What is a Payroll Audit? A Guide for UK Businesses

Conducting a payroll audit can be time-consuming, but it serves a crucial purpose: it helps minimise the fallout of human error when running payroll while ensuring your processes remain compliant with HMRC rules and guidance. 

Having a repeatable, easy-to-follow payroll process in place is one thing. But mistakes can still happen. Human error is always at play, whether inputting numbers incorrectly or forgetting to update employee data. Mistakes are easy to make. 

Most companies should aim to conduct a payroll audit at least once a year. So whether you’re running your very first payroll audit or just after some general pointers, this guide is here to help…

What is a payroll audit? 

A payroll audit is a process that helps determine just how good your payroll process is. It identifies potential vulnerabilities in your system, including any non-compliance issues. 

The goal is to minimise the risk of non-compliance as well as costly fines and penalties you could incur from HMRC if your payroll isn’t up to snuff. And, of course, you want to ensure workers stay happy by paying them on time and correctly.

The term ‘audit’ might sound daunting. But it’s simply a way to check how well your internal payroll process is working, including whether your payroll data is correct, so you can stave off issues later down the road (e.g. miscalculated pay). A payroll audit acts as a safety net, ensuring that your reporting and deductions are accurate. 

Why is a payroll audit important in business?

As we’ve just explored, your payroll process needs to be as efficient and reliable as possible in order to avoid errors. Everyone in your organisation is affected by your payroll process, so it’s crucial you check it’s all dandy. Ultimately, auditing your payroll procedure can help improve your internal processes by holding the payroll department to a higher standard.

What is an internal payroll audit?

Most of the payroll audits you’ll carry out will be internal audits. As the name suggests, these audits are carried out by a member of your in-house team. Although these aren’t compulsory, conducting these regularly, at least once a year, is best practice, as this can help you improve your payroll process (and help you avoid external audits in the future). 

What is an external payroll audit? And how is it different from an internal one?

Whether or not you need to run an external payroll audit will depend on a couple of things. For example, a payroll bureau might conduct an external audit to reassure clients of their compliance. But if you’re a public company, they’re mandatory. If you fall into neither of these categories, you’ll only need an external audit if a governing body such as HMRC requests it. Usually, an external audit includes more than just payroll records — it’ll include things like accounting, finance, and human resources, too. If you want to conduct an external audit, you’re best choosing a company that specialises in auditing. Most big accountancy firms are approved auditors, so it’s best to start your search there.

What is the best time to run a payroll audit?

You should aim to run a payroll audit semi-regularly, whether once a year or more frequently — the choice is yours. The end of the accounting year is pretty busy, so you might find it easier to run the audit at a quieter time. The audit should cover the entire payroll process, including the end-of-year process, even though it’s not actually happening at the time. You can consider conducting additional payroll audits if there’s a big change in your organisation, such as rapid expansion or a process change.

How do you conduct an internal payroll audit?

When running your audit, you’ll want to follow a clearly laid-out process. A process you follow each and every time you do one. This is to ensure consistency. Download our payroll audit guide to get a checklist at the end of this post of all the steps we recommend following for a smooth and efficient audit.

Can payroll software can help make payroll audits easier?

In a nutshell, payroll software helps you maintain accurate payroll data. Keeping data synchronised from one central location means everyone accesses the same data, and if there are any changes to that data, it’s updated across several locations. Accessing your data like this, regardless of your company’s size, means you’re more efficient when running payroll. It’s as simple as that. 

Payroll software, like PayFit, can also make sure your tax calculations are correct, that you never miss an HMRC submission deadline, as well as flag data anomalies. With PayFit, you can also tap into our support team, which is packed full of payroll experts who help support you with any payroll queries you may have.

Imagine being able to edit or add pay variables all the way up until you finalise your monthly payroll? Or being able to update payslips in real-time? Running payroll can be time-consuming, and so can conducting payroll audits. But, by having automated payroll software on your side… 

• you’re minimising clumsy manual data errors 

• you’re making sure everyone is paid efficiently and correctly every time 

• you’re improving the payroll experience for your employees and your payroll person 

Best of all, having accurate payroll means no HMRC fines sent your way (and no enforced external payroll audits, hoorah!)

Some reading for the road…

In need of more guidance? We’ve summed up all the information in this blog (and more!) in this handy takeaway guide. Download our payroll audit guide to learn the exact step-by-step process we recommend for running a clear and stress-free audit. It also includes a checklist of all the tasks you should complete as part of your audit, something you can refer back to at any time.