What is His Majesty's Revenue and Customs (HMRC)?

His Majesty's Revenue and Customs (HMRC) is the United Kingdom's government department responsible for tax collection, customs regulation, and the administration of various state benefits.

Also known as HM Revenue and Customs, HMRC was established in 2005 and replaced two government departments: Inland Revenue and Customs and Excise.

HMRC plays a key role in enforcing tax laws, preventing financial crimes such as money laundering, and ensuring compliance for both individuals and businesses. Miscellaneous roles include recovering student loan repayments and producing trade taxation statistics.

Employers, HR professionals, and payroll teams must interact with HMRC to manage payroll taxes, statutory payments, and employee benefits correctly. The public can read the HMRC’s official charter for a more in-depth understanding of its legal powers and responsibilities.

The role of HMRC in the UK tax system

HMRC oversees tax collection and ensures individuals and businesses comply with UK tax laws. It administers various taxes, including:

• Income Tax, Corporation Tax, and Capital Gains Tax: Applied to individuals and businesses based on earnings and asset sales
• Value Added Tax (VAT): Levied on most goods and services
• Excise Duties: Applied to specific goods like alcohol, tobacco, and fuel
• Inheritance Tax: Charged on estates over a certain threshold

Additionally, HMRC distributes certain benefits, including Child Benefits, Statutory Sick Pay (SSP), and Maternity Pay.

Why is HMRC important for HR and payroll teams?

HR and payroll teams rely on HMRC to process employee pay correctly and remain compliant with employment tax laws. This includes:

• PAYE (Pay As You Earn): The system through which income tax and National Insurance Contributions (NICs) are deducted from salaries
• Real Time Information (RTI) submissions: Employers must report payroll information to HMRC every time they pay employees
• Employee tax codes: Used to calculate tax deductions correctly
• Statutory payments: Employers must adhere to HMRC guidelines for Statutory Maternity Pay (SMP), Paternity Pay (SPP), and Sick Pay (SSP)

Failing to comply with HMRC regulations can result in fines and legal complications for businesses.

Self-employed people must make an annual self-assessment return to the HMRC. They are also required to pay income tax and national insurance to the same body.

What is PAYE, and how does it work?

The PAYE system ensures employees’ taxes are deducted at the source. Deductions are made according to each employee’s assigned tax code.

Employers must:

• Deduct the correct amount of income tax and NICs from salaries
• Submit payroll data to HMRC through RTI submissions
• Issue P45 and P60 forms when employees leave or at the end of the tax year

For a deeper dive into UK payroll regulations, check out our Guide to Payroll in the UK.

How does HMRC support businesses in tax compliance?

HMRC provides various resources to help businesses meet tax obligations, including:

• Online tax calculators to estimate tax liabilities
• Payroll software compatibility for automated RTI submissions
• Access to HMRC online accounts to manage tax payments and communication

For guidance on reducing payroll costs, read How to Reduce Payroll Costs in the United Kingdom.

How does HMRC handle employee tax codes?

Each employee has a tax code that determines their tax-free allowance. Employers must:

• Use the correct HMRC-issued tax code to calculate deductions
• Adjust tax codes when notified by HMRC
• Ensure accurate end-of-year tax documentation (P60s) is provided
• Provide accurate end-of-employment statements (P45s) to both HMRC and employees

An employee’s tax code will depend upon whether the employment is a first or second job or carries the individual over into a higher tax rate. There are special codes for non-taxable income, adjustments, and altered personal allowance rates.

What is the role of HMRC in statutory payments?

HMRC outlines employer obligations for Statutory Sick Pay (SSP), Maternity Pay (SMP), and Paternity Pay (SPP), ensuring employees receive appropriate benefits when eligible.

Employers must:

• Calculate payments based on government-set rates
• Submit claims where applicable (e.g., recovering payments for small employers)

For more on UK employee benefits, visit A Competitive Pension Plan for Your UK Employees.

How does HMRC handle benefits and expense reporting?

Certain employee benefits (e.g., company cars, medical insurance) are taxable. Employers must:

• Report benefits using P11D forms
• Ensure benefits-in-kind taxation is applied correctly
• A special K-prefix tax code may be used for such returns

Compliance and enforcement

What are the penalties for non-compliance with HMRC?

Employers who fail to meet HMRC obligations face penalties, including:

• Late RTI submissions – fines based on company size
• Underpaid tax liabilities – interest and penalties on overdue amounts
• Failure to report employee benefits – additional tax liabilities and fines

How does HMRC enforce employment laws?

HMRC enforces regulations such as:

• The National Minimum Wage: Employers must pay workers the correct wage or face penalties
• Anti-Money Laundering (AML) compliance: Businesses in regulated sectors must follow HMRC’s AML guidelines
• Mandatory employment benefits such as SSP, SMP, and SPP

International considerations

How does HMRC assist global hiring and international employees?

For businesses hiring international employees, HMRC provides:

• Guidance on tax residency and eligibility for tax relief
• Rules on double taxation treaties to prevent double taxation
• Support for global payroll compliance

For international hiring strategies, read the Beginner’s Guide to Hiring in the UK.

How do employers interact with HMRC at the end of the tax year?

Employers must:

• Submit final year-end payroll reports
• Provide employees with P60 forms summarizing annual earnings and deductions
• Submit P11D forms if applicable

For more on UK payroll responsibilities, check out our guide to Employer Costs in the United Kingdom.

Future trends: Digitalization and automation

Key initiatives shaping the future of HMRC include:

• Making Tax Digital (MTD): A government initiative requiring businesses to use digital tax reporting tools
• Automation in payroll reporting: Reducing manual errors in tax submissions
• Evolving policies for remote work and the gig economy: Ensuring tax laws remain relevant in modern work environments

For insights into UK tax basics, read TaxScouts Dishes the UK Tax Basics.

Next steps for UK employers

HMRC plays a vital role in ensuring compliance with tax laws, managing statutory benefits, and supporting businesses through digital transformation.

Employers and HR professionals must stay informed about HMRC regulations to ensure seamless payroll operations and avoid compliance risks.

For tailored payroll solutions, explore Deel’s Global Payroll Services or book a demo.