Payroll compliance

Payroll compliance is no longer a simple administrative process running quietly in the background. It has become a complex and highly regulated operational function, sitting at the intersection of tax, employment law, workforce strategy and financial reporting.

When managed well, payroll compliance provides control, insight and governance; when neglected, it exposes employers to significant financial and reputational risk.

Major reforms, including the forthcoming Employment Rights Bill, will be delivered in practice through payroll systems, making payroll the point where employment law meets operational reality. Employers must ensure that legal rights and obligations are correctly reflected in pay calculations, reporting and communication.

Payroll compliance and national minimum wage changes

The UK national minimum wage changes from April 2026. With rising minimum wage rates, plus changes to statutory sick pay, and the launch of the new Fair Work Agency, payroll accuracy is crucial to avoid penalties for non-compliance.

Minimum wage is not just a rate – it’s a calculation

In 2025 nearly half a million workers were underpaid. Wage underpayments often arise due to technical issues rather than deliberate non-compliance. Issues to look out for:

• Salaried employees working beyond contracted hours – starting early or staying late
• Unpaid additional working time such training and travel time
• Incorrect treatment of apprentices after the first year – once an apprentice turns 19 and have done their first year on the apprenticeship, most must be paid at least the minimum or living wage for their age
• Deductions that reduce pay below national minimum wage – such as deductions for accommodation, training, uniforms or salary sacrifice arrangements
• Failure to apply age related or annual increases at the right time

Note: Minimum wage changes apply from the first pay reference period starting on or after 1 April 2026, not necessarily from 1 April itself.

When implementing the changes, it’s important for employers to stay alert to common payroll compliance risk areas. Regularly reviewing pay calculations as rates change – alongside working time, deductions, and pay progression – helps ensure new minimum wage requirements are applied correctly.

Payroll compliance for minimum wage with salary sacrifice

Salary sacrifice arrangements are a useful part of an employee reward package, but they need to be managed carefully for minimum wage purposes. Because salary sacrifice reduces an employee’s cash pay, it can lower their pay below the national minimum wage when calculations are carried out, even where headline salary rates appear compliant. This is particularly relevant for lower paid employees or where multiple deductions apply. Regular reviews can help ensure compliance.

Statutory sick pay reform

Statutory sick pay (SSP) is also undergoing a significant reform, with changes designed to widen access but also increasing the complexity of payroll compliance.

From April 2026:

• The lower earnings limit is removed – all employees qualify for SSP
• The period of incapacity has been removed – SSP becomes a day one entitlement, with three waiting days removed.
• The standard weekly rate has increased to £123.25 – SSP is paid at the lower of the standard weekly rate or 80% of average earnings
• The maximum entitlement remains 28 weeks
• There is still no reclaim available for employers

While this extends SSP coverage to low paid and part-time workers, it means that in some cases, employees who previously received full SSP may now receive less due to the 80% earnings cap.

The reforms specifically aim to benefit part-time, seasonal, and zero-hours workers, who are frequently paid at or near the national minimum wage, by ensuring they receive 80% of their earnings during short-term sickness rather than nothing. They are intended to reduce presenteeism – where employees work while ill – and improve productivity.

Rising enforcement and the role of payroll compliance in protecting the business

HMRC no longer send ‘nudge’ letters to alert employers to potential minimum wage issues – and gone is the support stage where problems could be fixed without penalties. As a result, payroll compliance has become a critical control point in protecting the business from financial and reputational risk.

Recent years have seen a sharp increase in investigations, penalties and public naming of employers who fall short. In March 2026 the government handed £12.6m in penalties to nearly 800 employers, including well-known brands, for underpaying – with a further £7.3m to be repaid to their employees. In many cases, the underpayment per employee is small – sometimes just a few pounds – but across a workforce this quickly adds up.

Key risks employers need to be aware of include:

• Penalties of up to 200% of the underpaid amount
• Public “name and shame” listings for breaches over £500
• Repayment of historic arrears at today’s current minimum wage rates – so mistakes become significantly more expensive over time

Case law developments have expanded what must be included in holiday pay calculations, while issues such as salary sacrifice, deductions, accommodation offsets and working time continue to trigger unintended minimum wage breaches. These are not theoretical concerns: enforcement activity has increased, with material penalties and reputational damage for non‑compliant employers.

Payroll compliance – from back office function to strategic risk

Getting payroll right isn’t about reacting when something goes wrong – it’s about building confidence that the basics are working as they should.

Payroll errors rarely appear suddenly but tend to develop gradually – small issues that go unnoticed until they surface. By taking a proactive, year round approach to minimum wage calculations, recordkeeping and process reviews, employers can reduce risk, support employee trust and stay ahead of regulatory change.

In an environment of rising costs and closer scrutiny, you need the solid foundation that is an accurate payroll. We’d advise the following to help prepare for upcoming changes:

• Review minimum wage calculations, not just pay rates
• Ensure accurate records of working time and contracts
• Prepare for increased scrutiny from the Fair Work Agency
• Update payroll processes for SSP changes from April 2026
• Build regular checks into payroll routines, not just year end

Proactive planning now can prevent costly corrections, penalties and reputational damage later. When payroll accuracy is maintained throughout the year, year‑end reporting becomes significantly smoother – and compliance risk is reduced.

In this environment of rising scrutiny, payroll should be treated as strategic infrastructure rather than a back‑office function. High‑quality payroll data informs workforce planning, reward strategy, forecasting and compliance. When integrated effectively with finance and HR systems, it becomes a powerful source of insight for leadership teams.

Ultimately, payroll compliance is not just about paying people accurately – it underpins employee trust, financial wellbeing and sustainable, well‑governed growth.