HMRC Compliance & PAYE Hashing
Hashing refers to the process of generating a cross-reference that links each employer direct BACS payment to employees with their RTI return to HMRC.
Using direct BACS to pay employees is not compulsory but using the hash code if you do is. Payroll software automatically inserts hash codes into payment instructions where direct BACS is being used to make payment.
Hash codes are created using a hash key of 4 randomly generated characters. This hash key is used by a hashing algorithm chosen by HMRC and used in all RTI payroll software, to encode other information. This includes bank sort codes, but no account numbers, and the amount of each net salary payment. When encoded into the full hash string, the information it contains can only be read using the 4 characters of the hash key, contained in the BACS file.
The significance of the hash code in BACS is that it proves the amounts paid to employees via BACS have been calculated correctly using RTI payroll software. Employers can use the hash to prove their compliance with PAYE to HMRC.
The BACS network sends hash data directly to HMRC, so the hashed net payment values are in effect validated by reference to BACS’ own data, allowing employers to prove their PAYE calculations and payments to HMRC.
More information about HMRC’s hashing rules for BACS are available as a download on this page.
HMRC made hash coding compulsory for BACS RTI users because linking PAYE reporting to actual employee payments is what RTI is all about.
The importance of creating a link between payments and PAYE reporting is the payment validates the RTI return and the return reconciles with the payment.
HMRC is relying on RTI to reduce tax credit fraud and errors, and ultimately this relies on a direct link between payments and RTI reporting.
While there are no penalties for late RTI returns in the first year, penalties are already in force for inaccurate returns, and HMRC have made clear they will instigate compliance checks to ensure employers are reporting RTI correctly.
This approach makes it essential that employers and their payroll providers can demonstrate their compliance with their RTI reporting obligations and prove they are correctly operating PAYE.
The only sure way to prove PAYE is being operated correctly in real time is to use direct BACS to pay employees.