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What Happens When Payroll Goes Wrong?
Payroll is a service that no-one ever comments on. If things are going right. However one mistake and everyone will know about it.
Making a payroll error can be costly to a business, both financially and emotionally. So, if you want to be sure you’re getting it right, look out for some of these common mistakes that businesses make which can lead to unnecessary stress and penalties.
Failing to appreciate the Big five payroll risk areas
Many businesses had to get rapidly up to speed with the furlough scheme which exposed weak payroll services. The following five areas are also known to cause major headaches and errors when it comes to running the payroll in-house.
- Statutory Maternity Pay (SMP)
- Statutory Sick Pay (SSP)
- Share Schemes
- Pensions and Student loans
- Termination Payments
With SMP, SSP and Termination payments, it’s really important to ensure that the qualifying conditions are met. If you are unsure, always seek specialist advice before proceeding. Share schemes, Pensions and student loans can generate a lot of queries that can take an inexperienced person time to research.
Not checking tax codes or using the wrong tax code
Every year, we are all allocated a tax-free allowance. This is converted into a tax code so that employers can pay employees the right amount of pay. However, HMRC may apply adjustments to your employee’s tax code.
For instance, your employee may owe some tax from a previous year. Or they have a second job, or they receive taxable benefits from you. If their tax code is incorrect and doesn’t get picked up or you fail to use the correct tax code, it means they are paying more, or less, tax. Which creates more work.
Failing to claim £4,000 employment allowance
If you employ staff, do not forget to claim the £4,000 cash off your payroll tax bill. This is not an automatic allowance and must be claimed by ticking a box or making an application depending on how you run your payroll. There have been cases where small businesses have missed claiming this allowance for a period of four years. That’s a lot of money to lose out on.
If you’re a sole director and the only person on your payroll, you cannot claim this allowance.
Failing to declare personal bills as earnings
Personal bills incurred by employees and directors (for example payment of credit card or utility bills) that are paid by the employer will normally be liable to tax and NI. The tax treatment depends on who the contract is with and how payment is made. So, where the contract is between the employee and the supplier, the employee pays the bill but then gets reimbursed by the employer, the full cost is treated as earnings (salary) for the purposes of tax and NI. And this needs to go on the payroll.
Not keeping proper records and risking £3,000 penalty
HMRC requires all employers to keep certain records for three years from the end of the tax year they relate to. Otherwise they may estimate what you have to pay and charge you a penalty of up to £3,000.
The records to keep include: what you pay your employees and the deductions you make; reports and payments you make to HMRC; employee leave and sickness absences; tax code notices; taxable expenses or benefits.
Overpaying or underpaying staff
This is the most common and the most sensitive payroll mistake employers make. And where over payment has been made to staff who have left, it can become impossible to get the overpayment back, especially if the employee can demonstrate that they didn’t know they had been overpaid.
To avoid this error, it’s important to use a checklist and do a reasonableness check on net payments made to staff.
Not reporting benefits and expenses
Most benefits you give to your staff are taxed. For example, car allowances, holidays and medical insurance. At the same time some expenses you pay on behalf of your staff also get taxed and subject to national insurance. However, the way these get taxed is not through the monthly payroll but through the Benefits in Kind system. A classic mistake here is forgetting to report and declare these benefits.
Not reviewing trivial benefits and staff functions
You don’t have to pay tax on a benefit for your employee if all of the following apply:
- it cost you £50 or less to provide, it isn’t cash or a cash voucher, it isn’t a reward for their work or performance, it isn’t in the terms of their contract.
- neither do you have to pay tax if you spend £150 per head per year on staff functions.
Employers can lose track of expenditure in these areas only for them to be picked during a routine PAYE visit by HMRC. To avoid this, include an annual PAYE health check within your payroll services.
Getting payroll right is extremely important in every business, no matter the size.
These are examples of classic payroll mistakes that businesses make. It is a complex area which is why there is a whole professional body and exams (CIPP) behind payroll professionals. Please take advice, review how you are managing your payroll, and make sure you avoid these kinds of mistakes.
Outsourcing payroll to an expert provider can make great business sense. All the platinum and gold members of HRi are able to offer high quality payroll services via our exclusive partnership with Mazars. If you would like to find out more, please email us at firstname.lastname@example.org
Author: Ruth Cornish, co-founder and director of HRi