Payroll rarely features at the top of a board agenda. Yet when things go wrong, trustees discover just how consequential it can be.

Late PAYE submissions trigger HMRC penalties. Missed pension contributions invite enforcement from The Pensions Regulator.

And payments made outside of payroll to casual workers, volunteers or trustees themselves can unravel under scrutiny, which creates tax liabilities and reputational damage that boards would rather avoid.

Charitable status offers no shelter here. Charities must operate PAYE and pensions in the same way as any other employer.

This guide covers the three areas that trustees and CEOs most need to understand: PAYE obligations, automatic enrolment and the grey areas where charities often fall short.

Along the way, we will pose the questions your board should be asking.

Why Charity Payroll Is a Governance Issue

Payroll compliance falls squarely within trustee duties.

The Charity Commission’s CC8 guidance requires charities to establish procedures that reduce the risk of losses from fraud, error or poor value for money.

The guidance specifically states that trustees must ensure financial transactions are properly authorised, that duties are appropriately segregated and that there are adequate controls over payments to employees and others.

Payroll represents one of the largest, most regulated outflows a charity will have, which makes it a prime area for board oversight.

Regulatory Risk and HMRC Penalties

HMRC can impose penalties for late Real Time Information, (RTI) submissions, incorrect PAYE calculations, and missed payment deadlines. Late filing penalties start at £100 per month for employers with fewer than 50 employees and rise to £400 per month for those with 250 or more staff.

The Pensions Regulator has its own enforcement powers for auto-enrolment failures, including fixed penalty notices of £400 and escalating daily fines that can reach £10,000 for larger employers.

Where payroll errors suggest broader weaknesses in financial management, the Charity Commission may also take an interest, particularly if public funds or donor money are involved.

Staff Trust and Donor Confidence

Payroll mistakes affect people directly. Late or incorrect payments erode staff trust. Pension contribution failures can damage relationships with employees who expected their retirement savings to be handled properly. And if compliance issues become public, donor confidence can suffer too.

Funders increasingly expect the organisations they support to demonstrate sound financial governance, payroll included.

Why Boards Must Take Responsibility

Trustees may delegate day-to-day payroll processing, but they cannot delegate responsibility. Whether payroll is handled in-house, by a bureau or by an outsourced provider, the board must satisfy itself that systems work.

A useful question to ask at your next finance committee: What assurance do we receive that payroll is accurate, timely and compliant?

PAYE for Charities: What Trustees Need to Know

Pay As You Earn is the system through which employers deduct income tax and National Insurance Contributions, (NICs) from employees’ pay and send them to HMRC. If your charity pays anyone who meets the definition of an employee, even part-time or casual staff, you will almost certainly need to operate PAYE.

When to Register as a Charity Employer

Registration is required when you start to pay employees whose earnings reach the National Insurance Lower Earnings Limit, (£6,396 per year for 2024/25) or when any income tax is due. For many charities, this happens as soon as the first member of staff is hired.

The Charity Tax Group notes that charities must register with HMRC before the first payday and registration can be completed online up to four weeks in advance.

The process generates a PAYE reference number and an Accounts Office reference, both of which are needed to file returns and make payments.

Core PAYE Duties for UK Charities

Once registered, your charity must:

• Submit RTI returns to HMRC each time you run payroll, which reports what you have paid and deducted
• Pay PAYE and NICs to HMRC by the 22nd of the following month, (or 19th if you pay by post) unless you qualify for quarterly payments
• Issue payslips that show gross pay, deductions for tax, NICs, pension contributions, student loans and any other amounts withheld
• Maintain records of pay, tax, contracts and right-to-work checks for each employee

Charity Payroll and Multiple Funding Streams

Charities with multiple funding streams or grant-funded posts often face additional complexity. Staff may be paid from restricted funds with specific reporting requirements, and part-time or variable hours contracts can make payroll calculations more involved.

Understanding how your charity’s finances interact with payroll is an important part of tax obligations for charities.

Common PAYE Mistakes Charities Make

Two errors appear repeatedly.

The first is misclassification of workers, which means to treat someone as self-employed or as a volunteer when, in reality, they meet the legal definition of an employee.

The second is to pay trustees, guest speakers or sessional facilitators without an assessment of whether PAYE should apply.

Both can result in back taxes, penalties and awkward conversations with HMRC.

A question for your finance team: Do we have a clear list of everyone we pay, and are we confident each person is treated correctly for PAYE purposes?

Charity Pensions and Auto Enrolment Requirements

Since 2012, UK employers, including charities, have been required to automatically enrol eligible workers into a workplace pension scheme.

Who Must Be Auto-Enrolled

Eligible jobholders are workers aged between 22 and State Pension age who earn above the earnings trigger, (currently £10,000 per year) and work in the UK. They must be enrolled on a qualifying pension scheme, with minimum contributions of 8% of qualifying earnings, (at least 3% from the employer).

Workers who do not meet these criteria may still be entitled to join if they ask, though employer contributions may differ.

How to Choose a Pension Scheme for Your Charity

The Charity Finance Group advises that small charities should evaluate pension providers on several factors:

• annual management charges, (typically ranging from 0.5% to 0.75% of funds under management)
• whether the provider accepts smaller employers without minimum staff thresholds
• the quality of online administration tools for processing joiners and leavers
• and the default investment strategy offered to members.

Master trust schemes such as NEST and The People’s Pension are popular choices because they have no minimum employer size, charge capped fees and handle much of the compliance administration automatically.

Auto Enrolment Compliance Duties

Auto-enrolment is not a one-off task. Ongoing duties include:

• Assessment of staff eligibility each pay period and enrolment of new joiners within six weeks of their start date
• Correct processing of opt-outs, (which must be actioned within one month of enrolment) and voluntary joiners
• Payment of contributions to the pension provider by the 22nd of the month following deduction
• Re-enrolment of eligible staff every three years and submission of a declaration of compliance to The Pensions Regulator

Pension Costs and Charity Budget Planning

Employer pension contributions represent a real and rising cost. Many charity annual reports now reference pension obligations as a material budget pressure, alongside the impact of National Insurance and minimum wage increases.

Boards should ensure pension costs are factored into project budgets, funding bids and reserves planning.

Questions for Your Next Board Meeting

Two questions to raise:

• Do we have a clear schedule of our auto-enrolment and re-enrolment dates?
• Are pension costs properly reflected in our financial forecasts?

Volunteers, Trustees, and Payroll Grey Areas

Some of the trickiest payroll questions arise outside the core workforce. Payments to volunteers, trustees and casual workers occupy a grey zone where well-meaning charities often get things wrong.

Volunteer Expenses and Tax Rules

Reimbursement of volunteers for genuine out-of-pocket expenses, such as travel costs, meals while on duty and materials purchased, does not create a tax liability, provided the payments reflect actual expenditure.

PEM’s guidance on volunteer payments warns that problems arise when charities pay flat rate allowances or honoraria that exceed real costs.

If a volunteer receives a fixed £50 weekly payment but their actual expenses are only £20, HMRC may treat the £30 difference as taxable income that requires PAYE.

The key test is whether the payment genuinely reimburses costs incurred or whether it constitutes remuneration for services rendered.

Volunteer Expense Waivers and Gift Aid

Some volunteers choose to waive their expense claims and donate the equivalent amount back to the charity. When properly documented with a Gift Aid declaration, this can boost the charity’s income by 25%.

However, the process must be handled correctly: the volunteer must have a genuine entitlement to the expenses, must make an active choice to waive them rather than being expected to do so, and the charity must have sufficient funds to pay the expenses if claimed.

Trustee Payments and PAYE Obligations

The Charity Commission’s CC11 guidance states that trustees may be paid for services, (as distinct from their role as trustee) only where three conditions are met: there is explicit authority in the governing document or prior Charity Commission approval, the payment is reasonable for the services provided and clearly in the charity’s best interests and a majority of the board remains unpaid to preserve independent oversight.

If the arrangement resembles employment, with set hours, supervision and ongoing obligations, PAYE will apply.

Casual Workers and Contractor Status

One-off payments to freelancers, consultants or sessional workers can feel straightforward, but the legal test for employment status is nuanced.

HMRC applies several tests:

• Does the individual have to do the work personally or can they send a substitute?
• Does the charity control how, when, and where the work is done?
• Is there mutuality of obligation, meaning the charity must offer work and the individual must accept it?

If someone works regular hours, uses your equipment and cannot send a substitute, they may be an employee regardless of what their invoice says.

Ask your team: What payments do we make to individuals outside of payroll and what evidence do we have that this treatment is correct?

Payroll Giving for Charities

Payroll giving allows employees to donate to charity directly from their gross pay, after National Insurance but before income tax is calculated. Because tax relief happens at source, the donor does not need to reclaim anything, and the charity receives the full donated amount without submission of a Gift Aid claim.

How Payroll Giving Works

According to HMRC’s guidance, employers must register with an approved Payroll Giving Agency, (such as Charities Aid Foundation, Charitable Giving or Charities Trust) to offer this scheme. The agency acts as an intermediary, collecting donations from employers and distributing them to the chosen charities.

For employees, the tax benefit is automatic: a basic rate taxpayer who donates £10 through payroll giving sees only £8 deducted from their net pay, while higher rate taxpayers pay just £6 for the same £10 donation.

Agencies typically charge a small administration fee, though some offer free processing for smaller employers.

Benefits of Payroll Giving for Charities

For charities that employ staff, payroll giving can be a modest staff engagement benefit that demonstrates commitment to charitable causes.

For charities that seek income, encouragement of corporate supporters to set up payroll giving schemes can generate regular, predictable donations with minimal administrative overhead.

Unlike one-off donations that require Gift Aid processing, payroll giving creates a recurring income stream with no paperwork for the receiving charity.

Board Level Payroll Compliance Checklist

Use this checklist annually or when your charity first takes on staff, to confirm that financial accountability extends to payroll:

1. Confirm the charity is registered as an employer with HMRC and operates PAYE on all relevant workers
2. Verify that RTI submissions are filed on time and PAYE and NIC payments are made within HMRC deadlines
3. Review internal controls: who can add or amend employee records, who authorises pay changes, and how these are documented
4. Check that auto enrolment duties are met: eligible staff enrolled, contributions paid, re-enrolment dates in the diary
5. Map all payments made outside payroll and obtain professional advice where employment status is unclear
6. Ensure the board receives regular payroll assurance, such as an annual compliance summary and that any HMRC or Pensions Regulator correspondence is reported to trustees

How Charity Accounting Partners Can Help

Payroll may never be the most exciting item on your board agenda, but it deserves attention. The regulatory obligations are real, the penalties for failure are material and the reputational risks affect the people your charity exists to serve.

Trustees who engage with payroll as a governance issue, rather than leave it entirely to the finance team, build organisations that are stronger, more resilient, and better placed to deliver on their mission.

At Charity Accounting Partners, we help trustees navigate payroll compliance, strengthen financial controls and build the systems that support confident decision-making.

If you would like to review your charity’s payroll arrangements or discuss how we can support your board, book a discovery call with our team.