UK Employers Face Higher Payroll Penalties as HMRC Increases Late Payment Interest Rates

UK employers are set to face higher payroll costs following the Bank of England’s Monetary Policy Committee’s decision to increase base interest rates from 5% to 5.25%. While the base rate increase mirrors American moves to shore up interest rates following high inflationary periods, payroll costs will experience a knock-on effect.

Specifically, HMRC will now charge 5.25% interest on all late payments and repayments following the rate increase. The higher rate went into effect on 14 August 2023 for those making quarterly payments, and will apply to those making non-quarterly instalment payments as of 22 August 2023.

On the surface, the rate increase might not seem significant. After all, 0.25% may not amount to much on paper, but employers with significant employee bases will feel the pinch. According to a late 2022 study from EY, the average organisation needs to make 15 corrections per payroll period, so the costs associated with each error can quickly add up.

HMRC has justified charging these rates by indicating that the policy mirrors those in play in other markets worldwide. While the government hopes higher rates will incentivize timely payments, employers in the UK are set to face new repercussions from this change.

Payroll non-compliance just got costlier

Fast-growing companies will likely experience the greatest impact, since these entities have expanding workforces and are therefore most likely to experience scaling issues with payroll compliance.

Typically, small employers outsource payroll services to third party or fractional providers with payroll expertise. However, as a company grows, payroll changes can outrun an outsourced provider’s ability to keep pace with them. What’s more, HR teams can find it challenging to contend with the deadlines required to give payroll bureaus enough time to process payslips. As a result, fast-growing companies fall out of compliance due to the constant changes to their payroll structures.

The monetary hit for non-compliance has grown, posing a major risk for fast-growing companies. These organisations cannot afford to run payroll like a project management task, and must embrace electronic solutions that allow them to handle payroll in-house. Pento is a great example of an app built to automate UK payroll processes, making it easier for HR and finance teams to prevent late filings and create audit trails that prove compliance.

Electronic solutions like these eliminate payroll errors and simplify report creation, increasing the odds of on-time filings and compliance. While the costs involved with using these types of solutions  might seem high, they are often far less expensive than external service providers, and they provide far greater value when it comes to avoiding the penalties associated with non-compliance.

Integrating data sources

A lack of data cohesion is one of the biggest reasons fast-growing companies fall into non-compliance. As a company scales, its workforce grows, and employee data gets scattered across multiple departments and platforms. Startups that grow quickly often begin by managing data on spreadsheets before exporting them to outsourced providers.

While these service providers use electronic systems, companies don’t directly control their data. For instance, analysing payroll for increased expenses or projecting workforce expansion costs by integrating them into scaling financial models is impossible.

Solutions like Pento fit scale seamlessly with growing companies, since they integrate with many of the data sources that a company uses. These platforms centralise all data automatically, leaving the technical integration work to automated backend processes. As a result, HR teams can view, analyse, and export data across their organisation easily.

These functions can also come in handy when a company is looking to attract top talent. Finance teams can use advanced analytics to model different compensation structures and view the impact on costs. Modelling the impact of incentive-based pay structures on bottom lines is another use case that platforms like Pento enable.

Most importantly, Pento and other solutions like it prevent manual data entry errors or transformation errors when exporting data to a third party system. By removing these additional costs, companies can rest assured their processes are on track at all times and that their filings will never arrive late at HMRC.

Automation to avoid errors

Every electronic solution offers an automation advantage, and this function is doubly useful when examining payroll processes. Automation will ensure a company’s filings arrive on time, preventing expensive penalties.

However, automation also saves time and gives HR teams more space to execute value-added work. By automating clerical tasks like gathering data and transforming it for reporting to tax authorities and wiring funds to employees and their pensions, HR teams are free to focus on value-added tasks like preparing and modelling creative benefits packages that help retain and attract better talent.

HR teams that use automation can also operate in a lean structure, saving the company payroll costs. These teams have more time to focus on improving employee experiences, a major differentiator for top-tier talent when they choose employers.

Pento cites an 80% reduction in payroll costs its customers experience thanks to adopting its platform. These savings make intuitive sense when one examines the time Pento’s clients take to run payroll. With outsourced providers, running payroll usually takes a few weeks. However, thanks to automation and electronic integration, Pento’s customers can run each month’s payroll, with fewer errors, in a few minutes.

Digitalisation is the key to efficient payroll

Payroll is a significant expense for every company, and as interest rates rise, the costs of non-compliance will only increase. Digitalisation is the best way of mitigating these risks, and platforms like Pento are set to find more relevance in this new environment.