Direction of travel: is there a better way for payroll operations?

14 November 2024

David Yewdall, partner, BDO UK LLP, outlines the different considerations for employers when it comes to payroll compliance

Payroll teams are not often congratulated for delivering another successful payroll run or when payments are made to a workforce on time and without error, yet hearing the ‘noise’ of errors is commonplace. Even if immaterial in value, these can cause significant reputational, legal and reporting non-compliance issues that have an impact when there is an (often unexpected) shortcoming.

Increasing errors

However, the opportunities for errors to arise are growing rapidly as UK and international payroll operations have become increasingly complex over the post-Covid years. This trend is expected to continue due to a myriad of factors; a non-exhaustive list includes the below.

Changes to tax legislation increasing reporting and / or collection of taxes and / or National Insurance via the payroll

For example, year-end P11D reporting is moving to monthly reporting and withholding obligations with the mandatory payrolling of benefits in kind from April 2026. Our article entitled ‘Employers’ year end reporting’ in the June 2024 issue of Professional highlighted just some of the current unknowns of how this mandatory payrolling will work in practice, particularly given the relatively short timescale for implementation. This may be challenging for those companies that are not familiar with payrolling benefits, which is voluntary at present.

Employment regulatory scrutiny

Notwithstanding tax legislation, complex employment legislation to support payroll governance continues to be introduced. This requires data, which often sits in the payroll systems, to be collated, analysed and reviewed to ensure compliance with legislation. This includes current obligations, such as holiday pay and national minimum wage legislation, as well as those on the horizon, with more information having to be collated via real time information (such as the hours worked requirements coming into force from April 2026).

Reduced support or decommissioned payroll software from providers

With the advancement of cloud-based payroll software, companies are finding limitations with no updated or improved functionality / support of existing payroll software being released. This is often a headache where companies haven’t been informed of the decommissioning of software until it is too late and must invest in new software or create costly workarounds to update existing applications.

Demand for payroll data for wider company reporting requirements in addition to tax and employment regulations, there are broader regulatory requirements for environmental, social and governance and gender pay reporting as examples. In these cases, it can be necessary to collate and share certain data typically perceived to be held and owned by payroll. Hours worked is just one example of this, but the extraction and supply of this data in the required format may not be readily available.

Cross border considerations

Complexity is multiplied when having to manage cross border considerations, such as payments to assignees by both home and host countries. This is being further complicated by the emergence of new worker categories, including international remote workers or teleworkers.

Taking a step back to move forward

As organisations look to grapple with these and other challenges there is a clear benefit in taking a step back from the detail and considering a holistic approach to payroll management. This is where expert consulting support is useful to provide a strategy to help deliver payroll in a more time, cost and resource efficient way while meeting all payroll compliance reporting and withholding obligations.

In our experience, refocusing your challenges into the themes that create risks provides a valuable starting point, and these often fall under the following topics.

Data

The accurate and timely receipt of upstream source data required to produce downstream reporting is imperative. Therefore, understanding forthcoming changes to the data required and the challenges in receiving it (particularly where errors have arisen in the past), can help to identify and be proactive in creating viable workarounds. This is particularly effective when trying to understand where there is a reliance on data from other parts of the business to keep payroll processes operating smoothly, and vice versa. Mapping these data connections can help to create a process and governance framework for the payroll operations to reduce risk and non-compliance.

Skills and knowledge

There is an undeniable appetite and shift to utilise technology that can create efficiencies, particularly to automate significantly manual tasks. In payroll this can include activities such as reconciliation of changes or uploading information that may be held on another system (for example, hours worked or overtime in a time and attendance system). It is vital that the payroll team are upskilled to utilise the technology, understand the benefits it can offer, and understand its role in the process.

Diligence

A robust testing or review process of any automated process is fundamental to ensure it is understood what is being achieved and that you are not over reliant on systems and can spot problems if they arise. Therefore, payroll teams should have the opportunity and support to understand upcoming changes to then ensure processes (manual or automated) operate correctly to result in the correct reporting outcomes.

Technology

Broader technology transformation projects may have an impact on, or a vested interest in, the operation of payroll. For example, where a new human resources system or time and

attendance system may be able to integrate with an API feed to the

payroll system enabling the automatic information feeds.

Maximising the benefits

Taking the above themes into consideration not only supports compliance in getting payroll right, but also helps to elevate the payroll function beyond just the operational aspects. An effective and deliberately thought-out payroll operation can add strategic value for a business. Data collated can be used to deliver management insight, streamline costs by efficient delivery and engage a qualified payroll team with a varied skillset and opportunity to learn.

Fundamentally, the question to consider for your current operation would be “Is there a better way?” and if you think so, payroll consulting provides the opportunity to discover how.