For small businesses running payroll can be a headache and fear of making mistakes means it can be very stressful. Unfortunately, Payroll is difficult, and errors can be expensive. This is why there is a professional body for payroll professionals (CIPP) which has exams which are tough to pass.
To help you get payroll right let’s look at examples of classic mistakes that businesses can find themselves making. Here are the mistakes to avoid when running your small business payroll, as told by Jonathan Amponsah from The Tax Guys.
Not keeping essential records for three years
HMRC requires all employers to keep certain records for three years from the end of the tax year they relate to. If you don’t do this HMRC may estimate what you have to pay and charge you a penalty of up to £3,000.
The records to keep include:
- What you pay your employees and the deductions you make
- Reports and payments you make to HMRC
- Employee leave and sickness absences
- Tax code notices
- Taxable expenses or benefits
Not declaring personal bills as earnings
Personal bills incurred by employees and directors (e.g. payment of credit card or utility bills) that are paid by the employer will normally be liable to tax and NI. The tax treatment depends on who the contract is with and how payment is made. So, where the contract is between the employee and the supplier, the employee pays the bill but then gets reimbursed by the employer, the full cost is treated as earnings (salary) for the purposes of tax and NI. And this needs to go on the payroll.
Missing filing deadlines
Where you’ve paid your staff but not sent in the payroll returns (Full Payment Submission), HMRC will send you a late filing notice. Unless you have a reasonable excuse for filing late, they may charge you £100 a month penalty if you have fewer than 10 employees.
Breaching the minimum wage legislation
By not observing the minimum national wage, it’s not only the employee who is affected and might bring a claim; HMRC has been known to bring cases successfully against employers who pay below the minimum wage. HMRC do this because they too have a vested interest in the form of PAYE tax. So, the unsuspecting employer gets clobbered twice here.
Not claiming the employment allowance (£3,000)
You may be surprised to learn that there are examples where a small business has failed to claim the employment allowance for four years on the trot. As the annual employment allowance is £3,000 per year that is significant. If you have employees make sure you claim the £3,000 cash off your payroll tax bill. To make the claim is it essential that you tick the box or make an application as it isn’t an automatic allowance (the option you need to follow will be driven by the way your payroll is managed).
Claiming the employment allowance when you’re not entitled
The employment allowance rules can be easily misunderstood. If you are the only person on payroll i.e. you are a sole director, you are NOT entitled to claim this allowance. So do not check or tick any relevant box on your payroll software.
Not appreciating these payroll risk areas
The following five areas are known to cause major headaches and errors when running your payroll.
- Pensions and Student loans
- Statutory Maternity Pay (SMP)
- Statutory Sick Pay (SSP)
- Share Schemes
- Termination Payments
With Termination payments, SMP, and SSP it’s really important to ensure that the qualifying conditions are met. Always seek specialist advice before proceeding.
Failing to review and report tips and gratuities as earnings
A classic mistake some employers in the hospitality industry make is to assume incorrectly that they do not need to run PAYE on tips and gratuities. The tax treatment depends on the specific arrangement regarding the distribution of the tips.
Where the employer is involved in the distribution of the tips, then they need to include the amounts on the payroll. Where employees receive the tips directly from customers, then the employees would need to declare this on their own tax return and the employer does not need to run payroll. This is an area you will need to take further advice on.
Not completing an annual PAYE health check
You don’t have to pay tax on a benefit for your employee if all of the following apply:
- it cost you £50 or less for you to provide
- it isn’t cash or a cash voucher
- it isn’t a reward for their work or performance
- it isn’t included in their contract terms
Also you don’t have to pay tax if you spend £150 per head per year on staff functions.
Very often businesses don’t take the time to review these trivial benefits and staff functions. This will be a problem if they are picked up during a routine PAYE visit by someone from HMRC. To make sure this doesn’t happen it is a good idea to conduct a PAYE health check every year within your payroll services.
Over-reliance on payroll software
As mentioned at the beginning of this article, there is a reason why payroll people take exams and become members of the CIPP (Chartered Institute of Payroll Professionals) – any Payroll system used can only be as good as the person using it. Ensure that all relevant data is entered so that the system can calculate everything correctly. And do use a checklist and do reasonableness checks.
There are many potential pitfalls when running payroll so invest time to make sure your business gets things right and seek professional advice as necessary.