Until 31 October
Key Takeaways
Payroll fraud includes deliberately falsifying payroll records, manipulating payments or using a payroll provider that does not pay the correct tax and National Insurance to HMRC.
Warning signs include unexplained changes to employee bank details, suspicious payments, unusually low outsourcing quotes and payslips showing deductions that do not match HMRC records.
Payroll fraud prevention starts with separating payroll preparation, approval and payment, reconciling payroll reports against bank transactions, and checking outsourced providers.
Suspected payroll fraud should be investigated using documented evidence, restricted access to sensitive information and an appropriate reporting route, including HMRC where tax evasion is suspected.
A payroll discrepancy can stem from one of many common payroll mistakes, but it can also reveal deliberate fraud. HMRC updated its guidance on outsourced labour payroll fraud on 4 February 2026, highlighting risks for employers that outsource payroll or engage workers through agencies. Since 6 April 2026, new PAYE rules have also increased the importance of checking umbrella company arrangements. It is crucial to familiarise yourself with payroll fraud definition, common schemes, investigation steps and practical ways employers can protect their business.
What is payroll fraud?
Payroll fraud is deliberate deception involving employee pay, payroll records, wage payments or associated tax and National Insurance contributions. It differs from an ordinary payroll error because fraud involves intentional dishonest conduct, although an initial discrepancy alone does not establish that payroll company fraud has occurred.
How does payroll fraud affect employers?
The consequences depend on the scheme. Employers may lose money through unauthorised payments, face inaccurate payroll records or discover that tax and National Insurance deductions have not reached HMRC. Where an umbrella company is involved, the PAYE rules in force from 6 April 2026 can make the relevant agency or end client responsible for unpaid PAYE. HMRC may recover the underpayment from that party.
Who can commit payroll fraud?
Fraud may originate inside a business or outside of it. An employee with excessive payroll access, an external payroll provider or another business in a labour supply chain could be involved. Employers should check for signs of fraud surrounding each stage rather than assume that outsourcing payroll removes the risk.
What are the most common payroll fraud schemes?
Payroll fraud schemes exploit weaknesses in payment authorisation, employee records or the relationship between a business and its payroll provider. Understanding the method helps employers decide which controls to strengthen.
Employee payroll fraud and false records
Employee payroll fraud can involve false working-hour records, inflated overtime claims or payments obtained through dishonest declarations.The UK government's National Fraud Initiative documented a payroll fraud case involving Birmingham City Council and an employee who also held a casual role at a local NHS Trust. An investigation found the employee was working full-time for both organisations simultaneously, both roles undertaken from home. The employee was dismissed from both roles.
Payroll company fraud and payroll check fraud
Payroll company fraud can occur when a provider presents deductions on payslips but does not pay the correct amounts to HMRC. Another potential scheme involves diverting wage payments through unauthorised bank-account changes. Payroll check fraud, in the sense of manipulating or misusing payroll cheques, is a separate payment risk; it should not be confused with the specific payslip fraud described in HMRC guidance.
📌Example: A business may receive apparently valid payroll reports while workers' tax records fail to reflect the deductions shown. Employers should independently verify tax reporting and payments rather than rely solely on a provider's assurances.
What are the warning signs of payroll fraud?
No single discrepancy proves fraud. However, repeated inconsistencies, unexplained payment instructions or resistance to routine checks should prompt further investigation.
Unusual payroll payments and employee records
Employers should check that payroll records match the information submitted to HMRC and investigate discrepancies. HMRC identifies warning signs of payroll company fraud, including discrepancies in PAYE payments and deductions, and advises employers to check that their provider is meeting its tax obligations.
Suspicious payroll providers and payslips
In order to avoid payslip fraud, HMRC identifies warning signs such as unusually attractive payroll savings, requests to transfer workers to another company, payments to third parties, unclear service arrangements and providers without a credible online presence or physical presence at their registered address.
A payslip showing tax or National Insurance deductions does not, by itself, prove those amounts reached HMRC. Employers using agencies or umbrella companies should check who employs the workers, who operates PAYE and what evidence supports the reported payments.
⚠️ Warning: Do not assume that an apparently genuine payslip or a low-cost payroll contract proves that a provider is compliant. Verify the arrangement and relevant tax records independently.
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How should employers conduct a payroll fraud investigation?
A payroll fraud investigation should establish what happened, which payments or records are affected and whether the evidence supports suspected misconduct. Begin with documented discrepancies rather than assumptions about an employee or supplier.
Secure payroll evidence and review transactions
HMRC advises employers to check that outsourced payroll providers correctly account for PAYE and National Insurance contributions. Employers should review payroll records and payment information to identify discrepancies and verify that the correct amounts have been paid to HMRC.
Interview relevant people and escalate appropriately
Once the initial facts are documented, speak to the relevant payroll administrator, manager or supplier contact. Follow your organisation's disciplinary, grievance and investigation procedures, give individuals a fair opportunity to respond, and seek specialist legal or tax advice where necessary. If evidence suggests tax evasion by a provider or another business, consider reporting tax fraud to HMRC.
How can employers prevent payroll fraud?
Payroll fraud prevention combines reliable payroll processes, appropriate access controls, independent checks and careful supplier selection. The aim is to prevent unauthorised changes while making genuine errors easier to identify and correct.
Introduce payroll controls and payment approvals
Separate payroll preparation from final approval and payment wherever the size of the business allows. Require independent authorisation for new employees, bank-detail changes, unusual payments and changes to payroll access. Reconcile the final payroll report with the payment file and investigate differences before approving the run. Smaller businesses with limited staff can use compensating controls, such as a director reviewing a detailed payroll report and independently checking bank-detail changes with the employee.
Carry out due diligence on payroll providers
Before outsourcing, verify the provider's legal identity, VAT registration where relevant, contractual responsibilities and the exact services supplied. Ask for evidence of Real Time Information (RTI) submissions and payments to HMRC, establish who holds the employment contracts, and retain records of your checks. Since 6 April 2026, agencies and end clients within the scope of the new umbrella company rules must pay particular attention to PAYE compliance. HMRC can recover unpaid PAYE from the responsible agency or end client where the rules apply, so contractual assurances alone are not enough.
📌Example: Before renewing an outsourced payroll contract, request evidence of RTI submissions, confirm the identity of the business employing the workers, and reconcile a sample of payroll figures against HMRC records.
How do employers report payroll fraud?
If you suspect that a payroll provider, employer or another business is deliberately withholding tax or National Insurance, you can report payroll fraud to HMRC. Use the official reporting route that matches the suspected conduct, and distinguish suspected tax evasion from an internal payroll error that still needs correcting.
Report suspected tax or payroll company fraud
Use HMRC's online reporting service to report a person or business you suspect of tax fraud or evasion. You do not have to provide your personal details, although providing contact details can help HMRC request further information. HMRC advises reporters not to investigate further themselves or alert the person or business they are reporting.
Resolve employee pay discrepancies promptly
Not every payroll problem is fraud. In order to handle unpaid wages, or if an employee has been underpaid, it is necessary to investigate the discrepancy and correct any amount owed. Employers should tell affected workers in writing about known delays or errors, explain how the problem will be resolved and make outstanding payments as soon as possible. Failure to pay agreed wages can amount to a breach of contract.
What should employers do next to reduce payroll fraud risk?
Preventing payroll fraud requires ongoing oversight, not a single supplier check or annual review. Employers should assign responsibility for payroll approval, maintain a record of checks, review unusual transactions and make sure staff know how to raise concerns.
Review payroll processes and access rights
Start by checking who can create employee records, amend bank details, approve overtime and release payments. Remove unnecessary access, document approval responsibilities, and schedule regular reconciliations between payroll reports, bank transactions and tax records. Record the action taken when a discrepancy is identified.
Make payroll oversight a shared responsibility
HR should maintain accurate employee records, finance should review payments and reconciliations, and payroll administrators should document calculations and changes. Senior managers should review exceptions and ensure outsourced providers supply the evidence needed to verify compliance. If a concern emerges, escalate it through the agreed internal process rather than relying on informal assurances.
Payroll fraud can involve internal manipulation, suspicious payments or a provider failing to pay the tax shown on workers' payslips. Employers can reduce the risk by checking employee records, separating payment approval from preparation, reconciling payroll records and conducting due diligence on external providers. The 2026 PAYE rules make this highly relevant for businesses using umbrella companies. Review your labour supply arrangements, confirm who is responsible for operating PAYE and retain evidence of your checks. A dedicated payroll service supports payroll preparation and administration, while businesses retain visibility and approve each pay run.
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