Common payroll mistakes, plus how to avoid and fix them
Unfortunately, mistakes happen — but it’s how you deal with them that matters. You need to learn from each mistake and reduce the chances of them happening again by putting better payroll practices in place.
From miscalculating employee pay to disorganised payroll records and incomplete payroll data, these common payroll mistakes can cost your organisation dearly. Not just financially but by shattering employee trust and respect, too.
Payroll affects every single staff member, so ensuring your processes are as error-free and efficient as possible should be a priority.
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The importance of effective payroll management
In an ideal world, there would be no payroll mistakes, and although there are plenty of processes you can put in place, you’re never guaranteed 100% error-free payroll because there’s always a level of human intervention.
But the payroll error rate is a lot higher than you might think…
More than nine in ten businesses say they make payroll errors every month, and research shows these errors cost them about £159,000 each year. That’s a lot of money to throw away on preventable payroll issues.
So if you’ve made a payroll mistake, don’t worry — you’re far from alone.
5 most common payroll mistakes
By making yourself aware of the most common mistakes made in payroll, you can go some way to avoid making them in the first place.
1. Misclassification of employees
By incorrectly attributing worker status, your organisation could face legal action from employees, substantial back taxes and fines or penalties from HMRC. Oh, and heaps more admin!
So if your independent contractor is doing the same work as an employee in the same company, then they’re ‘inside ir35’, which means you need to pay them like an employee (i.e. holiday pay, pension scheme etc.).
If they’re classed as ‘outside ir35’ because they work on various projects, then they’ll be responsible for their own taxes, which means they pay less tax, and you pay less, too.
2. Overpaying or underpaying employees
You’d think if you overpaid or underpaid your employees, it would be flagged immediately. But a surprisingly high percentage of employees (25%) don’t check their payslips monthly. This means you could easily start a new employee on the wrong tax code or even continue paying an employee long after they’re gone without knowing it for ages.
All of this means you’re potentially haemorrhaging money or severely underpaying staff, which is a headache when sorting out back payments or trying to get the money back. Underpayments can mean staff are short-changed when paying bills — which causes stress for everyone involved.
Whether you underpay or overpay staff, it’s not a good look, and it’s these kinds of actions that cause staff to lose trust and respect for the organisation.
Disorganised or incomplete payroll records
Keeping accurate and organised records can be difficult if you rely on manual data entry. Not only do manual processes substantially increase the risk of human error, they mean the burden of payroll lies on one person’s shoulders.
For data to serve its purpose, it must be as accurate as possible. That means cleansing your data so it’s up-to-date. The statutory retention period for employee records is six years, so any employee who has left over six years ago can be removed from the database.
Organised payroll records are necessary for your organisation to avoid productivity and data loss. Productivity wanes when it becomes near impossible to produce timely and accurate payroll reports.
Missing important deadlines
Failing to file tax returns promptly is another common payroll mistake you’ll want to avoid. More seriously, it can leave your company open to fines and penalties. Not only does this mean budget has to be spent paying these penalties, which is bad enough, but it can also put you on HMRC’s radar for an audit.
The UK general government debt currently stands at £2,436.7 billion, which means they need all the tax they can collect, and this task falls to HMRC. So don’t leave any room for errors in tax calculations. Get them right the first time to avoid the upheaval of an audit.
PS never miss an HMRC deadline again with PayFit. Our software automatically manages RTI and pension submissions. Learn more.
Inaccurate expense data
If your organisation is still using paper expense submission, you’re leaving yourself open to fraudulent expense claims and reducing your employees’ productivity. They’re spending time collating and manually inputting receipts, sending them to management to sign off — which creates a fragmented process, ultimately leading to even more manual work for all teams.
According to a SAP Concur report, only 43% of employees know of their company’s travel expense policy, and just 34% of travel and finance managers know what fraudulent expense claims are. This leaves room for educating staff members and using software to support the accurate collection of expense data.
Expense management software can help you stamp out fraudulent expense claims by allowing you to define your company expense policies and automatically flagging any claims that sit outside of these policies.
This way, managers are automatically notified to sign off expenses, and expenses are automatically added to employee payslips — so the whole thing runs like clockwork!
Inaccurate expense data means employees are paying for business travel or other expenses out of their own pocket and potentially not getting reimbursed correctly. This can lead to stressful financial situations for all employees — again, not something you’ll want to associate your organisation with.
You need payroll processes that empower and support your employees.
How to ensure payroll accuracy
There are a few things you can do to reduce common payroll mistakes from cropping up time and time again:
Communicate errors when they happen (and learn from them)
When errors occur, be as transparent with your employees as possible. Being deliberately evasive will not help you build a trusting relationship with your employees. Instead, tell them exactly what happens, how it affects them and what you’re doing to resolve it and stop it from happening again.
Always encourage your employees to ask questions to rebuild trust.
Consider automated payroll software
Software can automate menial tasks, freeing up your payroll people to focus on more add-value business tasks — like providing useful data to help drive business strategy.
Aside from the time-saving benefits, integrating payroll software with HR and pension software can ensure your data is synced across all the important employee management systems — eradicating duplicate data.
Automated payroll software also helps reduce data errors, ensures you don’t miss HMRC deadlines and delivers a superior employee experience — what’s not to love?!
Employees need to know why you need timely payroll information, how you use it and what happens if there’s a delay in these processes.
Even if you invest in new software, you still need to ensure staff members are trained correctly to use it. That includes how to manage and use the expense management software, how to update contact information and other employee data, and explaining how to best use the employee portal.
You want employees to take control over their payslips, understand what they’re paying out in taxes, and how to manage annual leave and submit expenses. If no one knows what they’re doing, your payroll process will never be as efficient as it can be.
How PayFit helps businesses reduce and eradicate errors
PayFit specialises in making payroll as simple as possible for organisations just like yours. We help SMEs boost productivity and payroll efficiency while improving the employee experience.
Our software not only automates all the time-consuming tasks like payslip generation, RTI and pension submissions. But it helps you create custom finance reports in seconds, it enables you to remain HMRC-compliant, and it delivers a seamless payroll experience for employees, management, payroll, HR teams — everyone involved!
Our software also gives you unlimited support from our in-house payroll experts, so if you need some advice, just drop us a quick message or schedule a demo.