Running payroll in-house can be a bit of a minefield for businesses, especially for those who don’t have dedicated financial staff or expert accountants on hand. Payroll is one of the most crucial parts of managing a business, as it directly impacts employee satisfaction and business compliance.
But, as straightforward as it may seem, payroll can be riddled with potential errors that could lead to penalties, unhappy employees, or unnecessary costs.
In this blog, we’ll highlight some of the most common payroll mistakes and offer practical tips on how you can avoid them.
1. Misclassifying Employees
One of the most frequent mistakes businesses make is misclassifying their workers. It’s vital to understand the difference between employees and independent contractors. Each category is subject to different tax rules.
Employees must have income tax, National Insurance, and pension contributions deducted, while contractors are responsible for their own tax affairs. Misclassifying an employee as a contractor can result in penalties and backdated tax payments.
How to Avoid: Familiarise yourself with HMRC’s guidelines on employment status and, if unsure, consult with an accountant or use HMRC’s Check Employment Status for Tax (CEST) tool.
2. Incorrectly Calculating Overtime and Holiday Pay
Misunderstanding overtime rules or failing to correctly calculate holiday pay is another common payroll error. For example, not paying overtime rates or failing to include regular bonuses or commissions in holiday pay can lead to underpayments, which could trigger fines or legal action from employees.
How to Avoid: Ensure that you have a clear understanding of your employees’ contracts regarding overtime and holiday entitlement. Regularly review employment contracts and make sure any changes in legislation regarding holiday pay or overtime are reflected in your payroll calculations.
3. Missing Payroll Deadlines
Filing payroll late is not just frustrating for employees who rely on timely payment, but it can also result in penalties from HMRC for late submission of PAYE information. Consistently missing deadlines damages employee trust and can create unnecessary stress for your payroll team.
How to Avoid: Set clear internal deadlines for submitting payroll data well before the official deadlines. Automating the process with payroll software can help ensure payments are made on time, and reminders are sent to prompt action when needed
4. Incorrect Tax Code Application
Using the wrong tax codes for employees can lead to over or underpayment of taxes. This not only affects employee take-home pay but can also result in tax liabilities for your business later down the line. New employees, in particular, may provide old tax codes that are no longer applicable, leading to inaccurate deductions.
How to Avoid: Always check the tax codes provided by new employees or seek confirmation from HMRC. Keep an eye on any changes to tax code thresholds and update your system accordingly.
5. Neglecting Statutory Deductions and Payments
Employers must process statutory payments such as Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), and auto-enrolment pension contributions correctly. Failing to apply these accurately can result in fines and employee dissatisfaction.
How to Avoid: Familiarise yourself with all statutory requirements and ensure that payroll software is updated to reflect the latest rates and regulations. When in doubt, reach out to an accountant who can verify your compliance.
6. Not Keeping Accurate Payroll Records
Payroll requires meticulous record-keeping. HMRC requires businesses to keep detailed records of PAYE for at least three years. Failure to keep accurate records can lead to penalties if there is a discrepancy during an audit or inspection.
How to Avoid: Keep digital records of payroll reports, tax deductions, and employee information. Most payroll software systems automatically store this data, making it easier to access during inspections. Back up these records regularly to avoid data loss.
7. Failing to Keep Up with Payroll Regulations
Tax laws, pension rules, and employment regulations change regularly. If you aren’t keeping up with these changes, you might inadvertently fall foul of the law, risking fines or legal action from both HMRC and employees.
How to Avoid: Regularly check for updates from HMRC and invest time in training or consulting with professionals to stay compliant with the latest payroll regulations. Many payroll software programs also update automatically to reflect legislative changes, making them a valuable tool.
How Blue Spire Can Help
At Blue Spire, we understand that payroll management can be daunting, especially when it’s just one of many tasks business owners have to juggle. That’s why we offer outsourced payroll services, designed to take the hassle out of payroll processing for businesses of all sizes. With our expert team on hand, you can rest assured that your employees will be paid correctly and on time, every time.
We stay up-to-date with the latest tax laws and payroll regulations so you don’t have to. Whether it’s making sure employees are on the right tax code or handling complex statutory payments, we’ve got you covered.
Our goal is to help you avoid costly mistakes and give you more time to focus on growing your business.
Want to learn more about how we can streamline your payroll process? Get in touch today for a free consultation. Let us take the stress out of payroll, so you can focus on what you do best. |