By Jonathan Amponsah CTA FCCA, The Tax Guys
If you only have a small number of employees you’d think that running a payroll would be simple. However, Payroll can be difficult and errors are costly both financially and emotionally. That’s why there is a whole professional body and exams (CIPP) behind payroll professionals.
Let’s look at eight examples of classic mistakes so you can avoid them and get your payroll right.
1. Not checking tax codes or using the wrong tax code
Every year we all get our tax-free allowance. This gets converted into a tax code so that employers can pay employees the right amount of pay. However, HMRC may adjust your employee’s tax code.
For instance, the employee owes some tax from previous year, they have a second job or they 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 are paying more, or less, tax.
2. 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.
3. Failing to claim £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.
5. 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.
6. Failing to declare 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.
7. 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.
8. Not keeping proper records and risking £3,000 penalty
HMRC requires all employers to keep certain records for three years from the end of the tax year they relate to. Otherwise they may estimate what you have to pay and charge you a penalty of up to £3,000.
The records to keep include:
- what you pay your employees and the deductions you make
- reports and payments you make to HMRC
- employee leave and sickness absences
- tax code notices
- taxable expenses or benefits
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.