What is the cost of making payroll errors?

Manager Worried About Payroll Errors


When you’re responsible for HR within your business, the thought of payroll errors is enough to lose sleep over. That’s right: It’s a very real issue – with implications for workers’ well-being and their ability to buy basic items, pay bills and not fall into debt. This is amplified by the ongoing cost of living crisis and backdropped by soaring inflation and frequent headlines over fair pay.  

It’s fair to say – payroll is one of the most important functions within a business. When done well, it can keep employees satisfied and help your business stay well within the parameters of legality. But when mistakes happen, their impact can ripple across an entire organisation.  

You may have been prompted to read this post because you’re concerned about the consequences of payroll errors. Perhaps you’re working with a manual entry system and worried about the impact of human error…

Whatever it is, here at PeopleHR, we want to fill you with confidence and reassurance - most common payroll errors are easily avoidable with proper planning, education and the right payroll tools. 

With that in mind, this article promises to outline the costs and negative effects of payroll errors, whilst demonstrating how to avoid them from happening at all... 

How to fix payroll errors: Common examples

Payroll is a complex process and there are numerous places where businesses can make mistakes. You only have to look at the likes of Next and Asda – and their ongoing underpayment of employees (more on this later) which they put down to payroll vendor issues. It’s fair to say - mistakes happen with businesses big and small.

The most common mistakes made with payroll and how you can fix them:

1. Miscalculating employee pay

Miscalculating employee pay

Starting with the most obvious: miscalculating employee pay. If you’re tasked with things like commissions, overtime and statutory deductions, the margin for error is great. It’s certainly a lot to keep track of, especially if you’re the sole person responsible for it.  

As we mentioned before, there have been recent cases where large UK brands have fallen victim to payroll errors. An article reported that some Asda employees were forced to use food banks and skip bill payments due to regular errors that resulted in some being underpaid by £500 or more. Similar instances have occurred with Next employees – who were underpaid over several months after the poor implementation of payroll software. Read more here. 

Cases above highlight the consequences of payroll errors. Not only does it cause financial hardship for employees, but it reflects negatively on your perception as a company. 

Important to note: other things can also contribute to miscalculated pay – namely poor time-tracking capabilities. If your company doesn’t have a reliable way to track employee hours and paid time off, then your chances of mistakes are increased. Learn more about time and attendance software.

  • How to correct miscalculating employee pay:

The GOV.UK website notes that a mistake made with employee pay can be corrected by updating the year-to-date figures in your next regular Full Payment Submission (FPS). For further information on correcting payroll errors through miscalculation, visit the aforementioned link.

2. Incorrect deductions taken from an employee

One of the more common payroll errors can occur around incorrect deductions. There are certain parameters around when and how you can deduct someone’s pay.  

As an employer, you can only make a payroll deduction if:

    • The contract specifically allows the deduction 
    • It was agreed in writing beforehand 
    • You overpaid them by mistake
    • It’s required by law (e.g. Income Tax)
    • Missed work due to strikes or industrial action 

If you overpaid someone by mistake, it’s best to agree with them on how the money will be paid back. For example, a deduction in wages or a bank transfer. It may also be necessary to set up a payment plan to help your employee with their finances – especially if they owe a large amount.

  • How to correct payroll errors associated with deductions:

Similar to if you paid your employee the wrong amount, you should update the year-to-date figures in your next regular Full Payment Submission (FPS).  

The GOV.UK website also notes that you can correct payroll errors by sending an additional FPS before your next regular FPS. Further details on how to do this can be found here.

3. Incorrect payments made to HMRC

Tax returns are renowned for being complicated. A survey by Which? found that 28% of people reported finding tax returns difficult to complete.  

With multiple accounts, receipts and records to be checked, it’s easy to see why mistakes are made in your forms, and depending on what you get wrong, employees may end up paying more than they owe.  

With that in mind, what can you do if a submission is incorrect?

  • How to correct the error:

Correcting errors made with HMRC will depend on two things: whether you paid too much or too little. Further information can be found here, but to summarise: 

If you paid HMRC too little 

This can be corrected in your next regular report. The HMRC will add the underpayment to your next PAYE bill.  

The GOV.UK website also notes that you should pay any outstanding balance as soon as possible otherwise an interest or penalty fee may be applied.  

If you paid HMRC too much 

You can make the correction in your next regular report and HMRC will take the overpayment off your next PAYE bill.

4. Non-compliant payroll processing

One of the most common payroll errors made is payroll compliance. It is often one of the most critical yet challenging aspects of payroll management. If you’ve been in role for some time, you’ll know how frequently legislation and regulations can change, and keeping your finger on the pulse is crucial.  

If you’re a small business and don’t have the benefit of expert support in place, this may lead you to make costly errors. So, let’s find out how you can correct non-compliant payroll processing.

  • How to correct the error:

Non-compliance in payroll processing will involve you either overpaying or underpaying an employee. If this is the case, follow the steps highlighted in points one, two and three of this article.

To improve your payroll compliance, the best suggestion would be to consider a trustworthy payroll service, like PeopleHR, to manage all (or some) of the work for you. This passes the responsibility of compliance on to a company that has the time, skill and resources needed to reduce the risk of non-compliant payroll processing.

What are the consequences of payroll errors?

The consequences of payroll errors are two-fold: they could impact your business, your people, or both, as we have suggested throughout this article.

Here are some of the fines you can expect if payroll errors are made:

    • Real time reporting information and PAYE. Full Payment Submissions (FPS) need to be delivered to the HMRC accurately and on time. Failure to do so will almost certainly lead to fines. First offences are tolerated within a period of 30 days. After that, fines can range from £100-£400 depending on the size of your business.
    • Benefits of Kind. With Benefits of Kind, you have until 6th July following the tax year to submit P11Ds. Failure to submit this can result in a penalty of £300 per P11D. And this might increase by £60 per day.
    • National Minimum Wage. Payments of this nature are a big responsibility for employers. Penalties can be up to 200% of amounts due. If payments are made within 14 days, the penalty will reduce by 50%, however. 

Let’s not also forget the consequences of reputational damage – as mentioned earlier - with the discrepancies associated with big brands, Next and Asda. Such mistakes don’t just equal fines for the employer but could lead to a disengaged workforce, reduced productivity, and a poor brand perception within the wider community.

If you’re experiencing high staff turnover as a result of these frequent discrepancies, then you may also face the significant cost of recruitment, which Glassdoor estimates to cost £3000 per employee when you factor in advertising, training and onboarding. 

As you can see, the consequences of getting it wrong can be severe, so HR leaders should aim to streamline, strengthen and deliver payroll with accuracy.  

Let’s now explore how to avoid payroll errors.

How to avoid payroll errors

If you’ve been stung before, we hope it was a minor discrepancy. Whatever the outcome, we’re sure it was a learning curve for you and your business. But, if you’re looking to avoid payroll errors before they happen, these tips might just help.

1. Complete an audit

A payroll audit should be done in the first instance and performed regularly to alert you to any mishaps early on. An audit is an analysis of your company’s payroll processes, and they examine things like active employees, pay rates, wages and tax withholdings. This should be carried out at least once per year to ensure your process is up-to-date and legally compliant.

2. Reduce the risk of human error

A manual payroll approach carries the biggest risk of human error, and one wrong number or incorrect code can lead to a world of pain, as we’ve highlighted throughout the article. With legislation constantly changing, too, the chances of human error are increased.  

Many businesses can overcome this challenge by outsourcing payroll to a trusted provider. This will ensure your payroll remains compliant and free from error, every time. By transferring this responsibility, your business can begin to save time, optimise resources and therefore work more productively.

Effective payroll software can also integrate with other HR system processes – such as time and attendance software – to further eliminate the risk of human error and ensure people get paid for the hours they do.

3. Run regular payroll reports

Before processing payroll for the month, you should run regular payroll reports. This will ensure all details are correct, which is essential since payroll is likely to be your business’s biggest expense. When it comes to payroll reporting, here are some golden rules to bear in mind: 

    • Create frequent payroll reports to track expenses 
    • Make sure the report measures up to performance 
    • Use accurate payroll software to help
    • Hire an accountant 

You can’t manage what you don’t measure. That’s why payroll reporting, and tracking against payroll metrics, is such a crucial part of controlling your labour expenses, overheads and profit margins.

4. Ensure staff have the right expertise

If you don’t have the internal resource to keep updated with compliance laws, it may be necessary to hire an expert to help. This can be done by either outsourcing your payroll or hiring a dedicated person in-house. Bear in mind – hiring in-house can come at a significant expense to a business, with the average Human Resources professional salary being £36, 455, according to Reed 

In comparison, with outsourcing payroll, you can expect to pay around £5 per person, per pay slip, per period.

Whatever you decide is the best investment for your business, both suggestions guarantee the expertise to keep updated with relevant laws and reduce your chances of non-compliance.

Next steps

No matter how on top of the game you are, mistakes can (and do) happen – especially if you’re managing your payroll manually. And the consequences of payroll errors are more than just monetary; they can create reputational damage and break the trust of your employees.  

To recap, our advice when considering how to avoid payroll errors would be:

    • Complete regular audits 
    • Reduce the risk of human error as much as possible by automating manual tasks 
    • Run payroll reports regularly
    • Ensure you rely on expertise to get the job done accurately 

If you’d like to discuss your options around payroll further, don’t hesitate to contact us today. Our payroll software and payroll outsourcing services are there to help streamline your processes and provide peace of mind.

Sheldon Walker
By Sheldon Walker New Business Sales Representative

Sheldon is a New Business Sales professional with Access PeopleHR. He is dedicated to helping SMBs thrive in today's competitive landscape. With over 5 years of experience in SAAS and HR software products, he has provided numerous clients with the tools to make their life easier. Sheldon's passions lie in helping clients achieve their goals and giving them the freedom to do more.

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