5.4 Employer Registration, Payroll Records & HMRC Powers

5.4 Employer Registration, Payroll Records & HMRC Powers

Sections 5.1 to 5.3 dealt with the mechanics of pay, tax and deductions. Before any of that happens, though, there is a compliance framework: who has to register as an employer, what records they must keep, and what HMRC can do about it if they do not. That framework is sub-topic 4.1 of the scope of content, and it is examinable in its own right.

---

1. Who Operates Payroll, and Who Collects It

Payroll is operated by any business or individual who employs staff — a limited company, a partnership, a sole trader with one part-time assistant, a charity, or a private individual employing a nanny or a carer. There is no minimum size.

HMRC is the relevant tax authority for payroll, just as it is for VAT. The employer acts as an unpaid collector: it calculates the deductions, hands the net pay to the employee, reports the detail to HMRC in real time, and pays the tax and National Insurance over.

---

2. When a Business Must Register as an Employer

Registration is required before the first payday, and HMRC advises allowing time for the PAYE reference to arrive. A business must register if any of the following applies to any employee:

1. The employee is paid at or above the Lower Earnings Limit (£125 a week for 2025/26).
2. The employee already has another job.
3. The employee is receiving a pension — a state pension, a company pension or a personal pension.
4. The employee receives expenses or benefits in addition to pay.
5. The employer needs to operate a workplace pension for the employee.

If none of these apply — for example a single casual worker paid £60 a week with no other job and no benefits — the business does not have to register with HMRC, but it must still keep payroll records. It cannot simply pay cash and record nothing.

⚠️ EXAM TRAP: The registration trigger is the Lower Earnings Limit (£125/wk), not the Primary Threshold (£242/wk) at which employee NICs actually start. A business paying someone £150 a week deducts no tax and no NIC — but it must still be registered and must still file an FPS.

Registering as an employer

The business registers online with HMRC and receives an employer PAYE reference and an Accounts Office reference. Both appear on every payment and every RTI submission. Registration also confirms whether the business can claim the Employment Allowance.

---

3. HMRC's Powers to Require Compliance

The scope of content lists four areas where HMRC can compel an employer to comply.

Alongside this, HMRC has the same inspection rights for payroll as it has for VAT (section 1.4): an officer may inspect business premises, business assets and business documents, and may issue an information notice requiring records reasonably needed to check the employer's tax position. A payroll compliance visit — sometimes called an employer compliance review — typically tests worker status, expenses and benefits, the treatment of casual and temporary staff, and the reconciliation of the payroll to the FPS totals and to the amounts actually paid over.

---

4. What Payroll Records Must Be Kept

An employer must keep records of:

• What was paid to employees and the deductions made — gross pay, taxable pay, tax, employee NICs, employer NICs, student loan and any other deduction.
• Reports and payments made to HMRC — FPS and EPS submission receipts and the monthly remittances.
• Employee leave and sickness absences, including the evidence supporting statutory payments (fit notes, MATB1 certificates).
• Tax code notices received from HMRC (P6 and P9 notices, SL1 and PGL1 student loan start notices).
• Taxable expenses and benefits provided, whether reported on a P11D or payrolled.
• Documentation supporting an Employment Allowance claim.

Form and retention

Records may be kept on paper or digitally, and HMRC has no prescribed format. They must be kept for at least 3 years after the end of the tax year to which they relate.

Example: records for the 2025/26 tax year, which ends on 5 April 2026, must be retained until at least 5 April 2029.

Many employers keep payroll records for six years anyway, because employment tribunal claims and pension auto-enrolment obligations run on longer clocks. That is prudence, not the statutory minimum — and the assessment tests the statutory minimum.

Penalties

Failing to keep or produce adequate payroll records can attract a penalty of up to £3,000 per tax year. As with VAT, the harder consequence is evidential: without records the employer cannot displace an HMRC determination of the tax it thinks was due.

---

5. Data Protection and Employee Personal Data

The scope of content ends sub-topic 4.1 with the data protection principles specifically related to the personal data of employees. Payroll is one of the most sensitive datasets a business holds.

The practical obligations that follow are:

• Data minimisation — collect only what payroll needs. A payroll file does not need a copy of a medical report; it needs enough to evidence SSP entitlement.
• Purpose limitation — payroll data cannot be reused for unrelated purposes such as marketing.
• Accuracy — a wrong NINO or tax code causes an RTI rejection and an incorrect deduction, which is a data accuracy failure as well as a tax failure.
• Storage limitation — do not keep data longer than needed, balanced against the statutory 3-year minimum.
• Security — password-protected payslips, role-based access so that only payroll staff see salaries, encryption of files sent to advisers, and a controlled process for reporting a personal data breach.

⚠️ EXAM TRAP: A manager asking for a colleague's salary details is not a lawful basis for disclosure. Confidentiality gives way only to proper authority, a legal obligation, or a statutory inquiry such as an HMRC information notice — the point developed further in section 6.3.

---

6. Worked Scenario

Scenario: Harborne Kitchens Ltd starts trading in June 2026. It plans to take on two staff: Priya, working 12 hours a week at £160 a week, with no other job and no benefits; and Dev, working full time at £600 a week, who also draws a small occupational pension.

Questions: Must the business register as an employer? What records must it keep, and for how long?

Analysis:

1. Priya earns £160 a week, which is above the £125 Lower Earnings Limit, so registration is required on her account alone. She will pay no employee NIC, because £160 is below the £242 Primary Threshold, but she must still appear on an FPS.
2. Dev receives a pension as well as employment income, which is an independent trigger. His tax code will reflect the pension, and his employment income is likely to be coded BR or with a reduced allowance.
3. Registration must be completed before the first payday, and the business should allow time to receive its PAYE and Accounts Office references.
4. Records of pay, deductions, RTI submissions, tax code notices and any statutory payments must be kept for at least 3 years after the end of the tax year — so 2026/27 records until at least 5 April 2030.
5. Data protection: the payroll file should hold only what is needed, be access-restricted, and any fit note supporting a future SSP claim must be handled as special category data.