10 Biggest Payroll Errors - And How To Avoid Them

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1 Cutting Edge Payroll Solutions 10 Biggest Payroll Errors - And How To Avoid Them by Sharon Mordecai, Director, Payplus Payroll accuracy is a vital to a business or organisation. Problems that arise from processing payroll will directly impact on your staff and give you problems to resolve and them issues that will unsettle them. The 10 biggest issues to avoid that we have come across, in no particular order are: 1. Getting pay dates wrong Does your payroll provider make wages payments on your behalf directly into the bank accounts of your employees? From an employees point of view one of the worst payroll mistakes is for payments to be made on the wrong date. An employee that is paid even one day late can suffer financial hardship and as their employers you will suffer a good deal of embarrassment and have to pay any bank charges incurred. Your payroll provider should agree with you a diary of pay dates a year in advance, so that both parties understand the timetable.

2 2. Using incorrect tax codes Each individual s tax deductions are calculated based upon the tax code issued to them by the HM Revenue & Customs (HMRC). At the end of the tax year a year end submission is made to HMRC and they will check that the right tax code has been applied and the correct amount of tax has been deducted from the employee. Should an incorrect tax code have been applied to an employee s wages throughout that tax year the Revenue will pursue the employee for any underpayment of tax in the new tax year. Are you confident that your provider is registered to download your employees tax notices of coding from HMRC? 3. Paying a leaver Obtaining a refund from an employee that has been overpaid in error can be a time consuming and difficult business. If that overpayment happens to be made to employee who has left your employment the chances of claiming the overpayment back are remote. Legally an ex-employee paid in error is obliged to pay back any funds received in error, but pursing this through legal means is an expensive exercise. Should the ex-employee refuse to acknowledge the overpayment or just refuse to reimburse the funds it is often the case that it is more cost effective to write off the debt. You need to ensure that when an employee leaves your employment you advise your payroll provider, obtain a P45 and confirm that the employee has been removed form the current processing records.

3 4. Not taxing each pay element correctly Payslips are made up of various pay elements. In the simplest form an employee will have one pay element Salary and this is fully taxable. This is rarely the case as most payslips are made up of a number of elements, such as Salary, Overtime, Bonus, Holiday Pay, Expenses etc. It is vital that you understand that every element on each payslip is correctly dealt with for PAYE and National Insurance purposes, as a routine compliance visit from HMRC will check that all pay elements are being taxed correctly and as an employer you will be subject to paying over tax on any element that has been incorrectly taxed. Your payroll provider should be able to advise you as to the taxable treatment of each pay element being used within your payroll. 5. Understanding maternity pay policies When taking on your payroll did your payroll provider go through with you all of the policies you have in your employees contracts of employment? This is vital when looking at how payments are to be dealt with for things like Sickness and Maternity. Although there is a statutory minimum in place when it comes to paying Maternity Pay, you do not just have to pay the minimum you can make the salary up in full or make an additional contribution. Many companies have maternity pay schemes in place that pay over and above the statutory limit. It is important that your maternity policy is fully understood as it can be affected by any pension scheme in place as well as any salary sacrifice schemes in place. As an employer you can reclaim a proportion of Statutory Maternity Pay paid and your payroll provider should be able to explain to you how the reclaim has been calculated.

4 6. Working patterns An important piece of information to pass onto your payroll provider is the working pattern for each member of staff. Many payroll providers will assume that a full time employee will work Monday to Friday, 9.00 to 5.00, and will also not ask for the working patterns of any part time employees and pay them purely on the number of hours worked. It is important to establish the working pattern of all employees as this will have an impact on any sickness periods and payments of Statutory Sick Pay and also on the calculation of holiday entitlement and holiday pay. Employees starting or leaving part way through any month are likely to be under or over paid should the correct working pattern not be applied to the calculation. 7. Treating child care vouchers properly Childcare vouchers are made available to employees in the form of a salary sacrifice. This means that the amount of childcare vouchers given is deducted from the gross salary of an employee before tax and National Insurance is calculated. Childcare vouchers are also free from any employer s national insurance. Confirm with your payroll provider that they are treating any vouchers you provide your staff in this way if not your employee will be over taxed and your company will lose out on the National Insurance saving available.

5 8. Paying into incorrect bank accounts Are you provided with a net pay report showing employees bank account numbers and sort codes before any payment is processed for bacs? It is very easy to transpose digits of a bank account number when they are manually entered into a payroll system. Should an incorrect digit be entered there is a danger that if the incorrect account is a valid account the funds could be paid to someone else and lost. If the account is invalid the amount will bounce back to your company bank account eventually. If you are providing bank account changes to be entered into a payroll system, you need to make sure that you check a net pay report to make sure the changes have been properly recorded. Providing these sorts of changes in an electronic format that your provider can import into their system is the best way of avoiding this sort of human error. 9. Not implementing pay adjustments on a permanent basis When informing your payroll provider of a change to your employee s pay it is important that you are clear as to the difference between permanent changes and temporary changes. A permanent change would be something like a pay rise and a temporary change would be something like a bonus. As you can probably see treating a temporary change as a permanent change can mean incorrect payments being made to your employees on a long term basis. Should an error like this be made it can take many months before this is spotted, if at all. Should an error of this nature be discovered, in many cases it is very difficult to go back and rectify and could result in a loss of funds for your company. You payroll provider should give you a data collection file every month to complete that clearly distinguishes between the two types of amendments to ensure this type of error doesn t occur.

6 10. Correct tax treatment of pensions Do you make pension contributions on behalf of your employees? If you do then pensions need to be processed through payroll. There are many different types of pension schemes but the main rule to establish is whether the pension deduction should be pre or post tax. Your pension company will inform you at the outset how the contributions should be handled for tax purposes and it is important that you pass this information on to your payroll provider for them to process the contributions correctly. Should there be a mistake between the treatment of these two types of contributions your employees will either under or over pay tax. In this case it is difficult for an employee to identify the error. It is possible a mistake like this could go unnoticed for a number of years before then coming back on you as the employer to put it right. We hope you find these points useful. Of course, the team here at Payplus would love to help with your payroll and we can talk you through any issues you may have. Contact Sharon Mordecai to discuss how we work and to get a quote for your payroll. Contact details: Sharon Mordecai: Sales and Business Development Director Payplus, PO Box 501, The Nexus Building, Broadway, Letchworth Garden City, Hertfordshire SG6 9BL FREEPHONE: smordecai@payplus.co.uk