On the face of it Payroll should be simple. Once you’ve registered for PAYE and HMRC has approved your application, all you need is some software and you can start entering the pay details for your staff. Once all the data is in – voila! – you get a payroll summary and payslips to send to your employees. All that is left to do is to make payments to both your staff (net pay) and to HMRC (tax and national insurance.)
However, Payroll can be difficult and errors are costly in both financial and emotional terms. That’s why there is a whole professional body and exams (CIPP) behind payroll professionals.
Let’s review some commonly made payroll mistakes so you can get things right and avoid unnecessary stress and upset.
1. Failing to review and report tips and gratuities as earnings
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.
2. Not declaring 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.
3. Forgetting to claim the £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.
4. Incorrectly claiming employment allowance
The employment allowance rules can be easily misunderstood. If you’re a sole director and the only person on the payroll, you cannot claim this allowance. So do not check or tick any relevant box on your payroll software.
- 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.
6. 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.
7. Breaching the minimum wage legislation
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.
8. 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.
9. Missing the filing deadlines
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.
10. Over reliance on 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.
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.