Payroll errors have led to UK businesses incurring over £75 million in HMRC penalties since 2020. With approximately 30.4 million employees on UK payrolls as of January 2025, the importance of accurate payroll management is evident. As companies expand, ensuring accurate and compliant payroll processes becomes increasingly critical.
This guide delves into payroll best practices to help growing businesses manage payroll.
1. Design Payroll with Business Agility in Mind
As businesses scale, payroll must keep up with expansion, workforce changes and compliance demands. A rigid payroll system can lead to tax errors, inefficiencies and operational bottlenecks. Employers should prioritise agility to ensure payroll supports, rather than restricts, growth.
How to Implement a More Flexible Payroll System?
Use a payroll system that adapts to workforce changes
As businesses expand, they may hire contractors, part-time staff or international employees, each with different tax and benefits rules. Consider implementing a payroll system that automatically applies correct tax codes, deductions and classifications to reduce compliance risks as payroll complexity increases.
Integrate payroll with HR and accounting software
Manual payroll data entry increases the risk of errors and creates inefficiencies. Syncing up your payroll with HR and accounting tools can ensure that employee records, tax filings and financial reports stay accurate. Check out this list of the best payroll software to help you choose the right software for your needs.
Ensure payroll cycles align with tax and compliance deadlines
Tax and reporting deadlines vary by region, and failing to meet them can result in penalties.
For example, a UK company hiring employees in Germany might adjust payroll processing dates to align with German tax withholding requirements to avoid late filing fines.
For accountants managing payroll on behalf of clients, integrating a comprehensive practice management tool like Uku enhances your firm’s overall efficiency. Uku offers features such as task management, workflow automation, time tracking, and client management, ensuring that all aspects of your accounting services, including payroll-related tasks, are well-coordinated.
2. Consider Adopting Flexible Pay Practices
Standard weekly or monthly payroll cycles may not always fit your business or employees best. Employers who align payroll schedules with cash flow and workforce needs can reduce financial strain, improve employee retention, and enhance payroll efficiency.
Why Should Businesses Rethink Standard Payroll Cycles?
Fixed payroll cycles can create cash flow mismatches, particularly for seasonal businesses.
Some employees prefer more flexible pay schedules to help reduce financial stress, and ADP has found that offering alternative payroll structures can improve talent attraction and retention.
How to Adopt More Flexible Pay
Align payroll with business revenue cycles
If revenue fluctuates seasonally, payroll schedules should be adjusted accordingly.
For example, a hospitality business with variable income might switch from a monthly to a biweekly payroll to better match pay dates with revenue peaks.
Consider flexible pay structures to improve employee retention
Earned Wage Access (EWA) allows employees to access part of their wages before payday, which can reduce financial stress. Living Wage reports that we’re seeing the largest rise in low-paid workers in the workforce currently, and these workers are likely most likely to benefit from being able to access their wages before payday.
According to DailyPay, 49% of employees reported increased motivation once Earned Wage Access was implemented.
Explore split payroll for high-salary employees to balance cash flow
Instead of paying an employee’s full salary in one lump sum, split payroll divides it into two or more payments within the same pay period. This approach is often used for senior employees or high earners whose salaries significantly strain monthly cash flow.
A company might pay a fixed base salary at the start of the month and a performance-based or commission portion later to spread payroll expenses more evenly.
3. Use Analytics to Drive Strategic Decisions
In addition to paying employees, payroll can be a valuable source of business intelligence. Payroll data can reveal cost trends, employee retention risks and potential inefficiencies, helping businesses make smarter financial and workforce decisions.
So, How Can Businesses Leverage Payroll Analytics?
Track payroll trends to identify cost-saving opportunities
Analysing payroll data can help businesses spot inefficiencies, such as rising overtime costs, unnecessary bonuses or salary creep. In addition to this, carrying out regular payroll audits can highlight discrepancies in tax codes, benefits contributions or deductions, preventing costly errors.
Use payroll data to predict and reduce employee turnover
High employee turnover often correlates with payroll inconsistencies, such as late payments, incorrect deductions or salary disparities. Payroll analytics can help identify departments with high attrition rates, prompting HR teams to address salary structures or benefits issues.
Integrate payroll analytics into workforce planning
Payroll data can reveal hiring trends, helping businesses adjust workforce planning and budget forecasting. For example, a growing tech company might analyse payroll data to predict when it needs to hire additional staff based on increasing overtime costs. This helps to avoid employee burnout and staff leaving.
4. Implement AI & Automation Beyond Basic Payroll Processing
Many businesses automate salary payments but still manually handle compliance checks, tax code updates and payroll reporting. AI-driven payroll tools can help reduce errors, detect discrepancies and improve efficiency, making payroll management strategic and administrative.
Insights from KPMG show that AI is transforming payroll by reducing errors, improving compliance, and increasing payroll efficiency, helping businesses streamline previously time-consuming and error-prone processes.
How to Use AI and Automation to Improve Payroll?
Automate tax calculations and compliance updates
AI-powered payroll systems, such as Paiyroll, automatically adjust tax codes, deductions and regulatory changes without manual input. These tools help payroll professionals reduce the risk of misclassifying employees, underpaying taxes or missing compliance deadlines.
Use AI-driven tools to detect payroll anomalies
AI can also flag discrepancies in salary payments, overtime calculations or benefits deductions before they become compliance issues. On top of this, machine learning models are also able to identify fraud risks, such as duplicate payments or unauthorised payroll adjustments. Flex HRM is a good example of a payroll tool that does this.
Improve payroll forecasting with predictive analytics
AI can analyse payroll trends to predict future salary expenses, cash flow needs and hiring costs. For example, a company planning international expansion might use AI-driven payroll forecasting to ensure salary budgets align with foreign tax obligations and exchange rate fluctuations.
5. Rethink Payroll Security for a Remote Workforce
With more businesses operating remotely or across multiple locations, payroll fraud and security risks have increased. According to the IFA, ransomware attacks targeting employee data are on the rise, and cybercriminals are targeting payroll data due to its sensitive financial and employee information.
A report by Case IQ highlights that remote and hybrid work environments have made payroll fraud easier, with risks including unauthorised payroll access, salary redirection scams and data breaches. Without strong security measures, businesses can face financial losses, compliance penalties and reputational damage.
How to Strengthen Payroll Security for a Remote Workforce?
Implement zero-trust access controls
One of the biggest challenges of remote work can be attributed to the mismanagement of privileged credentials and access controls. Many workers have more access privileges than their job specification requires, adding risk to the threat of successful cyberattacks.
To combat this, restrict payroll access to only authorised personnel using role-based permissions and require multi-factor authentication (MFA) to prevent unauthorised logins, even if credentials are compromised.
Use geofencing for payroll approvals
Geofencing ensures that payroll actions can only be performed from approved locations, reducing the risk of fraudulent remote access. For example, a company with a global workforce might use geofencing to block payroll logins from unexpected locations, preventing fraudulent salary changes.
Encrypt payroll data & regularly audit access logs
All payroll records should be encrypted in transit and at rest to protect against cyberattacks. On top of this, conducting regular security audits can help to detect unauthorised access attempts, ensuring your payroll data remains secure.
6. Ensure Payroll Accurately Reflects Benefits Contributions
Payroll errors in pension contributions, bonuses, and salary sacrifice schemes can lead to regulatory fines and payroll disputes, as well as impact employee satisfaction. Many businesses still process benefits deductions manually, which can increase the risk of miscalculations or non-compliance.
A study by Moore Kingston Smith found that nearly half of existing pension schemes in the UK are non-compliant, often due to payroll miscalculations. Mistakes in benefits deductions or salary sacrifice adjustments can also lead to HMRC penalties, unexpected employee tax liabilities, or underfunded pensions.
How to Prevent Payroll Errors in Benefits Contributions?
Automate benefits deductions to ensure accuracy
Use payroll software like BrightPay that automatically applies the correct pension contributions, bonuses and salary sacrifice deductions based on employee agreements.
This will also help you make sure that real-time tax code updates are reflected in payroll calculations to prevent underpayments.
Conduct regular payroll audits for benefits contributions
Schedule quarterly payroll audits to identify any miscalculations in pension payments, salary sacrifice deductions or taxable benefits. Cross-check benefits deductions with HMRC reporting requirements to ensure tax compliance.
Train payroll & HR teams on salary sacrifice and benefits compliance
Payroll professionals should be regularly updated on any changes to pension auto-enrolment thresholds, salary sacrifice tax rules and HMRC reporting standards. For example, a UK business offering salary sacrifice for electric vehicles might prevent tax miscalculations by training payroll teams on new benefit-in-kind (BIK) rates.
SD Works Academy offers a short course on the fundamentals of salary sacrifice schemes.
7. Automate Global Compliance for Multi-Country Payroll
Expanding a business internationally brings with it complex payroll challenges, including varying tax rates, employee classifications and compliance regulations across different jurisdictions. Managing these complexities manually increases the risk of misfiling taxes, misclassifying employees and facing legal penalties.
Without real-time compliance tracking, payroll teams may miss critical updates. Ensuring payroll remains legally compliant across multiple countries requires a combination of automation, centralisation and expert oversight.
How to Ensure Compliance for International Payroll?
Use cloud-based payroll tools for real-time compliance updates
Implement payroll software that automatically adjusts tax rates, social security contributions and labour law requirements for different countries, such as Multiplier. Ensure the payroll system you implement supports multi-currency payments and aligns with local banking regulations.
Centralise payroll data for audit readiness
Store all payroll records, tax filings and employee classifications in a single system to simplify compliance reporting. Regularly review country-specific payroll compliance checklists to ensure adherence to local laws.
Outsource payroll for complex international operations
Outsourcing payroll to global payroll providers can help reduce compliance risks and administrative burdens for businesses operating in multiple countries. For example, a UK company hiring contractors in Spain and Germany might use an outsourced payroll provider to handle tax filings and classification rules, ensuring compliance with local employment laws.
For a more in-depth guide on managing international payroll compliance, refer to OysterHR’s Global Payroll Compliance Guide.
8. Prepare for Payroll Audits Before They Happen
Many businesses only focus on payroll compliance when an audit is requested. However, waiting until an audit occurs can result in last-minute scrambles, missing records and costly penalties. A proactive approach to payroll audit readiness helps businesses maintain compliance and catch errors before they become liabilities.
Regular internal payroll audits reduce the risk of tax miscalculations, employee classification errors and incorrect deductions, all of which can lead to HMRC investigations or financial penalties. Businesses can avoid compliance risks and improve financial accuracy by implementing structured payroll reviews.
How to Stay Audit-Ready?
Maintain a payroll compliance dashboard
Use a centralised system that tracks all tax filings, employee classifications, pension contributions, and payroll adjustments. This will help you to ensure payroll records are stored securely and are easily accessible for HMRC audits or internal reviews.
Conduct pre-audit payroll reviews
Schedule quarterly internal payroll audits to identify discrepancies in tax deductions, benefits payments and classification rules before an external audit occurs. Make sure to review your payroll data against HMRC guidelines to confirm that you are compliant.
Use payroll audit tools to flag errors in real time
Automated payroll software like AuditPro can scan for anomalies, such as duplicated payments, incorrect tax codes or inconsistent salary deductions. For example, a retail chain conducting regular payroll audits might catch an underpayment error in pension contributions, which, if left, could lead to an HMRC fine.
PeopleHR has put together this great payroll compliance checklist to help you with auditing.
9. Build a Payroll Contingency Plan
A payroll failure on payday can severely impact employee trust and business operations. System outages, banking issues, and human errors can all delay salary payments, leading to frustrated employees, compliance breaches, and reputational damage. Businesses need a payroll contingency plan to ensure staff are paid on time, even in unexpected situations.
How to Prevent Payroll Disruptions?
Create emergency payroll protocols
Establish a manual payroll processing workflow for when systems fail, including ensuring that finance and HR teams have access to alternative payment methods, such as direct bank transfers or emergency payroll funds.
Implement payroll redundancy systems
Use cloud-based payroll software with automated backups to prevent data loss and make sure that you have assigned multiple payroll approvers in case key personnel are unavailable.
Conduct regular payroll contingency drills
Test payroll backup systems to identify weaknesses before a real failure occurs. For example, a company might run a mock payroll failure scenario to ensure salaries can still be processed manually if software outages occur.
For a step-by-step payroll contingency planning guide and template, refer to Pipedrive’s guide to payroll contingency planning.
10. Use Payroll to Strengthen Employer Branding
Payroll plays a crucial role in shaping employer reputation and trust. A well-managed payroll system signals reliability, while mistakes such as late payments or payroll errors can damage employee morale and retention.
How to Strengthen Employer Branding Through Payroll?
Implement transparent salary breakdown & payslip access
Providing employees with clear, itemised payslips helps build trust and reduces confusion around tax deductions, benefits and salary adjustments. Instant digital payslip access through self-service payroll portals can improve employee satisfaction and reduce payroll-related queries.
Commit to pay transparency
Being upfront about salary structures and what everyone in your organisation earns can build trust, improve employee engagement and help with fair pay practices. A case study by HR DataHub found that implementing a pay transparency policy transformed their workplace culture, improved trust and encouraged healthier work practices around pay.
Future-Proofing Payroll for Business Growth
As businesses grow, payroll systems must evolve to handle complexity, prevent errors and support long-term scalability. By implementing advanced payroll best practices, businesses can reduce compliance risks, improve financial accuracy and enhance employee satisfaction. Investing in automation, proactive audits and flexible payroll structures ensures payroll remains a growth enabler, not a liability.
Companies that treat payroll as a critical business function – rather than an administrative task – will be better positioned to adapt, scale and thrive in an increasingly complex business environment.
About the author:
Piotr Kubalka is CEO of J. Dauman & Co, a West London accounting firm within the J. Dauman Group. With extensive experience as a chartered accountant and business advisor, he’s passionate about helping UK companies grow and expand into European markets. Piotr’s expertise spans multiple sectors, developed through years of work in both British and international markets. His leadership has cemented J. Dauman & Co’s position as a key player in cross-border financial advisory services. J. Dauman & Co also provide outsourced payroll services.
