How to Avoid These 10 Common Small Business Payroll Mistakes

Running payroll processes isn’t always easy, especially when you’re a business owner or HR professional managing it on top of your other duties. But the reality is mistakes are widespread, with Employment Hero’s research showing that 84% of small-medium enterprises (SMEs) have made payroll mistakes and a huge 40% of SMEs have already incurred fines or penalties. 

Anyone that has dealt with the process before knows it’s about more than just paying your team on time. It involves navigating complex calculations, strict HMRC deadlines and ensuring HR compliance. Under payroll errors law in the UK, employers are legally responsible for accurate submissions and payments.

When mistakes occur, whether from human miscalculations, outdated software, or missed deadlines, the consequences are serious. They can include:

• Fines
• Backdated liabilities
• Unhappy employees

We’ll explore the most common payroll error laws, how long you have to correct them and practical ways to prevent them in the future. 

The guide includes:

• Common mistakes to look out for checklist
• How to avoid payroll errors
• Key HMRC deadlines
• Last-minute payroll run check
• Payroll audit checklist                  

Common payroll mistakes employers make

Payroll mistakes are common across UK businesses. Here are the errors to watch out for, with examples of how they occur and what they can cost you.

Software and system errors

Payroll software should simplify processes and ensure compliance. But if it’s outdated, incorrectly configured or missing updates, it can cause serious issues. It’s important to remember that employers remain responsible under payroll error law UK, even if the system is at fault.

For example, if the software hasn’t been updated with HMRC’s latest tax or National Insurance (NI) thresholds, every payslip could be wrong. Incorrect default settings, such as tax codes or pension contributions, can also spread errors across the workforce.

How to avoid it: Use HMRC-recognised software with automatic updates, review settings each year and run test checks after updates.

Overpayments

Overpayments often result from duplicate timesheet entries, incorrect overtime, or failing to remove leavers from the system.

Employers can legally recover overpaid wages, but this can be sensitive if staff have already spent the money. If not resolved, overpayments also create reporting discrepancies with HMRC.

How to avoid it: Add approval steps for overtime, use error-flagging software and reconcile payroll against attendance records.

Underpayments

Underpayments usually happen when overtime is missed, incorrect rates are applied or allowances are overlooked.

How to avoid it: Double-check variable pay against contracts, train staff on correct rates and run regular audits.

Missing HMRC deadlines

HMRC requires data to be reported in real time via Full Payment Submissions (FPS) and Employer Payment Summaries (EPS).

Missing these deadlines can trigger fines. Repeat lateness may also prompt compliance checks.

How to avoid it: Automate submissions, maintain a clear payroll calendar and have a backup process if key staff are absent.

No payroll audit plan

Without regular audits, errors such as incorrect NI or tax codes can go unnoticed until HMRC raises a query, by which point liabilities may be significant.

How to avoid it: Schedule audits at least twice a year and consider external reviews for added reassurance.

No payroll continuity plan

If the process relies on one person or system, disruption, such as sickness or technical failure, can delay staff pay.

Missed paydays hurt morale, damage trust and  may even breach contracts.

How to avoid it: Cross-train staff, document processes and use cloud-based systems with multi-user access.

Misclassifying employees

Treating employees as contractors (or vice versa) is a costly error. Under IR35, HMRC can demand back payments of PAYE and NI, plus penalties.

It also denies staff their rights, such as holiday pay and pensions, which can lead to legal claims.

How to avoid it: Carry out regular status checks, review contracts and seek expert advice in grey areas.

Incorrect statutory payments

Statutory Sick Pay (SSP), Maternity Pay (SMP) and Paternity Pay (SPP) must be calculated according to strict rules. Mistakes usually come from miscalculating average earnings, misunderstanding eligibility or applying outdated rates.

Impact: Employees may be underpaid during vulnerable times, while employers face backdated liabilities.

How to avoid it: Use software with statutory pay calculations, train staff on eligibility rules and review cases during audits.

National Insurance miscalculations

NI thresholds and categories change frequently. Errors often happen when employers apply the wrong NI category or fail to update annual rates.

This can lead to unexpected liabilities for businesses and affect employees’ state pension or benefits records.

How to avoid it: Keep NI rates updated, check employee categories and use payroll software with HMRC integration.

Incorrect tax codes

Tax code errors are common when new starters are placed on emergency codes or when HMRC notifications aren’t actioned.

Employees may overpay or underpay tax, creating financial stress or arrears. Employers are responsible for correcting errors and resubmitting data.

How to avoid it: Process HMRC updates promptly, review emergency codes regularly and use software that syncs with HMRC records.

How long does an employer have to correct a payroll error in the UK?

Employers must correct errors as soon as they’re discovered. HMRC expects Real Time Information (RTI) submissions to be accurate and up to date.

Timelines:

• Within the same tax year: Correct in the next FPS.
• After 5 April: Report by 19 April in the final FPS or via an EPS. 
• Historic years: HMRC may still demand corrections, but processes are more complex.

Best practice: Correct errors quickly, inform employees and submit amendments without delay.

What should you do if you can’t afford to correct a major payroll mistake immediately?

Big payroll errors law UK can create financial gaps that aren’t easy to fix in one go. If this happens:

1. Be transparent with staff — explain the issue and share a repayment plan.
2. Spread repayments — correct underpayments or recover overpayments over multiple pay runs.
3. Contact HMRC — arrange a payment plan for tax or NI shortfalls.
4. Document everything — keep records of communications and agreements.
5. Prioritise compliance — correct statutory pay and NI first.

Hiding mistakes only increases risk. Transparency maintains employee trust and demonstrates good faith to HMRC.

What legal consequences can happen if payroll mistakes aren’t fixed?

Mistakes left unresolved carry real risks under payroll errors law in the UK.

HMRC penalties and fines

Late or incorrect RTI submissions trigger penalties and interest. Repeat errors may lead to investigations.

Tax and National Insurance liabilities

Employers must pay any PAYE or NI shortfalls, even if errors were accidental.

Pension Regulator sanctions

Errors affecting auto-enrolment contributions can lead to fines or compliance notices from The Pensions Regulator.

Criminal liability

Rarely, wilful negligence or fraud can result in director disqualification or criminal charges.

How to avoid payroll mistakes in the future

The good news is, most finance mistakes are preventable and businesses can reduce risks by:

• Running regular audits to catch errors early.
• Providing ongoing training for staff.
• Using reliable software with payroll compliance checks.
• Creating a continuity plan so payroll isn’t dependent on one person.
• Outsourcing if internal expertise is limited.
• Staying updated on HMRC changes through newsletters and alerts.

What to look for in payroll software

​​The right software does more than process payslips, it helps ensure compliance with payroll errors law in the UK and protects your business from fines, delays and unhappy employees. With so many moving parts in payroll, from tax codes to pensions, the right system should reduce risks and simplify processes, not add to your workload.

Here are the key features to prioritise:

Automation of calculations

Payroll involves hundreds of small calculations each cycle, including:

• PAYE
• National Insurance
• Pensions
• Overtime
• Holiday pay
• Statutory payments like SSP and SMP 

Automating these removes the need for manual spreadsheets and reduces the likelihood of costly mistakes.

Direct HMRC integration

Your software should connect seamlessly with HMRC for Real Time Information (RTI) reporting. This means Full Payment Submissions (FPS) and Employer Payment Summaries (EPS) can be sent automatically, helping you avoid late filing penalties.

Error detection and alerts

The best systems don’t just process data, they check it. Look for tools that flag anomalies before finalising payroll, such as:

• Duplicate entries
• Unusually high deductions 
• Missing information before 

This proactive approach allows you to fix problems before they reach HMRC or your employees.

Clear audit trails

Payroll mistakes often need investigating after the fact. Audit trails show who made changes, when and why, giving you transparency and protection if HMRC asks questions.

Support for statutory pay

SSP, SMP, SPP and other statutory entitlements are tightly regulated. Good software automatically applies the latest rates and eligibility rules, ensuring staff receive what they are legally entitled to.

Multi-user access and continuity

Payroll should never depend on one person. Look for cloud-based software that supports multiple authorised users. This ensures processes can still run if your main payroll officer is on leave or unavailable.

Automatic compliance updates

HMRC rules, NI thresholds and statutory rates change regularly. Software should update in line with these changes, so you never risk using outdated information.

Download the full guide

Mistakes can happen to any business, but with the right tools, processes and awareness of payroll errors law in the UK, you can stay compliant, protect your team and avoid costly fines. The key is being proactive: audit regularly, stay on top of HMRC deadlines and choose software that takes the stress out of compliance.At Employment Hero, we help thousands of UK businesses simplify payroll and reduce errors. Our solution integrates directly with HMRC, automates complex calculations and provides built-in compliance checks, so you can focus on running your business with confidence.