And how to avoid them
Each year, thousands of businesses face inconsistencies in their payroll records when it’s time to file their tax returns. While most payroll errors are easily fixed if spotted early enough, the lead-up to payroll year end can be a challenging time for businesses, especially if it coincides with an influx of sales or plans to grow your offering. However, it’s also the perfect time of year to take stock of your current payroll process to minimize the number of mistakes you might be making.
The best way to mitigate these mistakes is to first become aware of their existence and then proactively prevent their reoccurrence. This list of the most common payroll mistakes will help you to identify weaknesses in your payroll system while offering solutions so that you can rectify them.
Out of all the common payroll mistakes on this list, you’re most likely to become aware of this one first. Few employees are willing to accept less pay than they’re owed, but receiving queries or complaints on a regular basis from more than one member of staff will quickly become time-consuming. Whether you’re failing to action pay rises or log over time, miscalculating an employee’s pay time and time again could build resentment and result in a breakdown in trust.
If you have miscalculated someone’s pay, you will need to pay them what they’re owed at the next available instance. Depending on the amount owed, this may mean transferring the money outside of your usual payment schedule or waiting until the following month to top up their salary.
To prevent pay miscalculations from impacting your business in the future, spend some time reassessing the way in which employees are notifying you of any overtime they’ve worked and whether pay rises are being communicated through the appropriate channels. Perhaps instead of sending e-mails that are likely to get lost, employees can submit timesheets through an integrated payroll system.
The way businesses are required to manage payroll has changed in recent years, most notably due to new GDPR regulations that require you to keep your employees’ personal information secure. Your payroll system must be protected against data breaches and all third-party processors should be selected and assessed with caution. In addition, any data that you do hold about your employees must have been collected for a lawful reason and can only be used fairly.
If you suspect that your existing payroll system may not be GDPR compliant, you must familiarise yourself with the regulations before taking action. Fines for breaches of GDPR legislation can be severe, with some businesses paying up to 4% of their global annual turnover as a penalty.
Using payroll software that’s HRMC-recognised will not only help you to file your tax return more efficiently, but it’s more likely to be up-to-date with essential security features.
Gaps in your payroll records can make filing your tax return a complex task, whether you’re missing just a few months of payslips or haven’t kept track of any contractors over the past year. All payroll documents and employee information should be stored for three years in case HMRC decides to carry out an audit. Key records you must keep include:
- Payments to employees and related deductions
- Payments and reports submitted to HMRC
- Holidays and paid/unpaid leave
- Sickness and other absences
- Tax code changes and notices
- Tax allowances and expenses
If any of these records are missing, HMRC may issue your business a fine of up to £3,000, which is why it’s so important to have a secure, reliable storage solution for all your payroll documents. However, if the damage has already been done and you have lost some documents, it’s important to inform HMRC when you realise. In your payroll report, you will have the option of submitting estimated figures if you are unable to recover the necessary documents or provisional figures that you can update once you have the information you need.
Insufficient Tax Payment
Not paying enough tax to HMRC can not only result in fines and penalties but cash flow issues as well. If you’ve miscalculated the amount of tax you need to pay, then you may have less capital to work with than you had originally planned. It’s important to act quickly as soon as you’ve realised your mistake, as the quicker you pay HMRC what they’re owed the less severe any fines will be.
Not paying HMRC enough tax can happen as a result of a variety of factors, from not deducting the right amount of money from your employee’s wages to keeping inconsistent records. It may also be due to a lack of awareness of various tax regulations, such as the VAT threshold or corporation tax rules.
Improve your payroll processes today
Some payroll mistakes are inevitable every now and again, but it’s how you approach their solutions that really matter. Automating your payroll process and investing in accounting software can revolutionise the way you approach your business’s finances.