Common UK payroll mistakes and how to avoid them
Reviewed by Mellow Editorial Team, HR & payroll content team
Getting UK payroll wrong costs money, damages employee trust, and can trigger HMRC penalties. The most common mistakes — miscalculating tax and National Insurance, missing RTI deadlines, misclassifying workers, and neglecting statutory obligations — are all preventable with the right processes in place.
Miscalculating income tax and National Insurance
Tax and NI errors are among the most frequent payroll problems, and they often stem from using outdated figures or applying the wrong tax code.
For the 2026/27 tax year, employees pay no income tax on the first £12,570 of earnings (the personal allowance). Above that, the basic rate is 20%, the higher rate is 40%, and the additional rate is 45%. Employer National Insurance runs at 13.8% on eligible earnings, while employees contribute 8% up to the upper earnings limit, then 2% above it.
Using a stale tax code — particularly after an employee changes their circumstances — is a common trigger for under- or over-deduction. Always act on tax code notices from HMRC promptly. If an employee starts without a P45, use the correct starter declaration to determine the right interim code rather than defaulting to an emergency code and leaving it uncorrected.
Missing RTI filing deadlines
Under Real Time Information, you must submit a Full Payment Submission (FPS) to HMRC on or before each payday. Submitting late, even by a day, can result in a penalty notice. Many employers file after paying employees, which is the wrong order — the submission must accompany or precede the payment.
If you make an error on an FPS after it has been accepted, do not resubmit a corrected FPS for a previous period unnecessarily. Use an Earlier Year Update (EYU) or amended FPS as appropriate, depending on the tax year in question.
Also keep your employer payment summary (EPS) submissions accurate. If you've claimed statutory payments, employment allowance, or have nothing to pay in a given month, the EPS is how HMRC reconciles your account. Missing it can leave an unexplained liability on your PAYE record.
Misclassifying workers
Paying someone as self-employed when HMRC would consider them an employee — or a deemed employee under IR35 — is one of the most expensive payroll mistakes a business can make. It creates backdated PAYE and NI liabilities, plus interest and penalties.
Worker classification depends on the substance of the working relationship: control, mutuality of obligation, substitution rights, and financial risk all matter. A written contract alone does not determine status. If your business engages contractors through their own limited companies, the off-payroll working rules (IR35) may require you to assess their status and operate PAYE if they fall inside the rules.
When in doubt, use HMRC's Check Employment Status for Tax (CEST) tool as a starting point, and document your reasoning.
Overlooking statutory payments and leave entitlements
Statutory Sick Pay, statutory maternity, paternity, adoption, and shared parental pay all carry rules about eligibility, notice requirements, and minimum payment amounts. Errors here are often administrative rather than intentional — employers miss a qualifying week, apply the wrong rate, or fail to keep adequate records to reclaim payments where permitted.
Separately, statutory annual leave entitlement is 5.6 weeks per year — that is 28 days including bank holidays for someone working a five-day week. Part-year and irregular-hours workers have their leave calculated differently following case law changes, so blanket approaches can easily produce underpayment.
The Employment Rights Act 2025 has also strengthened day-one rights for employees, which affects how quickly certain obligations arise after someone starts. Review your onboarding process to make sure entitlements are applied from the correct date.
Failing to manage pension auto-enrolment correctly
Auto-enrolment obligations continue throughout the employment relationship, not just at the point of onboarding. Employer minimum contributions are 3% of qualifying earnings; employees contribute a minimum of 5%. Common mistakes include:
- Failing to re-enrol eligible workers every three years
- Using the wrong earnings definition to calculate contributions
- Not enrolling workers who opt back in after having previously opted out
- Missing contribution deadlines set by the pension scheme
The Pensions Regulator can issue compliance notices and fixed penalty notices for breaches. Keep a clear audit trail of assessment dates, opt-out records, and contribution submissions.
Year-end obligations
Two annual deadlines catch employers out regularly. P60s must be issued to all employees still in your employment by 31 May following the end of the tax year. P11Ds, which report benefits in kind provided to employees and directors, must be submitted to HMRC by 6 July. Missing either deadline attracts automatic penalties.
Start preparing both documents before the deadlines, not on them. Reconcile your payroll records against your PAYE account throughout the year so there are no surprises when year-end arrives.
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