10 Payroll mistakes that can lead to unnecessary tax, penalties, and staff issues
By Jonathan Amponsah CTA FCCA, The Tax Guys
On the face of it payroll should be straight forward. After registering with HMRC for PAYE (Pay as You Earn) you use your chosen software, enter the data and at the end of the month you have payslips and a payroll summary.
Unfortunately, it isn’t that simple. Payroll can be difficult and costly error can easily be made.
That’s why there is a whole professional body and exams (CIPP) behind payroll professionals.
This is an area where you want to get things right so let’s examine 10 examples of payroll mistakes that businesses often make so you can avoid both penalties and stress.
By not observing the minimum national wage, it’s not only the employee who is affected and might bring a claim; HMRC has been known to bring cases successfully against employers who pay below the minimum wage. HMRC do this because they too have a vested interest in the form of PAYE tax. So, the unsuspecting employer gets clobbered twice here.
A classic mistake some employers in the hospitality industry make is to assume incorrectly that they do not need to run PAYE on tips and gratuities. The tax treatment depends on the specific arrangement regarding the distribution of the tips.
Where the employer is involved in the distribution of the tips, then they need to include the amounts on the payroll. Where employees receive the tips directly from customers, then the employees would need to declare this on their own tax return and the employer does not need to run payroll. This is an area you will need to take further advice on.
Each tax year individuals get their tax-free allowance. This is converted into a tax code to enable employers to pay their staff the right amount of pay. However, there are occasions where HMRC may adjust your employee’s tax code.
For instance, an employee may owe tax from previous year, or have a second job. They may also 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 may have an over or underpayment of tax.
Making an over or underpayment to employees is a very sensitive payroll mistake. Definitely something to be avoided!
Where an over payment has been made to an employee who has left your business, it becomes impossible to get the overpayment back particularly if the employee can show that they were unaware that they were overpaid.
To make sure you don’t make this error, it’s important to use a checklist and also to make reasonableness checks on net payments made to employees.
You may be surprised to learn that there are examples where a small business has failed to claim the employment allowance for four years on the trot. As the annual employment allowance is £3000 per year that is a substantial sum. If you have employees make sure you claim the £3,000 cash off your payroll tax bill. To make the claim is it essential that you tick the box or make an application as it isn’t an automatic allowance (which option you need to follow will be driven by the way your payroll is managed).
The employment allowance rules can be easily misunderstood. If you are the only person on payroll i.e. you are a sole director, you are NOT entitled to claim this allowance. So do not check or tick any relevant box on your payroll software.
As mentioned at the beginning of this article, there is a reason why payroll people take exams and become members of the CIPP (Chartered Institute of Payroll Professionals) – any Payroll system used can only be as good as the person using it. Ensure that all relevant data is entered so that the system can calculate everything correctly. And do use a checklist and do reasonableness checks.
Personal bills incurred by employees and directors (e.g. 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.
You don’t have to pay tax on a benefit for your employee if all of the following apply:
Also you don’t have to pay tax if you spend £150 per head per year on staff functions.
Very often businesses don’t take the time to review these trivial benefits and staff functions. This will be a problem if they are picked up during a routine PAYE visit by someone from HMRC. To make sure this doesn’t happen it is a good idea to conduct a PAYE health check every year within your payroll services.
Where you’ve paid your staff but not sent in the payroll returns (Full Payment Submission), HMRC will send you a late filing notice. Unless you have a reasonable excuse for filing late, they may charge you £100 a month penalty if you have fewer than 10 employees.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant who advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.