Mandatory payrolling what will it look like

Mandatory payrolling is becoming an increasingly important topic for UK employers, particularly those who engage contractors and temporary workers. The system, governed by HMRC’s Real Time Information (RTI) requirements, has evolved significantly over recent years. If you’re still unsure how it affects your business, you’re not alone—but understanding the mechanics now could save you considerable headaches and potential penalties down the line.

What is Mandatory Payrolling?

Mandatory payrolling, formally known as “payrolling arrangements,” is HMRC’s requirement for certain employers to operate a PAYE scheme for workers who might otherwise fall outside the traditional payroll. Rather than treating these individuals as genuinely self-employed or using payroll service providers with separate tax arrangements, you must bring them onto your main payroll and report them through your Real Time Information (RTI) submissions.

The policy targets situations where workers might previously have been misclassified as self-employed—a long-standing concern for HMRC. By mandating payrolling, the tax authority aims to ensure that National Insurance contributions and income tax are properly accounted for upfront, rather than relying on subsequent self-assessment declarations.

Who Does It Apply To?

The mandatory payrolling rules primarily affect engagements in the private sector where workers supply their services through an intermediary—typically a limited company (personal service companies or PSCs). However, it’s worth noting that public sector workers and genuinely self-employed individuals with their own established client bases fall outside these requirements.

For the 2024/25 tax year, if your organisation engages a worker through an intermediary, you should be treating them as an employee on your payroll unless specific exemptions apply. The key question HMRC asks is: would the worker be an employee if they contracted directly with you, rather than through a company structure? If the answer is yes, mandatory payrolling likely applies.

The Practical Implementation

When mandatory payrolling applies, you’ll need to:

Process payments through PAYE: All remuneration must be processed via your standard payroll system, with PAYE tax and National Insurance contributions calculated and reported in real time.

Maintain accurate RTI submissions: Your monthly or weekly payroll submissions to HMRC must include the payrolled worker alongside your permanent employees. There’s no separate reporting category—they’re treated identically for RTI purposes.

Handle expenses correctly: Unlike the previous intermediary arrangements, expenses claimed by payrolled workers follow standard employment law. Genuine business expenses may still be deductible, but personal expenses cannot be claimed against income in the same way.

Keep detailed records: Documentation proving the worker’s status and your compliance with mandatory payrolling rules is essential. Should HMRC enquire, you’ll need to demonstrate that you’ve correctly identified and treated the engagement.

Many employers use specialist payroll software to manage this seamlessly, particularly if they have multiple contractors. Your payroll provider should be familiar with mandatory payrolling requirements—it’s worth checking with them directly if you’re uncertain.

Common Pitfalls to Avoid

One frequent mistake is failing to identify arrangements that fall within mandatory payrolling scope. Some businesses assume that because a contractor has their own limited company and invoices them, no payrolling is required. This isn’t always correct—the structure of the engagement matters more than the administrative paperwork.

Another pitfall is not updating your systems before the relevant tax year begins. If you discover mid-year that mandatory payrolling should have been in place, you’ll need to correct your submissions, potentially incurring penalties if HMRC considers it a compliance failure.

Finally, don’t assume the exemptions apply to your situation without proper analysis. Whilst there are legitimate exemptions (such as for genuine self-employed individuals with multiple clients), they’re narrower than many employers think.

Moving Forward

The landscape around worker classification continues to evolve, particularly following recent case law and HMRC initiatives. Staying informed and proactive about your obligations protects both your organisation and your workers. If you’re uncertain whether mandatory payrolling applies to your engagements, it’s worth seeking professional guidance rather than making assumptions based on previous arrangements.

Mandatory payrolling, when correctly implemented, actually simplifies your tax compliance and ensures everyone pays the right amount of tax at the right time. It removes the grey area that has historically caused disputes between employers and HMRC.

For tailored advice on whether mandatory payrolling affects your specific arrangements, or to discuss implementing it across your business, contact Severn Accounting—we’re here to help.