How to avoid common payroll mistakes in your small business

Many owners struggle with managing payroll effectively alongside the other demands that come with running a small business.

However, it’s essential that employers do everything to keep staff happy and motivated, which includes paying them accurately and on time.

Here are some of the common mistakes small business owners make with payroll (and how to avoid them):

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Be aware of HMRC reporting rules and deadlines or you could be fined

You do not need to register for PAYE if none of your employees are paid £123 or more a week, get expenses and benefits, have another job or get a pension.

You are required to keep payroll records.

• If you run payroll yourself, you’ll need to report employees’ payments and deductions to HMRC on or before each payday

• You will need to run regular reports and inform HMRC of changes, such as a new employee starting or a change in circumstance

Make sure payments are made on time

It sounds obvious, but it’s essential that staff are paid on time and the same date each month. With the rising cost of living, knowing when your salary is incoming is imperative to paying bills and other commitments.

Allow at least a week in advance to get the payroll run planned.

Check staff are on the right tax codes

Employees can be penalised and over or under-charged if they are on the wrong tax code.

Encourage staff to take control and ensure they are on the right code by referring to the Government Gateway site.

Calculate daily or partial working hours correctly

It can be complicated to calculate wages for staff who work on different shift patterns. Staff could be under or overpaid. Use a salary calculator to help you understand who should be paid what.

Don’t tax items that are not subject to tax and NI

Items on the payslip, such as expenses, are not subject to tax and NI deductions. Take time to check what is being taxed and what isn’t.

Understand which employees are subject to NI contributions

Over 65s and under 16s don’t have to pay National Insurance, which should be reflected in the payroll and on payslips.

Make sure payslips are detailed and contain the correct information

Payslips are used as proof of your earnings, tax paid and any pension contributions.

Items that must be shown on a payslip should contain the employee's: 

• earnings before and after any deductions

• the amount of any deductions that may change each time they are paid. For example, tax and National Insurance (NI)

• the number of hours worked if their pay varies depending on time worked

Employers must also explain any deductions fixed in amount. For example, the repayment of a season ticket loan. They can choose to do this either on a payslip or in a separate written statement.

Get your free Small Business Toolkit

Download your free toolkit for a payslip template and give your employees the clear and consistent financial information they deserve.

Calculate sick and holiday pay in line with your company’s policy

This varies if you offer enhanced sickness, holiday pay or statutory.

Communicate with staff about pensions, what they are entitled to and what’s deducted

Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute to it as 'automatic enrolment'.

You must enrol and make an employer’s contribution for all staff who:

• are aged 22 and state pension age

• earn at least £10,000 per year

• normally work in the UK (including those who are based in the UK but travel for work)

Automate the process

When you first start, it makes sense to operate payroll manually, but as you scale you will soon find this unmanageable.

Mistakes can be made when you’re calculating pay in this way and delays are inevitable. We would always recommend using HR or payroll software to help. There are numerous solutions on the market, which in the long run will save you precious resources.

Relevant resources

• How to start and manage payroll effectively

• Seven ways start-ups can retain talent and avoid employee turnover

• An essential guide to how much you should pay yourself