7 Common Payroll Mistakes Small Businesses Must Avoid

The payroll slip-ups that quietly cost you a fortune

Picture this. Payday should be smooth sailing. Instead, one wrong tax code or a missed RTI and you have a letter from HMRC, an unhappy employee, or both. Small businesses feel this harder than big employers. Tighter cash, fewer hands, and a team who spot errors fast. The silver lining? Most payroll mistakes are common and totally avoidable.

So here is the straight-talking guide to the payroll and expenses errors I see most, and how to stay on the right side of them.

Hazel (our Chief Wellbeing Officer) has never once queried her pay, on account of being paid entirely in biscuits. A simpler model, admittedly.

Quick Answer Box

• Do this: pay at least the legal minimum, use correct tax codes, file RTI on time, and only deduct from wages with proper authority.
• Avoid this: accidental minimum wage breaches, late HMRC submissions, guessed statutory pay, and deductions without written consent.
• Write down: your payroll process, every deduction's legal basis, and a clear expenses policy, then keep the records.

Paying below the minimum wage (often by accident)

This is the big one, because most breaches are not deliberate. The National Minimum Wage and National Living Wage are set by age band and reviewed regularly. Do not rely on a rate you remember; check the current figures on gov.uk before every review.

The sneaky ways businesses breach it without meaning to:

• Deductions that push pay below the threshold, for example for uniforms, tools or training the job requires.
• Unpaid working time, such as time spent on handovers, opening up, mandatory training or security checks.
• Salary sacrifice that drops cash pay under the minimum. A scheme can be great and still illegal if it takes someone below the floor.
• Forgetting to bump pay when someone moves up an age band on their birthday.

HMRC can name and shame, demand arrears and issue penalties, so this is worth a careful annual check.

Quick actions:

• Audit pay after any deduction.
• Add an age-band alert to your HRIS or payroll.
• Keep a simple log of unpaid time risks and fix them.

Wrong tax codes

A wrong tax code means someone pays too much or too little tax, and it will land back on your desk eventually. Use the code HMRC provides, update it promptly when they tell you to, and make sure new starters are set up correctly from their starter information. If something looks odd, query it rather than guessing. gov.uk has guidance on tax codes.

Quick actions:

• Use starter checklists for P45, P46 details, and student loans.
• Reconcile codes against HMRC notices each month.
• Sense-check 0T, BR, or emergency codes before payday.

Late or incorrect RTI submissions

Real Time Information is how you tell HMRC about pay and deductions. In most cases you submit a Full Payment Submission on or before each payday, with an Employer Payment Summary where relevant.

Where SMEs trip up:

• Submitting late, which can trigger penalties.
• Reporting the wrong figures, then having to correct them.
• Forgetting to report when there is no pay in a period.

Accurate, on-time RTI is a habit. Good payroll software helps, but you still have to run it on time. See running payroll and RTI on gov.uk.

Quick actions:

• Put payday and RTI deadlines in a shared calendar.
• Run a pre-payroll checklist with two sets of eyes.
• Use EPS for recovery items and nil periods.

Holiday pay miscalculations

Holiday pay goes wrong constantly, especially for staff with variable or irregular hours, where pay is usually based on an average over the previous 52 weeks. Fixed-hours staff are simpler, but enhanced holiday still needs pro rating for part-timers. We cover the whole thing in how to calculate annual leave for part-time employees. Get the entitlement and the pay rate right, and write down your method.

Quick actions:

• Document your 52-week averaging method.
• Exclude unpaid weeks from the average.
• Review bank holiday treatment for part-timers.

Incorrect statutory pay

Statutory Sick Pay, Statutory Maternity Pay and the rest have qualifying rules and set rates, and they change. A few traps:

• SSP now starts on day one of absence, which changes the cost picture. See the UK statutory pay rates for 2026/27.
• Misjudging who qualifies, or paying the wrong rate.
• Not accounting for how salary sacrifice can affect statutory pay, since some payments are based on earnings after the sacrifice.

Do not quote the rates from memory. Confirm them on gov.uk each time.

Quick actions:

• Use eligibility checklists for SSP, SMP, SPP, SAP, and ShPP.
• Recheck rates each April.
• Keep MATB1 and fit notes filed against the right employee.

Pension auto-enrolment errors

Auto-enrolment duties are easy to let slip when you are busy. Common errors:

• Not enrolling eligible staff, or enrolling them late.
• Getting contribution levels wrong.
• Missing re-enrolment duties, which come round on a cycle.
• Forgetting to keep the records that prove you complied.

Check current thresholds and duties on gov.uk and with your pension provider.

Quick actions:

• Run an eligibility assessment every pay period.
• Diary your re-enrolment date and re-declaration.
• Spot-check contribution bases and postponement letters.

Unlawful deductions from wages

This one has real legal teeth. Under section 13 of the Employment Rights Act 1996, you generally cannot deduct money from someone's wages unless:

• it is required or allowed by law (such as tax and National Insurance), or
• there is a relevant term in their contract allowing it, or
• the employee has given prior written consent.

So clawing back an overpayment, a cash-register shortfall or a training cost without the right authorisation is an unlawful deduction, and it can be challenged at tribunal. Get written agreement before you deduct, not after. ACAS has guidance on deductions from pay.

Quick actions:

• Add a fair deductions clause to contracts.
• Use signed repayment plans for overpayments.
• Keep evidence on file before processing payroll.

Do not forget expenses

Expenses are part of getting payroll right, and they are easy to neglect. When you reimburse staff late or messily, morale dips, people feel they are funding the business out of their own pocket, and your records get tangled, which creates tax risk.

To keep expenses clean:

• Have a clear, written expenses policy: what is claimable, what evidence is needed, and the deadline to submit.
• Reimburse promptly, ideally on a predictable cycle.
• Keep receipts and records, and report taxable expenses and benefits correctly to HMRC. See expenses and benefits on gov.uk.
• Do not quote specific allowance rates, such as mileage, from memory; confirm the current figures.

Quick actions:

• Use a simple claim form or app with photo receipts.
• Publish mileage, subsistence, and deadlines in one page.
• Reconcile and reimburse with payroll each month.

A short example

Sam runs a 12-person café. He introduced a smart new uniform and deducted the cost from the team's first pay packet. Two problems landed at once: the deduction pushed a couple of his younger staff below the minimum wage for that period, and he had no written consent for the deduction in the first place.

The fix was not complicated, but it cost him. He repaid the shortfall, added a proper deductions clause to contracts, and now checks pay against the current minimum wage rates every time HMRC updates them. One careful process, and the whole thing would never have happened.

Common mistakes (and the fix)

• Mistake: deductions or unpaid time pushing pay below minimum wage. Fix: check current NMW rates on gov.uk and audit pay after any deduction.
• Mistake: using an outdated or wrong tax code. Fix: use HMRC's code, update promptly, query anything odd.
• Mistake: late or incorrect RTI. Fix: file the FPS on or before payday, every time.
• Mistake: guessing holiday or statutory pay. Fix: follow the proper method and confirm rates on gov.uk.
• Mistake: deducting wages without authority. Fix: get prior written consent or a contract clause first.
• Mistake: slow, undocumented expenses. Fix: clear policy, prompt reimbursement, kept receipts.

What to write down

Keep payroll defensible with a simple paper trail:

• your end-to-end payroll process and who runs it
• the legal basis for every deduction you make
• the tax codes, hours and rates you used each period
• your holiday-pay method and statutory-pay decisions
• a written expenses policy and the records behind each claim
• proof of pension auto-enrolment compliance

If HMRC or an employee ever queries something, this is the file that answers it. Remember too that you must retain payroll records for several years, and from April 2026 employers are expected to keep annual leave and holiday pay records for at least six years. Confirm current requirements on gov.uk.

Bottom line

• Most minimum wage breaches are accidental; audit pay after any deduction.
• Use correct tax codes and file RTI on or before payday.
• Follow the proper method for holiday and statutory pay, and confirm rates on gov.uk.
• Only deduct from wages with proper authority under the Employment Rights Act 1996.
• Pay expenses promptly, keep the records, and keep them long enough.

Right, what do you do now?

If you are not confident your pay clears the minimum wage after deductions, your RTI is on time, or your deductions and expenses are properly documented, this is exactly the kind of thing we check on the HR Advice Line and in an HR Health Check.

No judgement, no jargon. Just a clear view of where your payroll is exposed and what to fix first. Book a discovery call and we will run through it with you.