What Payroll Mistakes Could Cost You Big, and How Can You Avoid Them?

Introduction

Payroll mistakes can lead to HMRC penalties, underpaid staff, and compliance risks. As of August 2025, errors in Real-Time Information (RTI) submissions, incorrect tax codes, and missed pension contributions are among the top issues. Understanding how to avoid these can save your business from fines and employee dissatisfaction.

Why Is Payroll Compliance Critical for UK Businesses?

Payroll isn’t just about paying employees, it’s about doing so accurately, legally, and on time. In the UK, payroll errors can result in:

• Employers can face fines of up to £3,000 for failing to maintain accurate payroll records or misreporting statutory pay, not specifically for incorrect payslips.
• RTI penalties depend on your PAYE scheme size and are typically issued monthly for late submissions. For example, employers with 1–9 employees may face a £100 monthly penalty, increasing with company size.
• Disgruntled staff or legal disputes due to underpayment.

Maintaining a compliant payroll system is not just a finance function; it’s a legal and reputational necessity.

What Are the Most Common Payroll Mistakes in the UK?

Here are the most frequent payroll errors made by UK businesses in 2025:

1. Using Incorrect or Outdated Tax Codes

• Not updating tax codes after HMRC P6/P9 notices.
• Emergency codes are used beyond the probation period.
• Failing to apply the correct code after a change in employment.

2. Late or Inaccurate RTI Submissions

• Forgetting to submit FPS (Full Payment Submission) before payday.
• Submitting EPS (Employer Payment Summary) without adjustments.
• Using incorrect formats leads to HMRC rejections.

3. Misclassifying Employees vs. Contractors

• Treating contractors as employees or vice versa affects:
  • Tax deductions
  • National Insurance
  • Pension contributions

HMRC’s IR35 rules are strictly enforced in 2025; misclassification can trigger backdated liabilities.

4. Failing to Enrol Eligible Employees in Pensions

• Auto-enrolment is legally required.
• Missing staging dates or contribution deadlines can incur compliance notices and fines.
• Employers must contribute a minimum of 3% of qualifying earnings to workplace pensions, as part of the total 8% minimum contribution under auto-enrolment rules.

5. Not Keeping Up-to-Date Payroll Records

• HMRC requires employers to keep payroll records for 3 years from the end of the tax year. However, National Minimum Wage records must be kept for 6 years.
• Incomplete or missing records can lead to compliance audits or legal claims.

How Can These Payroll Errors Impact Your Business Financially?

What Are HMRC’s Current Rules for Payroll Compliance in 2025?

As per HMRC guidelines updated in mid-2025, UK employers must ensure:

• Submit Real-Time Information (RTI) before or on payday to the HMRC RTI system.
• Pay at least the National Minimum Wage (NMW), with the 1 April 2025 hourly rates as follows:

Auto-enrol eligible employees into a workplace pension if they are:

• Aged 22 or over
• Earn at least £10,000 per year, in line with The Pensions Regulator’s mandate.
• Apply accurate HMRC tax codes as provided in tax notices to ensure correct PAYE deductions.
• Retain payroll documentation, including payslips, contracts, RTI submissions, and related records, for at least 3 years, though keeping them for up to 6 years is considered best practice for audit readiness.

How Can You Prevent Costly Payroll Errors?

Conduct Monthly Payroll Audits

• Review RTI reports, tax codes, and NI categories.
• Spot anomalies before submission.

Use HMRC-Compliant Software

• Choose software that auto-updates codes and alerts for RTI deadlines.
• HMRC-recognised tools include: Xero Payroll, BrightPay, and Moneysoft.

Train Internal Staff or Outsource to Experts

• Payroll training ensures staff stay updated on evolving rules.
• Outsourcing reduces error rates and liability risks.

Stay Updated with Regulatory Changes

• Subscribe to HMRC employer bulletins.
• Use The Pensions Regulator’s checklists quarterly.

Integrate with HR & Time Tracking Systems

• Automate time data entry to reduce manual calculation errors.

When Should You Consider Outsourcing Payroll?

Outsourcing may be the right choice if:

• You're scaling fast and missing deadlines.
• Your internal finance team lacks payroll expertise.
• You’ve faced HMRC penalties in the past.
• Your business has remote/hybrid teams across the UK.

FAQs

1. What happens if I submit RTI late?

You may incur a penalty ranging from £100 to £400 per month, depending on the number of employees. Repeat offences may lead to further enforcement.

2. What is the current National Minimum Wage in 2025?

As of April 2025, it's:

• £11.44/hr for workers 23 and over
• £8.60/hr for 18–22

3. How long should I keep payroll records?

Minimum of 3 years, although 6 years is advisable for audit protection.

4. What’s the penalty for not offering a workplace pension?

The Pensions Regulator may issue:

• A compliance notice
• A fixed penalty of £400
• Escalating fines of up to £10,000/day for serious breaches

5. What’s the difference between FPS and EPS in payroll?

• FPS: Full Payment Submission, sent each time you pay employees
• EPS: Employer Payment Summary, used to claim reliefs or adjustments

Conclusion: What’s the Cost of Payroll Inaccuracy?

Payroll compliance in 2025 isn’t just admin, it’s risk management. One wrong number or missed deadline can lead to lost money, trust, and time. But with the right knowledge, systems, and support, most mistakes are completely avoidable.

If payroll is keeping you up at night, or costing you more than it should, Veritus Consultancy’s payroll experts are here to help UK businesses like yours stay accurate, compliant, and stress-free.