Payroll looks simple from the outside. Pay people what they are owed, send the figures to HMRC, repeat next month. In practice it is one of the easiest parts of running a business to get wrong, and the mistakes rarely announce themselves. They surface weeks later as a penalty notice, an underpaid employee, or a tax code that has quietly been wrong since April.
Research by Employment Hero found that 84% of UK small business leaders have made a payroll error affecting employee pay or business cash flow, and 40% of those businesses faced penalties as a result. The mistakes below are the ones we see most often, along with what they actually cost and how to stop them happening.
Applying the wrong tax code
The tax code tells your payroll how much of an employee’s pay is tax free. Get it wrong and you either under deduct tax, leaving the employee with a bill later, or over deduct it, leaving them short each month. The usual causes are starting a new employee on the wrong code, ignoring a P45, or failing to act on a P6 or P9 coding notice from HMRC.
When a new starter has no P45, you need a completed Starter Checklist to pick the right code. Our guide to starters, leavers and P45s walks through exactly which code applies to each statement. If you run payroll on autopilot and never reconcile codes against HMRC notices, errors compound across the year.
Missing RTI submission deadlines
Under Real Time Information, a Full Payment Submission must reach HMRC on or before the day you pay your staff. Miss it and you risk an automatic late filing penalty, which starts at £100 a month for the smallest employers and rises with headcount. Repeated lateness can also trigger a closer look at the rest of your payroll.
The trap is treating the FPS as an afterthought rather than part of the pay run itself. Our RTI compliance checklist for East Yorkshire SMEs sets out the submission cadence and the deadlines that catch people out.
Getting National Minimum Wage wrong without realising
Most National Minimum Wage breaches are not deliberate. They happen when something quietly pulls an employee’s effective hourly rate below the legal floor. From 1 April 2026 the National Living Wage is £12.71 an hour for workers aged 21 and over, £10.85 for 18 to 20 year olds, and £8.00 for under 18s and apprentices in their first year.
The classic mistake is a salary sacrifice arrangement that reduces gross pay below the threshold, but unpaid working time is just as common: time spent opening up, closing down, training, or travelling between jobs that nobody logs as paid. Deductions for uniforms or tools can have the same effect. HMRC actively investigates underpayment and publicly names offenders, so this is a reputational risk as well as a financial one.
Miscalculating holiday pay
Holiday pay is one of the most error prone areas in payroll, particularly for staff on irregular or variable hours. Paying basic salary only and ignoring regular overtime or commission, or applying a flat 12.07% where it does not belong, are both common. Getting it wrong creates underpayments that can stretch back years, and the government is now developing state enforcement of holiday pay through the Fair Work Agency.
Failing to update tax codes mid year
Tax codes are not set once in April and left alone. HMRC issues coding notices throughout the year as an employee’s circumstances change, and you are expected to apply them from the effective date. Employers who batch payroll once a month and never check for new notices end up running outdated codes, which means the employee pays the wrong tax until someone notices.
Misclassifying workers
Treating someone as self employed when they are really a worker or employee is a costly error. It affects entitlement to the minimum wage, holiday pay, pension auto enrolment, and statutory payments, and HMRC can recover unpaid tax and National Insurance going back years. The label on the contract does not decide the matter. The reality of the working relationship does.
How outsourcing prevents these mistakes
Every mistake on this list comes from the same root cause: payroll being squeezed in around everything else, by someone who does not do it full time. A bureau removes that pressure. Codes are reconciled against HMRC notices, submissions go in on time because that is the whole job, minimum wage and holiday pay are checked as a matter of routine, and someone is paid to keep up with rate changes so you do not have to.
If you would rather stop second guessing every pay run, error free payroll from Purely Payroll takes the whole process off your hands. We also explain the wider benefits of outsourcing your payroll if you want to weigh it up first.
How many of these mistakes is your business quietly making? Check our pricing to see what it costs to hand payroll over, or get in touch and we will take a look at how you run things now.
Based in Goole? Explore our dedicated payroll services in Goole.
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