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14th February 2022

Common payroll mistakes and how to avoid them

Effective payroll management is vital for the financial security and reputation of a business. When companies don’t have strong payroll management and processes, they risk fines, penalties, data leaks and damage to company morale and trust. 

Over the years we’ve seen several instances where employees have brought class action lawsuits against large employers (like Walmart, Sainsbury’s and Asda) who have not paid employees for working through lunch breaks, overtime pay and bonuses. 

The proper management and execution of payroll requires a lot of paperwork and administration - all of which comes with a lot of risk, especially if mistakes are made - here are five reasons you should outsource your payroll.

At Payescape, we’ve seen it all, so we thought we’d highlight the most common mistakes that happen when managing payroll in house, and how you can remedy them. 

Incorrect deductions have been made to employee pay

From underpaying an employee to accidentally taking a percentage of pay or submitting the wrong tax codes , incorrect deductions happen. However, it is important that you resolve this issue as soon as possible, and put things in place to ensure it doesn’t happen again. 

You can only make deductions to employee pay for the following reasons:

  • Tax 

  • National Insurance

  • If contracts specify an employee is liable for a shortfall (for example, a shortfall in a cash register) and the employee is found at fault 

  • Repayment of advance wages or a loan

  • Repayment of an accidental overpayment of wages

  • Buying shares or share options in the business

  • You’ve provided accommodation for your employees

  • Your employee has signed up for union subscriptions or pension contributions


How to fix it 

You can update any payroll mistake on the next Full Payment Submission (FPS) sent to HMRC, or you can submit an additional FPS with the pay period field showing the difference in what was originally reported instead of the correct amount.

If you’re consistently making incorrect deductions, you should look at outsourcing your payroll so that you can avoid this all together. 

Employee pay has been miscalculated 

From employees being given a pay rise that hasn’t gone through, to incorrect deductions, or overtime that hasn’t been paid, miscalculation of employee pay can happen for a number of reasons. 

If you continuously pay employees incorrectly, it can lead to significant fines and penalties. It can also lead to employee retention and trust issues.

How to fix it 

You must pay the employee the amount they are owed as soon as possible, and submit an additional FPS on or before the day you pay the employee. 

It is important to determine why these errors have happened to ensure this type of issue does not continue, as it can lead to penalties. If you bring a payroll management company in, they can help identify any weak points and fix it for you.

HMRC hasn’t been paid the right amount

Every company is expected to pay corporation tax, and it is important to pay the right amount. If you over pay, HMRC will repay you the amount that’s been overpaid. If you underpay, you will be charged. 

Failure to pay corporation tax or continuously underpaying can lead to a fine. 

How to fix it 

If you paid HMRC too little or too much, you can correct this error in your next regular report. HMRC will add any underpayment to your next PAYE bill, or take the overpayment off your next PAYE bill. It is important to ensure you review your PAYE bill for any inconsistencies. You can receive an incorrect bill or duplicate payroll records if you have previously made a mistake when making a payment to HMRC.

Your payroll process isn’t compliant with the latest rules and regulations

It is important to ensure your payroll records are regularly updated and all employee information is GDPR compliant. 

In most instances, late payments and first offences are tolerated if they’re resolved within 30 days. 

Late submission of FPS documents start from £100 (companies with 10 employees or less) and can go up to £400 for companies with over 250 employees. Businesses that fail to comply for more than three months in the tax year are penalised and fined for a further 5% of the tax owed. 

How to fix it 

If you think your business is at risk of being fined, or you’re struggling to remain compliant then it is definitely time to consider outsourcing to a managed payroll provider. Payescape is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, and Certified Information Privacy Professionals (CIPP) compliant. 

There are gaps in your records 

The saying goes, “the devil is in the detail” and when it comes to payroll and employee records, this is certainly true. It is important to make sure your employee and payroll documents are all filled out, and stored securely. Records must show accurate reporting and must be stored for 3 years from the end of the tax year they’re from. 

This is because a company may be subject to an audit at any time, and HMRC may look at your records to ensure you’re paying the right amount of tax. 

According to GOV.UK you must keep records of the following: 

  • Employee deductions and payments 

  • Reports made to HMRC

  • Payments made to HMRC

  • Employee leave and sickness absences

  • Tax code notices

  • Taxable expenses or benefits

  • Payroll Giving Scheme documents, including the agency contract and employee authorisation forms

Failure to keep full records can lead to a penalty of up to £3,000. 

How to fix

If you are missing any information or your records have been lost or destroyed and you can’t replace them,  it is important to tell HMRC as soon as possible. You should try and ensure all records are filled in correctly and properly as soon as possible. 

You must tell HMRC if your final payroll report of the tax year includes figures that are:

  • Estimated - that you want HMRC to accept as final

  • Provisional - that you’ll update later with actual figures

One of the easiest ways to ensure your records are stored safely, and are up to date without gaps is to outsource your payroll. A reputable payroll company will have the right technology and customised reporting that will ensure payroll is easy and compliant. 

Invest in the right software and reduce payroll mistakes

When you outsource your payroll and invest in the right software, accuracy is improved and mistakes are minimised. At Payescape, we have CIPP-certified staff to help when questions come up so you always have someone to talk to.  Get in touch today. We can help simplify your operations, manage compliance, and save time and money.

Need help to understand what solution is best for your business?

Speak with our expert team today on 028 2764 1060

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Payescape Limited is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017 (register number 821826) for the provision of payment services.

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