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The pitfalls of payroll

Payroll is becoming an increasingly complex process.   Unless your business has no choice as regards whether or not it should manage its payroll ‘in-house’, consideration should be given and a decision made as regards potentially outsourcing this important function.

Fundamental to making such a decision is not only the increasing complexity and associated risks of getting things wrong, but the associated cost and practicality of properly supporting and maintaining the professional competence of internal staff members managing and processing the payroll.

fountain pen on graph

It is fairly easy to appreciate the potential consequences of getting payroll wrong; the most obvious of these being understandably upset and demotivated staff members and fines for non-compliance with HMRC requirements. 

So what sort of things can go wrong? Here are just a few of the most common ones:

  • Not making adjustments correctly – such as where a pay rise, overtime or a bonus is to be applied.
  • Getting the details wrong – sick pay, pension payments, expenses and other elements in a particular pay period may each need to be treated differently for Income Tax and National Insurance purposes.
  • Missing the pay day deadline – a cardinal sin and with very significant potential detrimental implications for staff members.
  • Continuing to pay an employee who has left the business – requiring the recovery of payments which can often be costly at least in terms of time.
  • Using an incorrect or out of date Tax Code, thereby causing the tax deduction to be incorrect. This has become even more important to get right since HMRC introduced Real Time Information (RTI) into the PAYE process. This requires that for each pay period (whenever staff are paid), a fully accurate extract of the payroll data is required to be submitted online and which must correspond to the actual PAYE payment made by the employer for that pay period. The introduction of RTI has been the most recent catalyst for many more employers deciding to outsource their payroll function.

Another development which is set to become the next catalyst for a further shift to outsourcing payroll is the need to comply with Pensions Auto Enrolment regulatory requirements. Whilst this does not strictly have to be a payroll function it is increasingly being seen that more often than not those processing the payroll are better placed than anyone else in an organisation to carry out the necessary administration to meet these new demands. External payroll outsourcers are also increasingly being seen to be offering this support to employers as an additional, added value service to also processing their payroll.