Payroll errors: how to correct them before HMRC notices

Payroll errors happen to every payroll team at some point. The question is how quickly you catch them and whether you correct them correctly. Many errors can be fixed without HMRC involvement if you act promptly. Some require formal correction through RTI. A few attract penalties regardless. Understanding which type of error you have determines the right course of action.

Overpayments to employees

If you have paid an employee more than they were entitled to, you can generally recover the overpayment by deducting it from future wages — but only if the employment contract permits this, or if the employee has agreed in writing. Deducting from wages without authority is itself unlawful. It is worth noting that some overpayments — particularly those where the employee genuinely did not know they were overpaid and has spent the money — may be harder to recover.

For tax: an overpayment that has already been submitted to HMRC via FPS needs to be corrected through a correcting FPS or an Earlier Year Update (EYU) if the overpayment occurred in a previous tax year. HMRC will adjust the employee's tax position accordingly.

Underpayments to employees

If an employee was paid less than they were due, pay them the shortfall immediately. Do not wait for the next regular pay run if the error is material. Submit a corrected FPS showing the additional payment. For NMW/NLW underpayments, the correction must include any arrears owed at the higher of the underpaid rate or the current NMW rate — this is a statutory requirement that catches employers who try to correct minimum wage breaches at the historic rate.

Wrong tax code applied

If you applied the wrong tax code, the employee has paid too much or too little tax. HMRC reconciles tax positions at year end via the P800 process. If you catch the error mid-year, apply the correct code going forward — your payroll software will use the cumulative method to adjust the year-to-date position. If you used a W1/M1 emergency code when you should have been on cumulative, switch to cumulative as soon as you have the correct code.

NI category error

If you applied the wrong NI category, you may have collected incorrect employee NI and paid incorrect employer NI. If the error is caught in the same tax year, correct it via an in-year FPS amendment. If it is caught after year end, use an EYU. Significant under-collected employer NI is a payroll liability; HMRC may charge interest and penalties where the error is material.

Late FPS

If you submitted your FPS late, HMRC will have received the information after the payment date. In the first instance, HMRC often does not penalise first-time late submissions. If you receive a penalty notice, you can appeal if you have a reasonable excuse. Going forward, set a reminder at least one day ahead of each payday to complete and submit the FPS.

Year-end errors

If you discover an error after the final FPS has been submitted for the tax year, use an Earlier Year Update to correct the P60 data. EYUs can be submitted up to six years after the tax year end. HMRC will adjust tax records accordingly.

See RTI submissions: FPS and EPS explained for the correction submission types, and PAYE plain English guide for the payroll framework within which corrections operate.

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