Money (7)

What’s the biggest challenge for small and medium-sized enterprises in the year ahead? According to organisations such as the Federation of Small Businesses, it’s not the global economic slowdown that worries small businesses most or even the uncertainty over the UK’s EU membership referendum – the issue keeping them up at night is the cost and complexity of changing payroll regulation.

The introduction of the national living wage in April is one headache: Small businesses are widely supportive of the idea, but anxious about the cost of pay rises, particularly as they expect to have to also raise the wages of employees above the new minimums in order to maintain differentials. Even more concerning, however, is the impending arrival of auto-enrolment – between now and 2018, some 1.8 million small and medium-sized enterprises (SMEs) will reach their ‘staging date’, the deadline by which they must be up and running with a pension scheme for staff that meets certain basic standards.

Auto-enrolment has come as something of a shock for SMEs – particularly those that do not have the resources to employ specialist payroll staff. The good news in most cases is that it’s not too late to comply with the regulation, though you may need help and advice to hit your company’s deadline.

The principle of the new regime is that all staff must be automatically enrolled into your company pension scheme unless they have specifically opted out. You’ll be deducting pension contributions from their salaries – but employers have to contribute too. Currently, the minimum employer contribution is 1 per cent of salary, but this rises to 2 per cent from April 2018 and to 3 per cent from April 2019.

Give yourself at least six months to get auto-enrolment systems in place –a year or more is even better. You will need to allow time for the administrative groundwork, implementation and system testing and the pace of the launch won’t be entirely in your hands. You’ll need a pension scheme provider and these companies are likely to be exceptionally stretched over the next two years as hundreds of thousands of businesses reach their staging dates at the same time. Don’t be surprised if delays occur.

The penalties for missing the deadline are potentially severe – and the Pensions Regulator has signalled that it will be tough on those companies that come up short. Fixed penalty notices of £400 will be issued to firms that don’t comply with statutory notices, but the regulator also has the power to fine companies up to £10,000 a day for more serious compliance failures. Directors can even be held personally liable – and fined £5,000.

Moreover, it’s not just the financial impact of auto-enrolment – considerable with or without additional penalties – that SMEs need to plan for, but also the time taken up with getting a scheme up and running. All the more so given other challenges facing payroll right now.

Many businesses are still adjusting to the impact of real-time information, the electronic system introduced by HM Revenue & Customs last year. This requires employers to file payroll information to the taxman each time staff receive payment rather than making an annual declaration. Not only has this forced businesses to invest in new systems and software to meet the HMRC’s requirements, but it has also put them under pressure to calculate tax and national insurance accurately at all times.

Further changes lie ahead. In April, for example, the P11D expenses regime is being abolished – SMEs will henceforth have to ensure expenses are accounted for immediately and paid correctly on an ongoing basis.

With so much change, payroll is becoming something of a monster for many businesses. And while dealing with these issues may become less demanding as the changes bed in, it’s worth at least considering whether now is the time to outsource payroll functions to a third party. Although there will be a cost in doing so, many will welcome the opportunity to offload compliance responsibilities in an evolving environment to a professional adviser.

By Ruth Chapman, Author at PwC’s My Financepartner