Running a business involves many challenges, and payroll and paying your employees is one that can not be overlooked.
When you get payroll wrong, it can lead to the following:
- Employees receiving incorrect wages
- Legal and compliance issues if you fail to meet your tax obligations or miss payment deadlines
- Penalties, fines and tax audits
- Your company’s reputation being damaged and the demotivation of employees in the workplace
Ensuring that employees are paid the correct amount on the right date is not only your legal responsibility but also a fundamental part of keeping your employees motivated. Payroll mistakes can be costly and, in the most severe cases, can lead to legal action being taken against you as an employer by your employees.
Most payroll errors can be fixed, so it is extremely important that steps are taken to correct any mistakes as soon as they are identified.
Whilst payroll mistakes are inevitable, we always recommend putting systems and procedures in place to avoid them. With so many rules and regulations around running a payroll, if you do not have an in-house payroll department, we recommend outsourcing this service to an expert payroll provider such as Spotlight Accounting.
Common payroll errors and consequences
Common mistakes made when running a businesses payroll can include the following:
- Employers are not updating tax coding notices issued by HMRC, either in paper form or through the employer’s online HM revenue and customs account. This can lead to the incorrect amount of tax being deducted from employee pay.
- Not updating employee information such as national insurance number corrections, change of address, changes in employee employment contracts, and an increase in salary or student loan deductions.
- Not processing additional payments such as overtime, increase in the hourly rate, bonuses and holiday pay owed.
- Not allowing for any deduction such as sickness absences or advanced pay given.
- Late submission of payroll to HMRC. If your RTI reports are submitted to HMRC on a different date than payments are made to employees, this can lead to penalties for non-submission.
The main consequence of these payroll mistakes is that the company will not pay the right amount to the employee. The most common error is the incorrect PAYE code being used and not enough tax being deducted.
For example, more tax must be deducted if an employee has a second job. Whilst the business will of overpaid the employee, it is the employee’s responsibility to pay back to HMRC any unpaid tax. This can lead to increased money concerns for the individual, especially as significant amounts can be involved by the end of the tax year.
Other consequences include employee dissatisfaction and reduced productivity of workers if they are not paid the correct amount. The worst case scenario may mean legal action being taken by an employee making a claim against the business for money that they have not received.
How do I fix a payroll mistake?
As soon as a mistake is identified, action needs to be taken to correct the payroll error.
The first step is to calculate the correct amount of money the employee should have received. Once the corrected amount of pay has been identified, the employee needs to be informed of the mistake and payment sent for any amounts due.
If the employee has been overpaid, then an open discussion needs to occur about how the employee pays the amount due. For example, the company can make several deductions from future payments to spread the cost of the mistake over a number of months to prevent any individual financial problems from occurring.
The next step is to correct the amounts that have been submitted previously to HMRC. This can be done by sending a full payment submission if the correction is to the same tax year. However, an earlier year update can be sent through your business’s payroll software if the correction relates to a previous tax year.
Once payment has been corrected, any additional tax and national insurance should be paid to HMRC, as there can sometimes be an additional interest cost.
Should I use an accountant for my payroll?
Unless employers have an in-house payroll department, we recommend outsourcing a company or business payroll to an accountant.
Using an accountant gives peace of mind that the correct payments are processed for your employee with the right tax and national insurance deducted and that all reports are submitted to HMRC on time.
Not only will an accountant ensure that HMRC requirements are met, but they can also deal with your workplace pension requirements and ensure you comply with the pensions regulator.
Get in touch with our payroll experts today
Whether you are a sole director being paid once a month or are a large corporation with over 100 staff needing to be paid each week, at Spotlight Accounting, our team of experts deal with all sorts of payrolls on a monthly, fortnightly or weekly basis.
If payroll is not your area of expertise, get in touch to see how our payroll service can give your business peace of mind.
In summary
Payroll mistakes can be fixed, and it is important that steps to correct the tax and national insurance deduction are taken as soon as you are made aware of the matter.
Getting payroll wrong can be costly as it can mean you face fines from HMRC and lead to legal proceedings being taken against you by an employee. Not only is there a cost for defending the claim, but it can also create demotivation within the workforce, which has a knock-on effect on employee productivity.
Therefore, unless you have the skills and knowledge to prevent more mistakes, we recommend outsourcing your payroll to an accountant or other expert provider.
To learn more about outsourcing your accounting, check out our guides here:
