For many companies, a comprehensive payroll management process is already an essential part of their everyday business plans. But if it isn’t given the care and attention it deserves, payroll issues can quickly escalate and cause irreparable damage to your financial security and company morale.
If you’re not careful, it can also even result in class action lawsuits. This is true of any company around the world, regardless of the size and scope of the business.
In fact, many employees have successfully taken many huge global businesses to court for failure to comply with their legal obligations and employee payments. And if your employees don’t take you to task for it, the government certainly will.
And when it comes to maintaining a simple, clear, and meticulous path to being financially compliant, you’re opening your business up to a lot of risks through some common mistakes in your everyday payroll practices.
But what are these mistakes, and how can you rectify them quickly, and easily, to ensure that they don’t hinder the progress of your business? Here are the 7 biggest mistakes you can make with your payroll, and how you avoid them.
- 1 Mistake 1: Non-compliance With The Latest Rules And Regulations
- 2 Mistake 2: Deducting Employee Pay Incorrectly
- 3 Mistake 3: Miscalculations In Employee Payments
- 4 Mistake 4: Paying HMRC Too Little (Or Too Much)
- 5 Mistake 5: Notable Gaps In Your Employee And Payroll Records
- 6 Mistake 6:Using Incorrect Tax Codes
- 7 Mistake 7: Missing Key Deadlines
- 8 A Focus On The Fundamentals
Mistake 1: Non-compliance With The Latest Rules And Regulations
As technologies and processes change around us, so do the rules and regulations that businesses need to adhere to in order to protect sensitive information and avoid costly fines as well.
Companies must be vigilant about updating their records and protecting the information of their employees through methods and means that comply with the latest GDPR (General Data Protection Regulation) guidelines.
Try to maintain a schedule that includes regular evaluations of these guidelines and shift your processes accordingly. There’s no excuse for non-compliance, and negligence here can cost your company huge damages in terms of fines, brand reputation, and the trust of your staff.
Mistake 2: Deducting Employee Pay Incorrectly
Deducting pay from a worker’s wages is usually only done for a handful of reasons. And generally speaking, a payroll team should only deduct money from an employee in the following circumstances:
- National Insurance deductions
- Standard tax deductions
- Repayments for loans
- Repayments for advanced wages
- Pensions contributions
However, if for any reason an employee has been mistakenly deducted pay, it can be rectified by updating it on the next FPS (or Full Payment Submission) that you send over to HMRC. Failing that, you’re also able to provide another FPS in that pay period that highlights the differences in that original submission.
Mistake 3: Miscalculations In Employee Payments
Morale is an important thing in business. Particularly for smaller to medium-sized enterprises where everyone needs to work together to achieve their objectives.
Sometimes, retaining good workers and being a successful company rests on a company’s ability to pay overtime promptly, calculate wages correctly, and make sure they’re not making unnecessary deductions.
While everyone makes the occasional mistake, regular miscalculations can result in disgruntled employees, poor business reputation, decreased productivity and even legal penalties.
To avoid repeating this error, it’s pivotal to pinpoint why this oversight happened and how to prevent it from happening again. If miscalculations persist, it may be time to consider working with a payroll management company to help make your processes more efficient.
Mistake 4: Paying HMRC Too Little (Or Too Much)
If you’ve been in business for a while now, you already know about the importance of paying corporation tax. Like many other aspects of poor payroll practices, you’ll be fined for failing to pay these taxes or constantly miscalculating how much you should pay.
This problem can be easily remedied by making corrections in your next regular finance report. For example, if you’ve underpaid your previous PAYE bill, HMRC can add it to your next forthcoming bill. And if you’ve overpaid, they’ll simply take it from your next upcoming bill.
To avoid this oversight becoming a recurring problem, look into ways to better manage your tasks during difficult tax periods, like an end of year check list to help keep you on track. Like all correspondences between payroll and HMRC, be sure to check each communication for accuracy and ensure all of the information provided is correct.
Mistake 5: Notable Gaps In Your Employee And Payroll Records
As a business, your company can be audited by HMRC at any time during the course of your existence. During these audits, you are legally obligated to provide HMRC with access to your records in order to make sure you’re paying the right taxes. And failing to maintain comprehensive records of your payroll can result in fines that can reach up to £3,000.
In fact, you’re required to keep detailed records of each of the following:
- Any payments made to HMRC
- Any reports made to HMRC
- All employee leaves of absence and sicknesses
- All tax code notices
- All employee payments/deductions
- Any taxable benefits/expenses
What other measures can you take to ensure that your payroll records are as detailed and accurate as possible? Thoroughly checking each and every payroll document is filled out correctly and stored safely for at least 3 years from the end of the tax year it was created.
If any of your records are lost or damaged for any reason and cannot be replaced, contact HMRC to make them aware of the issue, especially if your final tax year report includes any provisional figures due to this lost information.
Mistake 6:Using Incorrect Tax Codes
There are many scenarios in a business where a payroll team may end up using an incorrect tax code. These scenarios can range from a new employee starting to a furloughed worker, or even something as simple as added employee benefits such as private medical care.
Either way, this common error can result in employees paying more tax than they’re supposed to, or not nearly enough. Ensuring that the right amount of tax is paid and collected between employees and HMRC is essential if you’re planning to run a successful, cohesive, and profitable business.
And while anyone working in payroll can attest to how stressful it can be at times, keeping on top of tax codes is a very straightforward process if you’re regularly monitoring and updating your payment records.
If you’re still struggling to stay one step ahead of any changes in tax codes, there are digital dashboards available that help businesses check their tax codes and keep up to date with any unexpected changes.
Mistake 7: Missing Key Deadlines
This is easily the most avoidable payroll mistake, and yet, it’s one of the most common reasons for businesses getting caught out and penalised. With so many things to consider and tasks to stay on top of, missing an HMRC payroll deadline is much easier than you might think.
And that unfortunate oversight can cost you far more than just a red face and a slap on the wrist. In fact, current late payment fees for PAYE or National Insurance can go from 1% upwards for between 1 to 3 defaults over the course of a tax year, and that’s not even including the late payment penalties that your business will incur.
You can avoid missing these important deadlines by adhering to a few tried and tested administrative methods, like:
- Planning ahead and keeping key dates in mind
- Implementing a comprehensive record-keeping system
- Delegating tasks to others during peak busy times
- Keeping in constant communication with necessary parties
A Focus On The Fundamentals
Because financial matters affect employees, processes, owners, and all other levels of your company alike, a dependable payroll team can serve as the engine that pushes your entire business forward as one cohesive unit.
But when you’re a small business, no matter how successful you are, there are always going to be complex payroll issues that test how your company works and how you can ensure that past mistakes don’t define the future of your workplace.
Despite the costly mistakes that can occur, and the changes in technology and administrative processes, a key focus on the fundamental aspects of a company (such as communication, careful planning, and keeping up to date on the latest regulations) can eradicate these errors, and get your business where it needs to be.