Most common payroll mistakes and how to avoid them

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Payroll plays an essential part in every business. No one notices when it’s done correctly, but mistakes can be expensive for your business and frustrating for your employees.

In fact, PWC reported that payroll errors cost the average FTSE 100 company between £10m and £30m each year.

By taking extra care to minimise errors, you’ll avoid hefty fines and complaints from employees who are cut short. In this blog post, we’ve outlined the most common payroll mistakes and how to improve the accuracy of your operations.


The most common payroll mistakes

  1. Dependence on manual methods

Reliance on manual entry through spreadsheets to pay employees is a risky business. That’s not to say these documents aren’t great for check-ups and quick calculations, but there are better ways of doing things.

Payroll software will save time and prevent errors, plus you can use free options if you employ under ten people. Better options will have handy automation features and reporting capabilities to highlight potential issues.

Manual payroll relies on the proficiency of in-house staff. This can cause problems in the event of leave or illness, and their experience must be comprehensive if you choose not to outsource. Plus, payroll legislation is everchanging, from RTI to auto-enrolment, meaning your team must keep up to date with regulations.


  1. Incorrect employee set up

Not assigning the correct details to your employees will cause incorrect payments. For example, not using the right National Insurance number will impact the amount of tax paid.

Take care to ensure all details are correct and encourage new starters to check their first payslips. If workers’ circumstances change, for example, if they go on parental leave or their hours increase, it’s worth notifying them that adjustments have been made.

If you work with contractors, ensure they are paid according to their payment type, whether that’s via a limited company, agency PAYE, or umbrella PAYE.

Some of the key errors in payroll come from deductions like maternity pay, statutory sick pay (SSP), redundancy payments, pensions, and student loans. As these vary by individual, it’s vital to get it right during set up. You must also keep on top of changing criteria, for example, student loan repayment thresholds sometimes change.


  1. Salary miscalculations

Following on from the previous point, you must also be aware of ongoing adjustments to an employee’s pay. This includes overtime, commissions, deductions, and so on.

Underpaying an employee will frustrate them, while making the same error again can impact staff retention. Overpaying an employee, on the other hand, can leave you at a loss if the employee refuses to return the funds.

Ensuring correct calculations necessitates good HR management in terms of time tracking and recording any leave. If an incorrect payment is made, you rely on either the attentiveness or goodwill of the employee to inform you.


People in office


  1. Insufficient record keeping

As an employer, you need to keep records of payments and deductions for three years from the end of the tax year they relate to. If you don’t report these in your tax return, HMRC may charge a penalty of up to £3,000. The records include leave, sickness, tax code notices, and more.


  1. Missed deadlines

Missing payday is an error that will cause frustration across the business and lower your employees’ trust. It’s vital you prepare all processes in advance to ensure salaries are paid on time.

Paying your employees punctually isn’t the only thing to consider. Since RTI was introduced in 2013, employers are responsible for submitting a Full Payment Submission (FPS) to HMRC on or before the day employees are paid. If you fail to do so without a reasonable justification, you’ll be hit with a penalty. Of course, you must also ensure your annual tax returns are submitted on time.


  1. Incorrect tax codes

Employees are assigned a tax code each year to determine how much tax is paid. HMRC will adjust these based on changes in circumstance, for example, if you offer an employee benefit. It’s important to keep track of changes to tax codes and ensure they’re correct, otherwise your employees may be paying too much or too little tax.


What to do if you make a payroll error

Errors can happen however careful you are to avoid them. If it’s a minor issue only affecting a small number of employees, there are a number of things you can do:

  • Cancel the payroll straight away and reprocess it once you’ve made corrections
  • Make adjustments for only the impacted employees and run payroll again
  • When you next process payroll, adjust the payment(s) to negate the error

Bear in mind, the last option may frustrate your employees depending on the circumstance. If the issue is underpayment, you’ll need to resolve it as soon as possible.


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How to avoid common payroll mistakes

  1. Invest in great payroll software

The best way to prevent and spot errors is by using top payroll software. By this, we mean solutions with automation features to highlight discrepancies, bulk processing functionality to avoid manual error, and a reporting suite to complete checks. Not only does this increase accuracy by decreasing dependence on humans, but it also speeds up the process and helps keep you compliant.

If you’re already using software and make regular errors, it may be time to try a new offering. Read our blog post on signs you need new payroll software.


  1. Train staff or hire an agency

If your payroll team is in house, it’s vital that they are trained on new and upcoming legislation. Failure to do so could result in incorrect payments and hefty fines. Although payroll software will increase the efficiency of processing, it’s still your responsibility to ensure employee information is up to date.

Outsourcing payroll is an option for businesses who don’t have the capacity to operate internally. Dedicated accountants are trained to be aware of upcoming legislation and improved operations. However, errors can still happen as payroll ultimately requires human input.


To summarise

Errors happen, and that’s OK – providing you correct them promptly and prevent the same mistake from happening again. Failure to do so will impact staff retention and your business’s reputation.

Using payroll software like Codapay with handy automation features will help to increase payroll accuracy and efficiency. Find out more about our solutions.

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