Learn How to Avoid These Common Payroll Mistakes

Payroll is one of the least appreciated but important functions within an organisation. If you get it right, you make employees happy. If you get it wrong, you face legal consequences. Violations and fines can be damaging, regardless of the size of your company. When an error occurs, it can have a massive impact on your business. It’s recommended to make corrections right away and not wait until the next period. Let’s look at the payroll mistakes that are important to avoid at any cost. 

Worker Misclassification 

There are two main classifications to take into account: employees and independent contractors. An employee is a person who provides services in exchange for adequate consideration (salary). By contrast, an independent contractor is a person or an entity who provides services for a definite fee. At times, it can be difficult to determine whether a worker should be classified as an employee or an independent contractor. It depends on the HMRC-mandated criteria, which aren’t always clear-cut. The criteria aren’t helpful when it comes to complex facts about the employer/worker relationship. More exactly, the legislation is nuanced and subjective. 

The off-payroll working rules can apply if a worker provides their services via their own limited company or another type of intermediary (a partnership, a personal service company, or an individual). IR35 was introduced to take measures against tax avoidance among independent contractors and the companies they work for. The party that does the hiring is responsible for figuring out whether their independent contractor is inside or outside of IR35. If inside, who pays the independent contractor has to deduct tax, national insurance contributions, and report them to the HM Revenue & Customs. 

Outdated Employee Information

When you calculate how much you’ll be paying per employee, your payroll software will determine how much income tax and national insurance will be deducted from the gross figure. Payroll software enables real-time reporting, which is good considering that you should hand over your month’s payroll information to the HMRC before you actually pay anyone. It’s paramount to maintain up-to-date records within the payroll processing software. Keep track of changes such as changes of name or address, standardised tax deductions, and so forth. When it comes to payroll records, you can never be too thorough.  

Failing To Report All Taxable Forms of Compensation

Compensation takes many forms, as follows: 

• Advances 
• Loans 
• Gifts
• Awards/prizes
• Employee benefits (retirement, holiday pay, maternity/paternity pay, etc.)
• Business expense reimbursements

It’s necessary to analyse each type of compensation to fulfil your withholding and payment obligations. Employee expenses and benefits must be reported to the HM Revenue & Customs. Otherwise, you could face significant penalties. Every individual needs to be included in the process, even if they’ve left the company. If you’ve made a mistake in running your payroll, try and correct it as soon as possible. Every now and then, the HMRC undertakes PAYE audits. You can be randomly chosen for an inspection or be selected on purpose if you file payroll submissions late. 

Running Payroll Late 

People rely on you to get their paychecks on time. In the UK, the payroll frequency is typically monthly, with payments made between the 25th and 30th of each month. Failure to pay your employees on time could result in penalties, fines, costly litigation, not to mention a permanently damaged employer-employee relationship. Just think about it. People will lose confidence, and it’ll be hard, if not impossible, to get them to perform at their best. Make sure you have enough funds to pay workers promptly on payday. If there’s a cash flow problem, fix it immediately. 

If you don’t send payroll information on time, you’ll get in trouble. The HMRC allows a three-day grace period. This translates into the fact that the UK’s tax, payments and customs authority won’t charge a late filing penalty for delays. Nonetheless, if you continue to submit payroll information late, you’ll be monitored and may be considered for a penalty. The penalty will be determined based on the number of employees. This is precisely why it’s good practice to run payroll and submit the full payment submission before making the payments to employees.  

Not Paying Debts Owed by Employees 

If one of your employees is a paying parent and they’ve missed a child maintenance payment or haven’t paid the full amount, the Child Maintenance Service can make you take money from their salary or pension to pay for child maintenance. It doesn’t need to apply to a court to get an order. You must take the amount the Child Maintenance Service asked for from your income and send it to them. Equally, as an employer, you can be legally compelled to make a deduction from an employee’s wages should they be subject to a court order to pay money. 

Failing To Stay Up to Date with Payroll Laws 

Keeping up with laws and regulations is crucial, especially if you don’t have a dedicated HR and legal team. Through continuous education, you can become a compliance leader. Payroll updates tend to come fast. So, is there anything you can do about it? Yes. Here are several ways to keep up with the challenging legislation: 

• Set email alerts. If you want to be au courant with the latest changes in payroll legislation, have the news sent directly to your inbox. Subscribe to the HMRC newsletter. You’ll receive email alerts as changes happen. 
• Take payroll training courses. Enrolling in a payroll training course is a great way to make sure you’re staying on top of changing legislation. Distance learning can take a little bit longer. You’ll hear about the latest developments and understand what they mean in practice. 

Make sure your payroll is accurate, and you remain compliant. Always consult a legal professional if you have questions about laws that may impact your business. 

All in all, mistakes happen. What matters is how you react and respond to errors. Act as soon as you’ve realised your mistake and report it to the HM Revenue & Customs if necessary.