Payroll reporting changes – HMRC consult on draft legislation

HMRC have published draft legislation to implement the outcome of their earlier consultation on increasing the data they collect. The additional information is intended to support HMRC’s enforcement activities, as well as the Government’s policy agenda. The prospective changes include requiring employers to report additional information through the Real Time Information (RTI) system on employees’ hours worked and, in certain circumstances, a description of the payments made. The consultation closes on 9 May 2024, with the final regulations – and additional employer reporting obligations – expected to come into force on 6 April 2025. This article discusses the specific changes set out in the draft regulations and what steps employers should consider to prepare.

Employers are currently required to include high level information on employees’ working hours in each RTI return by specifying within which band (A – D) each employee’s working hours fall (or selecting band E for ‘other’), and to include the actual hours worked on each employee’s payslip.

Following HMRC’s consultation ‘Improving the data HMRC collects from its customers’, the Government announced that it would require employers to provide additional information on contractual hours worked where these are reasonably stable (e.g. where the employee is not on a zero hours contract), and actual hours worked for hourly rate employees. However, it did not confirm exactly how this would be done.

HMRC have now published draft legislation, which is subject to consultation until 9 May 2024, to implement the specific proposals. The new employer reporting obligations are expected to apply for 2025/26 and subsequent years.

In summary, from 6 April 2025 employers will be required to report the total number of hours worked by each employee in respect of payments reported in the relevant RTI return.

How this is done will depend on how the employee’s pay is determined:

• If the employee is paid based on an hourly rate, the employer must report the number of hours worked that determined the relevant payment;
• If the employee is paid based on a number of hours specified in their employment contract, the employer must report the number of hours that the contract required them to work in the relevant pay period; and
• If the payment to the employee is not determined on one of these bases, the employer should report the number of relevant hours as ‘nil’ and, where relevant, specify one of the following descriptions of the payment:
  • Taxable social security benefits (e.g. Statutory Sick Pay);
  • Payrolled Benefits-in-Kind;
  • Termination payments;
  • Payments determined by reference to output (e.g. piece work); or
  • Payments made to officeholders (e.g. directors without contractual terms that specify a number of working hours).

If an employee’s pay in a particular period is determined in more than one of these ways, the employer should report the total working hours as the sum of the hours for each individual pay element (HMRC give the example of an employee whose contract specifies a number of hours but who also works paid overtime: the employer will report the total number of hours worked as the number of contractual hours for the pay period plus the number of overtime hours paid).

HMRC have stated that they will publish updated guidance on these measures prior to them coming into effect.

Employers should consider what these prospective changes will mean for their payroll/HR systems and processes in terms of gathering, validating and reporting the additional data on hours worked, and consider what steps they might need to take (and what internal project budgets might be required) to prepare for their new reporting obligations from 6 April 2025. Where relevant, employers should also consider how their workstream to prepare for increased RTI reporting from 6 April 2025 will interact with getting ready for mandatory payrolling of Benefits-in-Kind from April 2026.

For some employers, their internal systems might not hold the required information on hours worked or descriptions of payments in an easily reportable manner, or they might require additional system interface processes so that the data can be accessed effectively.

Additionally, HMRC’s original policy consultation explicitly linked more detailed information on employees’ actual hours worked with enhanced National Minimum Wage (NMW) enforcement (see this article for example of a particular NMW compliance risk that could become more visible to HMRC with enhanced working hours reporting). Strengthening NMW enforcement against deliberately non-compliant employers is welcome, but otherwise compliant employers could find that the likelihood of being selected for a risk based NMW review will increase if they fail to report accurate hours. It is therefore vital that compliant employers ensure they do not adversely affect their NMW risk rating by inaccurately reporting hours worked when the new obligations come into force.

KPMG in the UK is currently considering what submissions we might make in response to this consultation. If there are any points you wish us to consider including in any response we submit to HMRC, or if you would like to talk through the potential impact of the draft regulations on your business, please speak to the authors below or to your usual KPMG in the UK contact.

For further information please contact:

• Caroline Laffey
• Emily Salathiel