Payroll Mistakes & Common Issues to Avoid

Avoid Payroll The Payroll Pitfalls of Big Businesses

Continuous payroll mistakes can lead to huge consequences for companies, such as fines and loss in profit. Below will explore the most common payroll mistakes, huge companies and the consequences they faced, and how to overcome these issues in future.

The REAL cost of getting payroll wrong

You may think getting payroll wrong is a simple mistake, but have you considered the impact this has on your team? Recently staff at the University of Edinburgh experienced disastrous payroll mistakes. This started when the University switched to a centralised payroll and HR system in June, but there have been pay delays ever since, with some people not being paid in both September and October.

The lack of pay and communication caused significant stress for employees, which led to much bigger issues, including not being able to pay for rent, food and bills. It’s been proven that money concerns can impact physical and mental health – the impact that payroll mistakes have on employees should not be disregarded. Employers must do all they can to ensure payroll errors are reduced.

How Payroll Errors can Impact Businesses

Effective payroll management is vital for the financial security and reputation of a business. When companies don’t have strong payroll management and processes, they risk fines, penalties, data leaks and damage to company morale and trust. Over the years we’ve seen several instances where employees have brought class action lawsuits against large employers (like Walmart, Sainsbury’s and Asda) who have not paid employees for working through lunch breaks, overtime pay and bonuses.

Everyone makes mistakes – we’re all human. However, there are certain mistakes that can damage brand reputation, profitability and get you into trouble with the government. Payroll is one area where mistakes can have implications for employees, HMRC compliance, and if not identified in a timely manner, could cost your business thousands.

Police of Scottland

The Scottish Sun reported that Police Scotland paid 589 staff and officers for public holiday shifts due to confusion caused by irregular shift patterns throughout the pandemic. The mistake, which meant more than £40,000 in overtime was erroneously paid, was discovered during an internal audit.The police chief did not want to penalise the officers for the error so there will be no docking of wages or repayment. Find out more about payroll mistakes made by big businesses and how to avoid them.

Minimum Wage error costs John Lewis £36 million

In 2017 John Lewis took a huge hit, as a result of minimum wage errors and breaching National Minimum Wage rules. This isn’t the first time the retailers found themselves in hot water after making costly payroll mistakes.

This occurred only three years after John Lewis had to pay £40 million to employees due to holiday pay miscalculations over seven years. Unfortunately John Lewis didn’t realise they were making payroll mistakes and blamed it on a technicality. The pay issues only affected those paid hourly, as their pay was technically below minimum wage, as a result of the company using pay averaging since 2006.

Tesco compensates 140,000 current and former employees

In 2017 Tesco had to compensate 140,000 current and former staff members after breaching Minimum Wage rules and paying them below that national living wage. The majority of staff were owed £40 each with some being owed more, costing Tesco £9.7 million to rectify.

This mistake was found during the implementation of a new payroll system where employees voluntary contributions to pensions and childcare voucher schemes, led to them being paid below national living wage. As a result, Tesco had to compensate both current and former employees.

Below are multiple lessons Tesco’s mistakes can teach other companies:

– Using a reputable payroll company will help you highlight any payroll issues you may have and help you fix them.
– Employee benefits and vouchers often sit under HR
– If HR and payroll aren’t integrated this causes problems and mistake similar to Tesco’s
– When HR and payroll teams communicate, payroll and HR mistakes can be reduced significantly.
– You should outsource payroll from CIPP registered experts as they understand the difficulties and constantly changing payroll regulations, helping to cover your back

Asda staff report underpayments of £100 – £500

This year Asda’s payroll mistakes have caused staff to have to take out loans, not pay bills and have to use food banks to try and get by. Asda admitted to the Scottish Parliament that their external payroll company made 11,000 payroll mistakes that affected 5,500 employees.
Some staff members were even overpaid, meaning the clawbacks the next month meant that staff lost their benefits the following month.

Despite the huge impacts Asda’s mistakes have had on staff it has been stated that “Asda knows it is a massive issue, but sadly isn’t doing enough to put this right – they refuse to invest the money needed in the payroll operation to sort this out..”
It’s extremely important that companies look after their employees by ensuring they’re paid correctly and on time. Outsourcing payroll allows you to minimise your mistakes and ensure employees are looked after, helping to improve brand reputation and employee morale.

How do payroll mistakes affect people?

Increased money concerns

Being paid incorrectly can cause huge money concerns for employees, as they may be unable to pay rent, bills, childcare fees and more. For example, reports show that staff at Asda previously had to take out high interest loans due to the company underpaying staff between £100 and £500 a month. Find out how to avoid making similar payroll mistakes to Asda.

A survey by Money and Mental Health revealed that 86% of people’s mental health issues were exacerbated by financial problems. And almost one in five (18%) people with mental health issues are in problem debt. When you underpay or delay paying your team, people’s stress levels are drastically increased as they may have to put themselves in further financial debt to pay for necessities.

Increased stress and poor health

There’s a clear link between money-related stress and mental health issues. If your payroll team is constantly making mistakes, it will cause a huge impact on your team members both mentally and physically. This also has a knock on effect on motivation and productivity at work.

It can also lead to relationships breaking down and losing interests in hobbies, all of which are then felt in the workplace. 1 in 6.8 people experience mental health problems in the workplace, with 12.7% of sickness absences being attributed to mental health conditions. This highlights the negative impacts mental health issues have on both people’s home and work lives.

Getting payroll wrong may seem like a small thing, even if you only do it once. But the huge impact financial problems have on people’s work and personal lives is far too big to be ignored. Investing in a payroll software that helps you minimise payroll issues is extremely important for both your company and colleagues.

Poor company culture

When payroll errors are made, employees feel like you don’t care about them, creating a bad company culture. A report on The Culture Economy found that poor workplace culture is costing the economy £20.2 billion a year. This is something that needs to be stopped! One way in which we can do this is by ensuring companies are paying their teams correctly and on time. This will improve company culture, therefore increasing productivity, employee engagement, drive organisational purpose and improve results.

Poor company culture can affect a number of outside factors, such as:

• Leaking a toxic culture into another business: if a business with a poor company culture closes, it forces those with bad attitudes and a lack of motivation into other businesses, infecting them with a toxic culture.
• A lack of trust:  this can lead to unethical behaviour both inside and outside of the workplace, which can have a negative impact on our communities.
• Negative impacts on employee health: According to a national report published by Deloitte, the annual cost of poor mental health for employers has increased by 25% since 2019, making the annual cost between £53-56 billion in 2020-2021. This had a huge impact on both companies and the NHS, highlighting that improving company cultures will have positive effects on communities physically, mentally and financially.
• Employees are forced to consider new roles: Continually getting payroll wrong could force staff into having to look for a new role that’s more reliable to help create some stability within their everyday life and reduce stress.Continually getting payroll wrong could force staff to look for new roles to help provide a more reliable and stable work and home environment. A new role should offer financial stability and reduce risk in payroll issues. Continuous payroll mistakes could also force employees to gain a second job to try and pay their bills or any loans they had to take out to cover previous payroll mistakes
• Prevention over cure through outsourcing payroll: In any situation, Payroll mistakes have a huge impact on employees’ lives. However with the cost of living increasing, payroll mistakes are only having bigger impacts. Due to this, payroll and HR companies need to take extra measures to ensure they understand the payroll process to help prevent future mistakes occurring.

How to avoid payroll errors

Paying employees has become more complicated over the last year. Working from home changed the way companies handled daily business operations and key functions within the organisation. Payroll was one of the most impacted components of daily operations, as the furlough scheme was created and ongoing changes made payroll more complex. Common payroll challenges are often related to data inaccuracy, manual processes, and software.

Start with an audit of your current payroll process to identify issues that are causing payroll complications for your team. If the issue is data inaccuracy, look at the sources of your payroll data. Are you using email to handle employee data or requests? Are employees requesting changes to bank or personal details? Using an employee self-service portal to manage data can be the first step to reducing paperwork and avoiding errors.

So how can you prevent payroll errors in your business?

Eliminate manual processes

The first step is to eliminate any manual processes. Spreadsheets are commonly used to manage payroll and are most likely to be the source of errors. They depend on the person creating the spreadsheet and the data that is entered. If one formula is incorrect, the spreadsheet is useless, and the payroll calculations are wrong.

Automate your payroll processes

The second step is to automate payroll with software that provides real time updates to regulations and provides reporting to identify problems or errors before payroll is run. Getting rid of manual data entry each month reduces the potential for errors in the process.

Ensure your data is up to date and accurate

The next step is to make sure the data you’re keeping about employees is accurate and up to date. This includes contact information, changes in surnames, addresses, bank details and more. The same goes for any reporting and any payments made.

According to GOV.UK you should keep the following:
● Employee deductions and payments
● Reports made to HMRC
● Payments made to HMRC
● Employee leave and sickness absences
● Tax code notices
● Taxable expenses or benefits
● Payroll Giving Scheme documents, including the agency contract and employee authorisation forms

Failure to keep full records can lead to a penalty of up to £3,000.

Be compliant with regulation

Get one platform to manage your employees with customised reporting, real-time access to your payroll, and automated changes to regulations and avoid making those all too common payroll mistakes. You can directly file with HMRC and ensure compliance for your organisation. Talk to our team about our easy-to-use, integrated workforce management solution. Request a demo today.

Incorrect deductions have been made to employee pay

From underpaying an employee to accidentally taking a percentage of pay or submitting the wrong tax codes , incorrect deductions happen. However, it is important that you resolve this issue as soon as possible, and put things in place to ensure it doesn’t happen again.

You can only make deductions to employee pay for the following reasons:

• Tax
• National Insurance
• If contracts specify an employee is liable for a shortfall (for example, a shortfall in a cash register) and the employee is found at fault
• Repayment of advance wages or a loan
• Repayment of an accidental overpayment of wages
• Buying shares or share options in the business
• You’ve provided accommodation for your employees
• Your employee has signed up for union subscriptions or pension contributions (gov.co.uk)

You can update any payroll mistake on the next Full Payment Submission (FPS) sent to HMRC, or you can submit an additional FPS with the pay period field showing the difference in what was originally reported instead of the correct amount. If you’re consistently making incorrect deductions, you should look at outsourcing your payroll so that you can avoid this all together.

Employee pay has been miscalculated

From employees being given a pay rise that hasn’t gone through, to incorrect deductions, or overtime that hasn’t been paid, miscalculation of employee pay can happen for a number of reasons. If you continuously pay employees incorrectly, it can lead to significant fines and penalties. It can also lead to employee retention and trust issues.

You must pay the employee the amount they are owed as soon as possible, and submit an additional FPS on or before the day you pay the employee. It is important to determine why errors have happened to ensure this type of issue does not continue, as it can lead to penalties. If you bring a payroll management company in, they can help identify any weak points and fix it for you.

HMRC hasn’t been paid the right amount

Every company is expected to pay corporation tax, and it is important to pay the right amount. If you over pay, HMRC will repay you the amount that’s been overpaid. If you underpay, you will be charged. Failure to pay corporation tax or continuously underpaying can lead to a fine.

If you paid HMRC too little or too much, you can correct this error in your next regular report. HMRC will add any underpayment to your next PAYE bill, or take the overpayment off your next PAYE bill. It is important to ensure you review your PAYE bill for any inconsistencies. You can receive an incorrect bill or duplicate payroll records if you have previously made a mistake when making a payment to HMRC.

Your payroll process isn’t compliant with the latest rules and regulations

It is important to ensure your payroll records are regularly updated and all employee information is GDPR compliant. In most instances, late payments and first offences are tolerated if they’re resolved within 30 days. Late submission of FPS documents start from £100 (companies with 10 employees or less) and can go up to £400 for companies with over 250 employees. Businesses that fail to comply for more than three months in the tax year are penalised and fined for a further 5% of the tax owed.

If you think your business is at risk of being fined, or you’re struggling to remain compliant then it is definitely time to consider outsourcing to a managed payroll provider. PayEscape is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, and Certified Information Privacy Professionals (CIPP) compliant.

There are gaps in your records

The saying goes, “the devil is in the detail” and when it comes to payroll and employee records, this is certainly true. It is important to make sure your employee and payroll documents are all filled out, and stored securely. Records must show accurate reporting and must be stored for 3 years from the end of the tax year they’re from. This is because a company may be subject to an audit at any time, and HMRC may look at your records to ensure you’re paying the right amount of tax.

According to GOV.UK you must keep records of the following:

• Employee deductions and payments
• Reports made to HMRC
• Payments made to HMRC
• Employee leave and sickness absences
• Tax code notices
• Taxable expenses or benefits
• Payroll Giving Scheme documents, including the agency contract and employee authorisation forms

Failure to keep full records can lead to a penalty of up to £3,000. If you are missing any information or your records have been lost or destroyed and you can’t replace them, it is important to tell HMRC as soon as possible. You should try and ensure all records are filled in correctly and properly as soon as possible.

You must tell HMRC if your final payroll report of the tax year includes figures that are:

• Estimated – that you want HMRC to accept as final
• Provisional – that you’ll update later with actual figures

One of the easiest ways to ensure your records are stored safely, and are up to date without gaps is to outsource your payroll. A reputable payroll company will have the right technology and customised reporting that will ensure payroll is easy and compliant.

Redundant Processes

If you have multiple teams managing payroll and HR admin, there is potential for duplicate work being done to manage the same employee data. Redundant processes often lead to mistakes, and if you have manual entry or paperwork to manage employee payroll or HR there is more room for error. Using an employee self-service portal allows employees to update their own personal data and banking information. It reduces admin time for payroll and HR teams and is a great way to eliminate data errors and duplicate processes.

Outdated Software

Another common problem with payroll is software that can’t keep up with new requirements. In the last year there have been so many new payroll updates based on changing furlough schemes, if your software is not automatically updating you could have major errors in your payroll and tax filings. Over 70% of companies in the UK have discovered errors in payroll due to the HMRC furlough changes, and that puts you at risk for fines or penalties. Make sure your payroll software is keeping up with changes in real-time to ensure you stay in compliance.

Lack of Service

What happens when you have a payroll or compliance question your team can’t answer? If you don’t have a trusted service team to help when questions come up, your payroll is at risk of non-compliance. Your payroll software should also provide a service team to help when you need it to answer compliance questions and payroll-related queries so your team can ensure accurate payroll each month.

If your team is facing payroll complications, it’s time to look for a new payroll solution. PayEscape has cloud-based payroll software, customised reporting, and a CIPP-certified staff to help when questions arise. Don’t let payroll compliance get in the way of your business – talk to us today about simplifying payroll, HR admin, and compliance for your team.