As seasons unfold, the world of payroll compliance in the UK continues to evolve. For businesses and individuals alike, navigating these changes can feel like a complex and daunting task. And at Ellis & Co, we understand the challenges you face; hence, our aim is to simplify this for you to ensure you avoid unnecessary penalties whilst keeping your finances healthy.

In this guide, we’ll break down the key aspects of payroll compliance for freelancers, small to medium enterprises (SMEs), large companies and even employees, explaining what you need to know without the confusing jargon.

But first… what is Payroll Compliance?

Simply put, payroll compliance means following all the rules and regulations around paying your employees, handling their taxes and managing their benefits. This includes things like:

• Paying the correct wages: Ensuring everyone gets at least the National Minimum Wage (NMW) or National Living Wage (NLW), and that all hours (including overtime) are accurately paid.
• Deducting the right taxes and National Insurance (NI): Making sure the correct amounts are taken from employees’ pay and sent to HM Revenue and Customs (HMRC).
• Pension contributions: Meeting your obligations for workplace pensions through auto-enrolment.
• Statutory payments: Correctly calculating and paying things like sick pay, maternity, paternity, adoption, parental bereavement and neonatal care pay.
• Reporting to HMRC: Sending accurate and timely information about your payroll to HMRC.
• Keeping good records: Maintaining thorough and accurate records of all your payroll activities.

Key Changes to Watch Out For

The 2025/26 tax year (which started on the 6th April 2025) brings several important updates:

• Increases in National Minimum Wage (NMW) and National Living Wage (NLW): New hourly rates are in effect from 1st April 2025, so you’ll need to make sure your pay rates are updated!
• Employer National Insurance Contributions (NICs): There have been increases to employer NICs, and the threshold at which employers start paying NICs has changed. Thus, your overall payroll bill might be higher.
• Statutory Payment Rates: Rates for Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP) and other family leave payments have been adjusted (with varying percentages depending on where you’re located in the UK).
• Neonatal Care Leave and Pay: A new legislation coming into effect on the 6th of April 2025 is entitled to eligible parents whose babies require neonatal care. This is a significant new right that employers need to be aware of.
• Employment Allowance: Good news for many businesses! The Employment Allowance (which helps eligible employers reduce their NI liability) has increased, and the previous £100,000 threshold for eligibility has been removed. Therefore, opening it up to more businesses.

Who Needs to Be Compliant?

For Self-Employed Individuals:

While freelancers don’t run a “payroll” in the traditional sense, compliance is still crucial. This is because you’re responsible for your own tax and National Insurance contributions through Self-Assessment:

• Income Tax & National Insurance: You’ll need to accurately report your income and expenses to calculate your taxable profits. Depending on your profits, you’ll be subjected to varying rate classes.
• Payments on Account: Be aware of deadlines for making payments towards your next tax bill (including Class 4 National Insurance).
• Record Keeping: Keep meticulous records of all your income and expenses to ensure your tax return is accurate.

For Small to Medium Enterprises (SMEs):

SMEs often manage payroll in-house, making them particularly vulnerable to errors. With the changes happening in 2025, it’s more important than ever to be vigilant:

• Real-Time Information (RTI) Reporting: HMRC is cracking down on late or incorrect submissions. Which is why your Full Payment Submission (FPS) must be sent on or before payday.
• Accurate Calculations: Errors in calculating Income Tax, National Insurance and statutory payments can lead to potential penalties.
• Auto-Enrolment Pensions: Ensure you are correctly auto-enrolling eligible employees into a pension scheme and making the right contributions.
• National Minimum Wage: Review your pay structures carefully whilst considering all elements of pay. This should also include any deductions or salary sacrifice schemes, so as to ensure no employee falls below NMW/NLW.
• Employee Data: Keep employee details, tax codes and National Insurance numbers accurate and up-to-date.

For Large Companies:

Large companies often have dedicated payroll departments, but the sheer volume and complexity of their payroll means even minor errors can have significant consequences. Which is why the following should be noted:

• Scalability and System Updates: Ensure your payroll software (e.g. Sage, Xero, QuickBooks) can handle the new rates and thresholds and is automatically updated to reflect legislative changes.
• Benefits in Kind (BiKs): Be prepared for real-time reporting of most BiKs from April 2026, even though voluntary payrolling is available now.
• Complex Employee Scenarios: Managing varied contracts, international employees and complex benefit structures requires effective systems and expertise.
• Internal Audits: Regular internal audits of your payroll processes are vital to identify and rectify errors before they become compliance issues.

For Employees:

While employers are responsible for running payroll, understanding your payslip and statutory entitlements is empowering. Hence, we always encourage employees to:

• Check your Payslip: Regularly review your payslip to ensure your gross pay, deductions (tax, NI, pension) and net pay are correct.
• Understand Statutory Payments: Be aware of your rights regarding sick pay, maternity leave and the new neonatal care leave.
• Tax Codes: If you receive a new tax code, understand why it’s changed. And if it seems incorrect, raise it with your employer.

The Cost of Non-Compliance: Avoiding Penalties

If you don’t already know, HMRC is increasing the severity of penalties for non-compliance. These can include:

• Late Filing Penalties: Fines for not submitting your payroll information (like FPS and EPS) on time or for the correct amount. These can range from £100 to £400 monthly, depending on your number of employees.
• Late Payment Penalties: Significant penalties for overdue tax payments, which have increased from April 2025. Delays of even a few weeks can result in substantial charges, with the initial penalty racking up £100.
• Interest on Overdue Tax: On top of penalties, keep in mind that interest is also charged on any outstanding tax.
• Inaccurate Reporting Penalties: Penalties can be applied for errors in your payroll reports, especially if HMRC believes “reasonable care” wasn’t taken. Thus, having it range between 0% and 30% of the extra tax due. On the other hand, deliberate errors can lead to even higher fines between 20 and 70%, and even up to 100% if the deliberate errors were found concealed.
• “Naming and Shaming”: HMRC publishes lists of businesses that fail to comply with minimum wage regulations.

With that in mind, non-compliance beyond financial penalties can lead to:

• Reputational Damage: Negative publicity can harm your business’s standing.
• Employee Dissatisfaction: Incorrect pay or missed statutory entitlements can lead to low morale and disputes.
• Increased Scrutiny from HMRC: Non-compliance often triggers further investigations and audits.

How Ellis & Co Can Help

Staying on top of payroll compliance doesn’t have to be a headache. And our experts at Ellis & Co are experienced professionals dedicated to helping businesses and individuals navigate the complexities of payroll. We can:

• Provide up-to-date advice: Keeping you informed about the latest legislative changes.
• Process your payroll accurately and on time: Ensuring all calculations are correct and submissions are made by deadlines.
• Handle statutory payments: Guiding you through the rules for sick pay, maternity, paternity and other statutory pay.
• Manage pension auto-enrolment: Ensuring you meet your obligations and contributions are processed correctly.
• Offer expert guidance on specific scenarios: Whether it’s setting up salary sacrifice schemes or understanding employee classification.
• Help you avoid costly penalties: By ensuring you stay compliant with all HMRC regulations.

Having this in mind, don’t let payroll compliance become a burden. Partner with us and gain the peace of mind that comes with knowing your payroll is in expert hands.

Get in touch with us today for a consultation and let us help you achieve payroll success!

About Ellis & Co

Ellis & Co is a leading accountancy firm specialising in payroll, bookkeeping, accountancy & audit, tax planning and business advisory services. We work with a diverse range of businesses, from start-ups to established companies, ensuring they have the financial clarity and support they need to succeed. With our team of experienced accountants based in Chester and Wrexham, we are proud to offer personalised solutions that help businesses succeed.