There are three big potential consequences to payroll errors; financial loss to the business, potential legal ramifications from unlawful deductions, and lost employee morale in the event of underpayment.
According to data from the Global Payroll Association, one in four British PAYE employees has received at least one incorrect paycheque, and almost half of all UK employees have missed a bill payment following inaccurate payroll – either underpaying or paying too late for that payment to go out.
These kinds of errors can easily break the trust between business and employee – and yet arguably the other categories are worse.
Let’s take a look at some of the most crucial errors to avoid when running payroll.
Manual Spreadsheets Breed Errors
For many smaller businesses the temptation to handle payroll using a spreadsheet and manual updates until ready for something bigger can be very tempting. Often, this practice continues through business growth for far longer than it should do, and we’ve even seen cases where the spreadsheet used for one location was duplicated and the copy used for another location.
As anyone who’s used Excel for any length of time will tell you, sometimes incorrect or inconsistent number settings can create ongoing errors even when the formulae are accurate and no mistake is made updating them. But the true threat of a spreadsheet is that only the most glaring errors tend to get detected.
Now imagine there was an error in that first location’s spreadsheet before it was copied. What are the chances that the issue is found and fixed on both sheets?
Add in the ease with which the wrong data might be added (especially if it would have been the right data, if it was only one cell lower) and you have a nightmare waiting to happen.
For businesses with fewer than 10 employees, HMRC has produced Basic PAYE Tools, a free piece of software that eliminates these issues and several others. As your business grows, however, you will have to either outsource payroll or switch to new software.
Employees, Contractors & ‘Disguised Employees’
Misclassifying the people on your payroll can create a whole host of problems and lead to significant fines as the tax rules for employees and contractors are different. This is complicated further by contractors operating as ‘disguised employees’, which is what IR35 legislation is designed to resolve.
Be sure you’re handling these under the right guidelines so that you’re fully compliant.
Data Needs to be Accurate – AND Up to Date!
Errors in employee information are a serious problem; some of them can cause payment delays, and others are compliance issues just waiting to be identified.
You should track:
- Employee Name
- National Insurance Number
- Bank Details
- Deductions & Payments
- Reports to HMRC
- Payments to HMRC
- Leave and Sickness Absences
- Taxable Expenses or Benefits
- Tax Code Notices
- Payroll Giving Scheme Documents
These records must be kept up to date. As well as the obvious, that includes your employees’ names, so be sure to check after weddings!
Make Sure Time Tracking is Correct
For any worker whose hours and overtime affect their pay, it’s essential to have this correctly tracked. For everyone, leaves should be properly calculated also. The alternatives are errors that can create unpleasant disputes.
Incorrect Deductions to Pay
Underpaying an employee due to incorrect deductions can have lasting implications in more than just morale.
Deductions should only be made for:
- Tax
- National Insurance
- Repayment of Advance Wages or Loans
- Repayment of Accidental Overpayment
- Purchase of Shares or Share Options
- Accommodation Provided
- Union Subscriptions or Pension Contributions
In the event you make a deduction you should not have, you can update this issue on your next Full Payment Submission (FPS) to HMRC. However, we would advise that if you have to do this regularly, you should look at outsourcing this process to avoid further errors.
Ensure HMRC is Correctly Paid
As obvious as this sounds, if you’re undercalculating your tax contributions it can have devastating consequences.
Make Sure Your Process is Up to Date with Regulations
As legislation changes, the payroll process has to update to remain compliant. Most payroll software systems can be updated to help with this, but you will absolutely want to make sure whoever handles the payroll is familiar with the changes in legislation.
Making it easier and quicker to handle payroll (and giving our clients peace of mind that it will be handled correctly) is a huge reason for our outsourced payroll service. If you’d like to discuss the service, why not contact us today?
