Payroll Mistakes That Could Land Your Business in Trouble With HMRC

Payroll sounds straightforward — pay your employees, submit to HMRC. But in practice, payroll is one of the most error-prone areas of running a business in the UK. The consequences of getting it wrong range from frustrated employees to significant HMRC penalties. Here are the mistakes we see most often at SAS Yorkshire — and how to avoid every one of them.

1. Missing RTI Submissions

Real Time Information (RTI) requires employers to report payroll details to HMRC on or before every pay day — not once a month, not once a year. Missing even a single submission can trigger an automatic penalty notice.

⚠️ Penalty Alert

HMRC charges between £100 and £400 per month for late RTI submissions, depending on the number of employees. If you are three months late, an additional penalty of 5% of the tax and NI that should have been reported is added on top.

2. Incorrect Tax Codes

• Using an emergency tax code (1257L W1 or M1) for too long without updating to the correct code

• Not acting on P6 and P9 tax code notices issued by HMRC mid-year

• Applying the wrong code when an employee has a second job

• Failing to update codes at the start of a new tax year

3. Missing Auto-Enrolment Deadlines

ObligationDeadlinePenalty for FailureEnrol eligible employeesWithin 6 weeks of start date£400 fixed penaltyDeclaration of complianceWithin 5 months of staging date£400 + £50–£10,000/dayPay minimum contributionsEach pay periodCivil penalty + back payments

4. Getting National Minimum Wage Wrong

The National Minimum Wage (NMW) and National Living Wage (NLW) rates change every April. Failing to update your payroll to reflect the new rates — even by a penny — puts you in breach of employment law. HMRC names and shames employers who underpay minimum wage, regardless of whether it was intentional.

💡 Watch Out for Hidden Deductions

Deductions from pay — for uniforms, tools, or accommodation — can accidentally take an employee's effective hourly rate below the minimum wage even if their headline pay looks compliant. Always check the net pay after deductions against the minimum wage rate.

5. Not Issuing Payslips

Since April 2019, all workers — including casual and zero-hours contract workers — have a legal right to receive a payslip on or before their pay day. Failing to issue payslips is a breach of employment law and can lead to employment tribunal claims.

6. Misclassifying Workers as Self-Employed

If someone works regular hours, uses your equipment, works exclusively for you, and follows your instructions — HMRC may consider them an employee, regardless of what their contract says. Misclassifying an employee as self-employed to avoid PAYE and NI contributions is a serious compliance risk. HMRC can reclaim unpaid tax and NI going back years, with interest and penalties.

7. Not Running Payroll for Directors

Limited company directors who take a salary must run payroll — even if that salary is below the NI threshold. Many new directors assume that because no tax is due, they do not need to process payroll. This is incorrect and can cause issues with HMRC records and state pension entitlements.

✅ SAS Tip

Most of these mistakes are completely avoidable with the right payroll software and a reliable accountant. At SAS Yorkshire, we manage payroll for businesses of all sizes across Yorkshire — handling RTI submissions, auto-enrolment, tax codes, and payslips every pay period so you never have to worry.