And how to avoid them.
Most payroll mistakes are not the dramatic ones people worry about. They are the small, recurring errors that nobody notices for months, until they show up as an HMRC letter, a confused employee, or a bigger problem at year-end. Here are the five we see most often in small UK businesses, what they actually cost, and how to keep your payroll clean.
1. Using the wrong tax code
A new starter joins the business. You ask for their P45, they say they cannot find it, and you put them on a default emergency tax code. Three months later, they realise they have been taxed too much, and now you have to fix it: refund them through payroll, adjust the cumulative figures, deal with the questions, and explain why their first three payslips were wrong.
The fix is straightforward but the discipline is consistent. Every new starter needs either a P45, a starter checklist, or both. The starter checklist (which replaced the old P46) tells you which tax code to apply, and missing it is the single most common source of tax-code errors. The same applies when an employee’s circumstances change: a second job, a tax code notice from HMRC, a student loan. These all need to be reflected in the payroll on time.
2. Missing RTI submission deadlines
Real Time Information (RTI) is the system that requires you to report payroll information to HMRC every time you pay an employee, on or before the payment date. Miss the deadline and HMRC sends a penalty. The first one in a tax year is a warning; after that, the penalties are between £100 and £400 per month, scaling with the number of employees.
The mistake usually is not deliberate. It is the result of payroll being run late, or run early without the correct date applied, or processed but never actually submitted. The fix is to treat the RTI submission as a separate, named step in your workflow, not something that happens automatically when you press the “finalise payroll” button. The submission either goes in or it does not, and verifying that it did takes thirty seconds.
3. Auto-enrolment getting out of date
When auto-enrolment was first introduced, most businesses dealt with the initial setup and then mentally moved on. But auto-enrolment is not a one-off task. Employees have to be re-assessed every payroll. Opt-outs and opt-ins have to be processed. Re-enrolment happens every three years, with formal communication to employees and a declaration to The Pensions Regulator. Contributions thresholds change occasionally with legislation. New starters have to be assessed and enrolled within specific deadlines.
We see businesses that ran auto-enrolment perfectly on day one, then never updated anything for four years, and now have a backlog of employees who should have been enrolled and were not. The Pensions Regulator takes a strict line. The fix is to treat auto-enrolment as a recurring monthly check, not a one-time setup.
4. Holiday pay miscalculations, especially for variable-hours workers
Holiday pay used to be straightforward: full-time employees got their normal salary while on leave, and that was that. For workers with variable hours (zero-hours contracts, irregular shifts, term-time-only, casual workers), the rules are more complex. Holiday pay has to reflect their actual earnings, calculated over a reference period (currently 52 weeks of working time, excluding weeks where they did not work).
Recent legislative changes have added more options: rolled-up holiday pay is once again legal for irregular and part-year workers, but only if it is clearly itemised on the payslip and paid at 12.07% of normal hourly pay. Getting this wrong is one of the most common reasons for back-pay claims at employment tribunals. The fix is to know which method you are using for each worker type, and to apply it consistently. Software helps, but the underlying logic has to be set correctly from the start.
5. CIS subcontractor verification mistakes
For construction businesses operating under CIS, the most common mistake is paying a new subcontractor before verifying their status with HMRC. If you cannot verify them (because their details do not match HMRC’s records, or because they are not registered), you must deduct at the higher 30% rate, not the standard 20%. Paying at the wrong rate creates a deduction shortfall that you, the contractor, are liable for.
The second most common CIS mistake is deducting from the wrong portion of the invoice. CIS deductions apply only to the labour element of a subcontractor’s bill, not to materials. If you deduct from the materials portion as well, the subcontractor is over-deducted and you owe them the difference. If you under-deduct (treating part of the labour as materials), HMRC will eventually notice.
The fix on both counts is process: verification before first payment, and a clear separation of labour and materials on every CIS invoice. For businesses running CIS at any scale, this is where a specialist payroll team earns its keep, because the cost of one mistake at scale is significant.
The pattern behind all five
Look at the five mistakes above and they share a common cause: payroll being treated as a one-off task rather than a continuous process with its own discipline. Every one of them is preventable with the right system. None of them is preventable without one.
Most small businesses do not have the resources to run a payroll system that disciplined internally. That is not a failure, that is just the reality of running a small business. The cost of a payroll mistake (in penalties, in lost employee trust, in your own time fixing it) usually outweighs the cost of outsourcing to a specialist team many times over.
If any of the mistakes above sound familiar, or if you would like an outside pair of eyes on a payroll setup you suspect is not running cleanly, the first conversation is free. Book a no-obligation call at www.lexaroxpayroll.co.uk and we will tell you honestly what we see and what to do about it.