Avoid These Payroll Errors

Did you know that errors in payroll are one of the biggest sources of poor employee morale across UK businesses?

A 2024 survey by the Global Payroll Association revealed that almost half of all employees in the UK have missed at least one bill payment due to an issue with payroll, whether that’s an underpayment or a delay in receiving it.

Moments like that stick in the memory; even if you’ve always been self-employed yourself, the odds are good that you’ll remember a time that a bill was coming due, the income you needed to pay it was delayed, and the payment would either be missed or leave you with no margin for anything else.

And if you do have a memory like that, we’d be willing to guess that it took a long time for that customer to regain your trust.

Of course, employee morale isn’t the only problem that mistakes in payroll can cause; you can even face legal consequences if deductions made were illegal.

With that in mind, we wanted to take a look at the biggest errors often made by small businesses handling payroll, and cover how to fix them.

Incorrect Deductions

Part of the payroll process is to deduct money for tax, National Insurance, and some other things from the employee’s payments.

If you’re used to doing this but you’re not fully familiar with payroll legislation, you might end up making deductions that aren’t permitted. This means an employee (or maybe more than one) goes underpaid – but the issue will need to be addressed in your next Full Payment Submission (FPS) to HMRC.

If the deduction you’re about to make isn’t on the following list, it isn’t permissible to make the deduction:

• Tax
• National Insurance
• Pension Contributions
• Union Subscriptions
• Purchase of Shares or Share Options
• Repayment of Accidental Overpayment
• Repayment of Advance Wages or Loans
• Accommodation Provided

Poor Time Tracking

Obviously, for employees paid hourly and/or eligible for overtime payments, time records must be tracked correctly and payroll must be calculated appropriately. Not only will an employee be frustrated it paid for fewer hours than they worked, but if they can show a discrepancy this can have significant legal and reputational ramifications.

What’s often overlooked is that time tracking also pays a role in paid leave calculations, so even if your employees are all salaried, it is still worth tracking leave owed, time spent under statutory sick pay, etc.

Many of the most unpleasant employee/employer disputes ultimately stem either from inaccurate time tracking or the employee’s belief that tracking is inaccurate. As such, it’s well worth being fully transparent with policies on how you track time, illness policies, etc.

And it should go without saying, but if you’re not confident in your knowledge of legislation in this field, make sure your policies are compliant.

Poor Record Keeping in General

Inaccurate or out of date employee information has serious impacts on payroll,  whether it leads to payment delays, incorrect payments (for example, through poorly tracked deductions), or even compliance issues.

The checklist of things to track includes:

• Employee Name
• National Insurance Number
• Bank Details
• Deductions & Payments
• Reports to HMRC
• Payments to HMRC
• Leave and Sickness Absences
• Taxable Expenses or Benefits
• Tax Code Notices
• Payroll Giving Scheme Documents

Not everything on this list will change; most likely, your employee will continue to use the same bank account throughout their time with you, and of course their National Insurance number is fixed. However, in all the congratulations offered to an employee on their marriage, it’s easy to forget that you should check whether their name has changed as a result!

Incorrect Employment Classifications

Does your business work with contractors? If it does, you should have at least a decent familiarity with IR35 legislation. Some contractors may legally be classified as ‘disguised employees’.

How to tell whether this applies in a specific situation is beyond the scope of this article, but the tax implications are very different. If you’re not sure, we’d be happy to help you sort it out.

Using The Wrong Software

And by this, we’re not criticising any specific payroll software or suggesting only one of them is good. We’ve just seen too many small businesses trying to manage payroll on Excel or Google Sheets, with all updates handled manually.

There’s nothing wrong with using a spreadsheet in the way it’s designed, but even then you often have to be very careful. It’s not just making sure all the numbers you add in are right and that the formulae are correct; even the way the number’s formatted can mean a calculation is incorrect – and for the most part, the only times this is noticed is when they’re so far from the expected value that it’s obvious at a glance.

No, spreadsheets just aren’t designed to be effective accounting software. Most modern accounts software packages can handle not just payroll but other key aspects of business accounting, but if your business is small and you don’t have the budget for that, try Basic PAYE Tools, a free piece of software HMRC maintains for businesses with fewer than 10 employees.

Mispaying HMRC

This entry is on our list purely for completeness; we’re sure anyone reading this understands that underpaying your tax contributions will have lasting and extensive consequences as soon as this is identified.

Not Moving with the Times

Legislation, regulations, and official guidance all evolve steadily over time, and as a consequence, the payroll process has to update as well. While software will usually be updated in line with these changes, it’s well worth having someone in the process who is familiar with how legislation is changing, so they can keep everything compliant.

Whether it’s a member of your team or an external accountant like us, their role at this point is to protect your business from legal consequences and that payroll is correctly calculated in time for everyone to be paid on time. The peace of mind that comes from knowing someone’s handling that cannot be denied.

If you’d like to discuss this service, get in touch and we’ll be happy to answer your questions.