Payroll, it should all be simple right? You register for PAYE (Pay As You Earn) number, HMRC approves your application, you get a piece of software, enter the pay details for your staff and voila.
Payroll, it should all be simple right? You register for PAYE (Pay As You Earn) number, HMRC approves your application, you get a piece of software, enter the pay details for your staff and voila you get a payroll summary and payslips to send to your staff. You then make payments to both your staff (net pay) and to HMRC (tax and national insurance.)
However, Payroll can be difficult and errors are costly both financially and emotionally.
So, if you want to be sure you’re getting it right, here are some common mistakes to look out for that businesses make and can lead to unnecessary stress and penalties.
Not checking tax codes or using the wrong tax code
Every year we all get our tax-free allowance. This gets converted into a tax code so that employers can pay employees the right amount of pay. However, there are many instances where HMRC may adjust your employee’s tax code.
For instance, the employee owes some tax from previous year, they have a second job, or they receive benefits from you. If their tax code is incorrect and doesn’t get picked up or you fail to use the correct tax code, it means they are paying more, or less, tax.
Failing to claim £3,000 employment allowance
There have been cases where small businesses have missed claiming this allowance for a period of four years. That’s a lot of money to waste. If you employ staff, do not forget to claim the £3,000 cash off your payroll tax bill. This is not an automatic allowance and must be claimed by ticking a box or making an application depending on how you run your payroll.
Always remember: if you’re a sole director and the only person on the payroll, you cannot claim this allowance
Failing to appreciate these five payroll risk areas
The following five areas deserve an article on their own as they are known to cause major headaches and errors when it comes to running your payroll.
- Statutory Maternity Pay (SMP)
- Statutory Sick Pay (SSP)
- Termination Payments
- Share Schemes
- Pensions and Student loans
With SMP, SSP and Termination payments, it’s really important to ensure that the qualifying conditions are met. Always seek specialist advice before proceeding.
Overpaying or underpaying staff
This is a very common and sensitive payroll mistake employers make. And where over payment has been made to staff who have left, it becomes impossible to get the overpayment back especially if the employee can show that they didn’t know they were overpaid.
To avoid this error, it’s important to use a checklist and do reasonableness check on net payments made to staff.
Failing to declare personal bills as earnings
Personal bills incurred by employees and directors (for example payment of credit card or utility bills) that are paid by the employer will normally be liable to tax and NI. The tax treatment depends on who the contract is with and how payment is made. So, where the contract is between the employee and the supplier, the employee pays the bill but then gets reimbursed by the employer, the full cost is treated as earnings (salary) for the purposes of tax and NI. And this needs to go on the payroll.
Not keeping proper records and risking £3,000 penalty
HMRC requires all employers to keep certain records for three years from the end of the tax year they relate to. Otherwise they may estimate what you have to pay and charge you a penalty of up to £3,000.
Not reporting benefits and expenses
Most benefits you give to your staff get taxed. For example, car benefits, holidays, school fees, medical insurance and the like. At the same time some expenses you pay on behalf of your staff also get taxed and subject to national insurance. However, the way these get taxed is not through the monthly payroll but through the Benefits in Kind system. A classic mistake here is forgetting to report and declare these benefits.
Not reviewing trivial benefits and staff functions
You don’t have to pay tax on a benefit for your employee if all of the following apply:
it cost you £50 or less to provide, it isn’t cash or a cash voucher, it isn’t a reward for their work or performance, it isn’t in the terms of their contract.
Neither do you have to pay tax if you spend £150 per head per year on staff functions.
However, it’s common for employers not to review these areas only for them to be picked during a routine PAYE visit by HMRC. To avoid this, include an annual PAYE health check within your payroll services.
These are examples of classic payroll mistakes that businesses make. It is a complex area which why there is a whole professional body and exams (CIPP) behind payroll professionals. Please take advice, review how you are managing your payroll, and make sure you avoid these kinds of mistakes.