Avoiding costly payroll errors

Many businesses struggle to stretch resources across competing business functions, vying for attention and needing to allocate time effectively to each. Payroll is an area where significant attention is needed due to the complexities, when at all costs you’ll want to be avoiding mistakes and correcting any payroll errors to keep employees happy.  James Aylesbury MCIPPdip, Associate Director and Payroll Specialist at HWB Chartered Accountants advises

Keeping up with advances in payroll and employment laws, however, is unfortunately one of the areas where many costly mistakes can be made. As a result, employee payment issues can lead on to poor productivity and staff morale, not to mention the possibility of an HMRC audit.

To ensure you don’t slip up while running your payroll we have outlined some of the most common mistakes we think you should avoid:

Not setting up your payroll correctly

Making sure you are paying the correct amount of taxes and filing them correctly can easily be accomplished by using an experienced payroll service provider. Software they use will have automated payroll functions built in making it easier to meet the levels of accuracy required, not to mention their experience and ability to pick up errors and understand compliance requirements.

Penalties from payroll errors can be high and an audit from HMRC could easily cripple a small business. It is important to avoid such complications and put in place as many barriers to failure as possible.

Understanding who is classed as an employee

If you employ contractors or freelancers they may or may not be considered an employee. Some employers may mis-classify employees in genuine error and could come under scrutiny for doing so. Check the rules carefully under IR35, as a contractor without other customers should be treated as an employee. If they are found to be an employee of yours then you will be forced to make PAYE and NIC payments which could have been overlooked for a while.

Getting payroll tax codes wrong

It is important to keep track of employee situations that alter tax codes, from changes in salary, to additional benefits, bonuses, or student loans, each of which can alter a tax code. Getting a tax code wrong can result in some costly amendments and over-payments with the possibility of upsetting employees. An underpayment could also mean you as a business are faced with a sudden large tax bill in the new tax year.


Poor record keeping

Most payroll mistakes are due to not keeping records effectively. Due to incorrect data entry such errors can have a detrimental effect on your business. For example, it is important to correctly track start and end dates of maternity or paternity leave to ensure payments are correct. Future issues can arise from not tracking this correctly and you can run into all sorts of problems.

Not treating childcare vouchers correctly

If you are offering childcare vouchers as part of a salary sacrifice scheme then they need to be deducted from an employee’s gross salary before tax. Many employers are missing out on National Insurance savings and employees are overtaxed when they are not treated correctly in this way.

Missing a deadline

If you make late payroll tax payments, then you could face large fines. We find many businesses make this mistake which can be avoided by having a payroll calendar in place, using dedicated software or employing an experienced payroll provider.


Avoiding and correcting payroll errors will ensure you don’t fall on the wrong side of HMRC or your valued employees. If like many businesses you are pressed for resource, outsourcing your payroll to experts will ensure you avoid this and can spend more time on running and growing your business, knowing you are in safe hands.