees into a workplace pension scheme. Eligible employees are those aged 22 to state pension age, earning £10,000 or more per year.

The minimum total contribution is 8% of qualifying earnings: at least 3% from you as the employer and 5% from the employee. You must enrol eligible employees within three months of their start date. Penalties for non-compliance start at £400 and can escalate to £10,000.

Record-keeping requirements

HMRC requires you to keep payroll records for at least three years after the end of the tax year they relate to. Records must include employee details, pay, deductions, and all RTI submissions.

From April 2026, a new requirement means you must keep holiday pay records for six years. Good record keeping protects you during audits and helps resolve any disputes with employees or HMRC.

Common payroll compliance mistakes

Even well-intentioned employers can make errors that lead to penalties. Knowing the most common pitfalls helps you avoid them.

• Misclassifying workers. Treating an employee as a self-employed contractor, or vice versa, can result in back-payment of tax, NICs, and holiday pay. Use HMRC's Check Employment Status for Tax (CEST) tool to determine the correct classification.
• Inaccurate tax calculations. Applying the wrong tax code, missing code changes, or calculating deductions incorrectly can lead to underpayments or overpayments that trigger HMRC enquiries.
• Late RTI submissions. Missing the deadline for your FPS, even by a single day, results in automatic penalties that accumulate each month.
• NMW breaches from salary sacrifice. Failing to check whether salary sacrifice arrangements push employees' effective pay below the minimum wage is a common and costly oversight.
• Pension auto-enrolment errors. Missing the three-month enrolment window, applying incorrect contribution rates, or failing to re-enrol employees every three years can all result in penalties from The Pensions Regulator.
• Poor record keeping. Incomplete or disorganised records make it difficult to respond to HMRC enquiries and can lead to penalties during compliance checks.

Payroll compliance penalties

HMRC applies a structured penalty system for payroll non-compliance. Understanding the specific penalties helps you prioritise where to focus your compliance efforts.

Late filing penalties for FPS submissions depend on the number of employees:

• 1 to 9 employees: £100 per month.
• 10 to 49 employees: £200 per month.
• 50 to 249 employees: £300 per month.
• 250 or more employees: £400 per month.

Late payment of PAYE and NICs attracts interest charges and additional penalties. Inaccurate reporting can result in penalties based on the amount of tax underpaid, ranging from 0% for genuine mistakes to 100% for deliberate and concealed errors.

Pension non-compliance penalties from The Pensions Regulator start at £400 and escalate to £10,000 for persistent breaches. For national minimum wage underpayment, you face penalties of 200% of the arrears owed, plus the risk of being publicly named and shamed.

The Fair Work Agency now has enforcement powers covering minimum wage, holiday pay, and other employment rights, with the ability to look back six years and issue substantial penalties.

2026 payroll compliance changes

April 2026 introduced several important changes that affect how you run payroll. Make sure your processes and systems are up to date.

• National minimum wage and national living wage increases. The NLW for workers aged 21 and over rose to £12.71 per hour, with corresponding increases across all age bands.
• SSP reform. Statutory sick pay is now payable from day one of absence. The lower earnings limit has been removed, so more employees qualify. SSP is paid at the lower of 80% of average weekly earnings or £123.25 per week.
• Fair Work Agency launch. Established on 7 April 2026, this new body consolidates employment rights enforcement and has powers to investigate up to six years of records.
• Payrolling of benefits. From April 2027, employers will need to payroll most benefits in kind. Now is the time to prepare your systems for this change.
• Day-one employment rights. Paternity leave and parental leave rights now apply from day one of employment, removing previous qualifying service requirements.
• Holiday pay record keeping. A new six-year retention requirement for holiday pay records took effect in April 2026.

Worker classification and employment status

Correctly classifying your workers is one of the most important compliance decisions you'll make. Getting it wrong can have serious financial consequences.

UK employment law recognises three main categories: employees, workers, and self-employed contractors. Each has different rights and different tax and NIC obligations for you as an employer. When you're hiring employees, understanding these distinctions from the outset is essential.

The IR35 rules, known as off-payroll working, determine whether a contractor should be treated as an employee for tax purposes. If you engage contractors through intermediaries such as personal service companies, you're responsible for assessing their employment status and deducting tax and NICs if they fall inside IR35.

HMRC provides the CEST tool to help you assess employment status. If you misclassify a worker, you could face back-payment of income tax and NICs, plus holiday pay arrears and penalties. Maintaining clear contracts and regularly reviewing working arrangements helps reduce this risk.

How to stay payroll compliant

Building good payroll habits helps you stay on top of your obligations and avoid costly mistakes. Here are practical steps to keep your payroll compliant.

• Create a payroll calendar. Map out all key dates: FPS submission deadlines, PAYE payment dates, pension contribution due dates, and tax year-end reporting. A calendar helps you avoid missed deadlines.
• Conduct regular audits. Review your payroll data at least quarterly. Check tax codes, NIC calculations, pension contributions, and minimum wage compliance to catch errors before HMRC does.
• Use payroll software with automatic compliance features. Look for payroll software with RTI integration, automatic tax code updates, and pension management tools. Good software reduces manual errors and keeps you aligned with current legislation.
• Get professional support. An accountant or payroll specialist can help with complex situations such as IR35 assessments, salary sacrifice schemes, and multi-state compliance. Their expertise is especially valuable during legislative changes.
• Keep records organised. Maintain digital records of all payroll runs, employee details, and correspondence with HMRC. Organised records make audits smoother and disputes easier to resolve.

Choosing payroll software

The right payroll software can significantly reduce the time you spend on compliance tasks while lowering the risk of errors. Here's what to look for when evaluating options.

• Automatic PAYE, NIC, and pension calculations. The software should calculate deductions accurately based on current tax codes and thresholds, updating automatically when rates change.
• RTI integration with HMRC. Direct submission of FPS and EPS to HMRC from within the software saves time and reduces the risk of late filings.
• Record management. Built-in record storage and retrieval makes it easier to meet HMRC's retention requirements and respond to audits.
• Automatic tax code updates. The software should apply HMRC tax code notices automatically, so you don't need to update each employee manually.
• Audit trails. Comprehensive logs of every payroll action help you track changes and demonstrate compliance during inspections.

Xero's payroll features include automatic tax and pension calculations, direct RTI filing to HMRC, and built-in record keeping, all designed to help you manage compliance with less manual effort.

Simplify payroll compliance with Xero

Payroll compliance doesn't need to drain your time and resources. When your processes are solid and your tools are reliable, you can focus on what matters most: growing your business and supporting your team.

Understanding how to pay employees correctly is fundamental to running a compliant, well-managed business. With the right payroll software handling calculations, submissions, and record keeping, you gain confidence that your obligations are covered.

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FAQs on payroll compliance

Here are answers to frequently asked questions about payroll compliance.

How do you ensure payroll compliance?

You can ensure payroll compliance by using reliable payroll software that automates tax and NIC calculations, submitting RTI reports on or before each payday, and conducting regular audits of your payroll data. Keeping up to date with legislative changes and maintaining organised records also help you stay compliant.

What is a payroll compliance check?

A payroll compliance check is a review of your payroll processes and records to confirm they meet legal requirements. HMRC may carry out these checks to verify that you're calculating and reporting PAYE, NICs, and statutory payments correctly.

What are the main components of payroll?

The main components include PAYE income tax deductions, National Insurance contributions, pension auto-enrolment, statutory payments such as sick pay and maternity pay, and RTI reporting to HMRC. You also need to track employee hours, holiday entitlements, and record keeping.

What are common payroll compliance mistakes in the UK?

Common mistakes include misclassifying workers as contractors instead of employees, applying incorrect tax codes, missing RTI submission deadlines, and failing to enrol eligible employees into a pension scheme on time. Salary sacrifice arrangements that inadvertently breach minimum wage rules are another frequent issue.

What are the penalties for payroll non-compliance?

Penalties vary depending on the type of breach. Late FPS filing incurs monthly fines of £100 to £400, pension non-compliance starts at £400 and can reach £10,000, and national minimum wage underpayment attracts penalties of 200% of the arrears owed. The Fair Work Agency can also issue penalties of up to £20,000 per individual affected.

What changed in UK payroll compliance in 2026?

Key changes from April 2026 include statutory sick pay becoming payable from day one, national living wage increasing to £12.71 per hour, the launch of the Fair Work Agency, new day-one rights for paternity and parental leave, and a six-year retention requirement for holiday pay records. Payrolling of benefits in kind takes effect from April 2027.