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Common Pitfalls when dealing with Payroll

By Liz Lockwood
8th Jul 2024

Payroll processing is a critical operation for many businesses.  Mistakes can be costly to the business, as well as having a significant impact on employees so it’s vital to get things right.  Understanding these common mistakes is the first step towards ensuring an accurate payroll.

Employment Allowance – This is a scheme designed to support businesses and charities with employment costs, and is often overlooked or claimed incorrectly. Eligible employers can reduce their National Insurance (NI) liability by up to £5,000pa. To be eligible, a business must have had employer’ Class 1 NI liabilities of less than £100,000 in the previous tax year.  Where there are groups of companies or other connected parties, only one entity can claim the allowance.  Full eligibility criteria can be found at https://www.gov.uk/claim-employment-allowance

The allowance can be claimed for the current tax year and the four previous years.

Incorrect National Insurance Letter – there are currently 16 NI letters, and incorrect usage could cost both the employee & employer.  Commonly overlooked, letter M should be used for employees under the age of 21 and reduces the NI payable by the employer.  Letter H works similarly, for apprentices under the age of 25.  Letter C should be used for employees over the State Pension age, which will remove their charge to NI.

Incorrect Tax Codes – Using the wrong tax code can lead to incorrect tax deductions from employees. This mistake not only affects employees’ net pay but will likely lead to adjustments in future periods.  Ensure tax code notifications from HMRC are actioned promptly, either by manually checking your HMRC account or ensuring your software is set to automatically apply these.

Not noticing Birthdays – employees reaching certain key ages can move them into new requirements for National Minimum Wage, NI contributions, and pensions.  It is vital your payroll system monitors these key dates.

National Minimum Wage (NMW) – common problem areas include deductions from pay for uniform or training costs; these must not take the overall wage under the NWM.  Employers must also take all time into consideration when calculating the NWM, including training, trial shifts, and travel time within the work day.

To prevent these errors, there are a number of measures businesses should consider. 

  • Provide regular training for payroll staff to ensure they stay abreast of any legislation changes. 
  • Invest in reliable payroll software that can handle the intricacies of UK payroll, which is updated regularly. 
  • Seek Professional Advice: When in doubt, seek advice from your accountant.
  • Consider Outsourcing to a professional payroll bureau, a solution that works well for many businesses. By being aware of these common mistakes and taking proactive steps to avoid them, businesses can ensure their payroll process is efficient, compliant, and trusted by their employees.

This information is given by way of general guidance only, and no action should be taken based solely on the information contained herein. No liability is accepted by the firm for any actions taken without seeking appropriate professional advice.