5 payroll mistakes that HR teams in the UK need to avoid

Staff writer | 19 June 2023 | 1 year ago

Payroll is a central business function at every company, and it also serves as an efficiency barometer. After all, payroll is usually a company’s biggest investment and expense. Executing it correctly reveals how well a company has aligned its processes and prioritised its employees.

Unfortunately, payroll errors are frustratingly common in the UK, often creating easily avoidable extra expenses. Here are five of the most common payroll errors and how companies can avoid them.

Late payments to HMRC

Every profitable company in the UK is liable for corporation tax. Unfortunately, many companies fail to clear their dues before filing deadline dates, incurring costly penalties. Tax filings in the UK have become more complex over the years, and companies adhering to manual payroll processing are paying the price.

Here’s a list of all the documents and payments companies must make every year:

  • Full payment submission
  • Employer payment submission
  • PAYE payment
  • P60 forms
  • P11 and P11(D) forms
In addition to these forms, companies must review tax rates, thresholds, Director NI calculations, employment allowance claim eligibility, and the apprenticeship levy allowance. Executing these tasks manually demands a small army of experienced workers, and this creates significant payroll processing costs.

Alternatively, companies can use an electronic platform to automate these processes and set up approval workflows, culminating with automated payments to HMRC and EPS reports, eliminating costly penalties. With its extensive integrations with HR data platforms and accounting tools, Pento is considered by many to be a leader in its category.

Employee misclassifications

HMRC takes employee misclassifications seriously. The body publishes a list of violators and rarely offers employers a way out of hefty fines. In the past, companies have been forced to compensate wrongly classified workers for each year they were misclassified, with some misclassifications running for as long as 14 years.

The government’s worker categorisation criteria play a role in misclassifications. The UK is unique in that it specifies three categories of employees: employees, contractors, and workers.

The best way to avoid such errors is to task HR onboarding flows with correctly classifying workers. However, employee statuses can change over time, creating payroll headaches. For instance, an employee might request a flexible work arrangement (protected by UK law) and thereby potentially become a “worker” in HMRC’s eyes.

Payroll must run validation checks before processing compensation and filing returns. This means keeping pace with the Government’s definition of each category and ensuring employment contracts contain the right language. For example, describing an employee as a “worker” on their employment contract might render the document invalid and attract penalties.

Payroll departments must work closely with HR onboarding and offboarding teams to ensure such errors do not take place.

Using the wrong tax codes

While worker categories can be a minefield for employers to navigate, tax codes offer even more complexity. Unlike employee misclassifications, tax code errors affect employees directly, and repeated errors damage employee morale and a company’s image in the recruitment market.

The government publishes a list of tax codes and expects employers to use appropriate codes for each employee. Using the wrong code leads to over or underpaid tax. In the latter case, HMRC will reach out to the employee directly and demand additional payment.

In such instances, employees are unlikely to view their employers favourably. The introduction of the PAYE scheme has increased the frequency of these errors since employees must not settle claims each month, instead of waiting for the annual tax return filing date.

Company payroll and HR departments must move fast to verify employee tax codes to avoid such issues and increase their odds of retaining workers. TaxScouts offers a free tax code checker tool that reveals the PAYE implications of each.

Pension duty errors

UK employers must automatically enrol their employees in pension schemes. However, changing thresholds and regulations mean errors occur frequently. For instance, the Department of Work and Pensions publishes earnings thresholds for automatic enrolment each year.

Using incorrect thresholds leads to employees missing pension contributions, something they’re unlikely to find favour with. Other common errors include enrolling staff but failing to notify the relevant parties, which is a legal requirement, and ignoring maternity pay considerations when calculating contributions.

Payroll departments must regularly check The Pensions Regulator‘s publications to keep pace with changes and avoid mistakes that jeopardise their companies.

Miscalculating employee compensation

Wrong deductions, no compensation for overtime, lack of accounting for union contributions and pensions, and other common snafus can have a domino effect, causing still more errors in employee payroll calculations. Given the impact salaries have on employees’ lives, companies can ill-afford to make mistakes here.

While the government allows companies to amend their filings with additional FPS filings, the real damage occurs when examining employee relationships. Often, poor record-keeping and data storage are prime reasons for these errors.

For example, an employee who has been recategorized as a contractor is not eligible for certain benefits. Companies that continue to pay these benefits increase salary costs and put themselves on the wrong side of HMRC.

Employers must review the frequency of these errors and redesign their processes to minimise them. Here too, it’s wise to use an automated platform that syncs with the latest requirements and incorporates approval workflows.

Avoiding errors is critical

Payroll errors are often easily avoided, yet companies continue to make elementary mistakes. Recent advances in technology have made it easier for companies to reduce payroll errors. Backing these tools with the right processes will help companies to avoid exposure to fines as well as potential damage to their employer brands.



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