Introduction

Payroll management in the UK is a complex but critical function for any employer. With ever-evolving legislation from HMRC and The Pensions Regulator, even minor oversights can lead to significant penalties, unhappy employees, and reputational damage. This comprehensive guide highlights the 10 most common payroll mistakes UK employers make and provides actionable strategies to avoid them, ensuring compliance and smooth operations for the 2026/27 tax year.

1. Incorrect Tax Codes

An employee's tax code determines how much Income Tax is deducted from their pay. Using an incorrect tax code can lead to employees paying too much or too little tax, causing issues for both the employee and HMRC. For the 2026/27 tax year, the standard Personal Allowance is £12,570, corresponding to a tax code of 1257L for most employees in England and Northern Ireland [1]. Employers must ensure they use the correct tax code for each employee to avoid discrepancies and potential penalties.

How to Avoid:

• Always use the tax code provided by HMRC on P45s or official tax code notices (P6, P9).
• Ensure new employees provide a P45 from their previous employer. If a P45 is not available, use the HMRC Starter Checklist to determine the correct tax code.
• Regularly check HMRC notifications for tax code changes and update your payroll software promptly. Many modern payroll systems integrate directly with HMRC to automate these updates.
• Communicate with employees about their tax codes and advise them to contact HMRC if they believe their code is incorrect.

2. Late RTI Submissions

Real Time Information (RTI) submissions, primarily Full Payment Submissions (FPS), must be sent to HMRC on or before the payday. This ensures HMRC has up-to-date information on employee pay and deductions. Late submissions are a common compliance issue and trigger automatic penalties [2].

HMRC Late Filing Penalties (2026/27)

How to Avoid:

• Establish a strict payroll schedule and adhere to it. Ensure payroll is processed and submitted well in advance of the payday.
• Ensure your payroll software is up-to-date and correctly configured for RTI submissions. Many software solutions offer automated submission features.
• Submit an Employer Payment Summary (EPS) if no employees are paid in a tax month, or if you are reclaiming statutory payments.
• Consider setting up reminders or automating submissions through advanced payroll software to minimise human error.

3. Not Enrolling Eligible Workers in Pension

Under UK auto-enrolment rules, employers must automatically enrol eligible jobholders into a workplace pension scheme and make contributions. Eligibility is based on age (16-74), working in the UK, and earning above the earnings trigger. For the 2026/27 tax year, the earnings trigger for automatic enrolment remains £10,000 annually [3]. The qualifying earnings band, on which minimum contributions are calculated, is between £6,240 and £50,270 annually [3].

How to Avoid:

• Regularly assess your workforce for eligibility, especially new hires and those turning 22 or reaching the earnings trigger.
• Ensure your payroll software is capable of handling auto-enrolment calculations, communications, and re-enrolment duties.
• Keep accurate records of opt-ins, opt-outs, and contributions made to the pension scheme.
• Stay informed about changes to auto-enrolment thresholds and duties by regularly checking TPR guidance.

4. Incorrect National Insurance (NI) Categories

National Insurance contributions (NICs) are determined by an employee's NI category letter, which reflects their age, employment status, and other factors. Using the wrong category can lead to incorrect NICs being paid by both the employer and employee, impacting their take-home pay and future state benefits [1]. For 2026/27, the standard employee rate for Category A is 8% on earnings between the Primary Threshold (£12,570) and Upper Earnings Limit (£50,270), and 2% above the UEL. The standard employer rate is 15% above the Secondary Threshold (£9,000) [1].

How to Avoid:

• Verify the correct NI category for each employee, especially for new hires, those under 21, apprentices, or employees in specific zones (e.g., Freeports) who may have different rates.
• Regularly review employee NI categories, particularly if their circumstances change (e.g., turning 21 or 25, or starting an apprenticeship).
• Utilise payroll software that helps assign the correct NI category based on employee data and automatically applies the correct rates.
• Consult HMRC guidance (CWG2) for detailed information on NI categories and rates [4].

5. Not Paying National Minimum Wage (NMW)

All eligible workers in the UK must be paid at least the National Minimum Wage (NMW) or National Living Wage (NLW), depending on their age. The rates are updated annually, typically in April. For April 2025 to April 2026, the NLW for those aged 21 and over is £12.21 per hour [1]. Failing to pay the correct minimum wage is a serious offence.

National Minimum Wage Rates (April 2025 - April 2026)

How to Avoid:

• Stay informed about the latest NMW/NLW rates and ensure your payroll system is updated immediately when changes occur.
• Regularly review employee pay rates, especially for those on or near the minimum wage, and conduct internal audits.
• Be aware of common NMW breaches, such as deducting costs for uniforms, tools, or accommodation that effectively bring pay below the minimum.
• Ensure all working time, including training, travel between work sites, and opening/closing duties, is correctly accounted for when calculating pay.

6. Incorrect SSP/SMP Calculations

Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) are legal entitlements for eligible employees. Calculating these correctly can be complex, involving qualifying conditions, average weekly earnings, and specific payment periods. For 2026/27, the standard weekly rate for SSP, SMP, SPP, SAP, ShPP, SPBP, and SNCP is £187.18, or 90% of average weekly earnings if lower (for SMP/SAP first 6 weeks, it's 90% of AWE) [1].

Statutory Payments Weekly Rates (2026/27)

How to Avoid:

• Familiarise yourself with the eligibility criteria and calculation rules for all statutory payments. HMRC provides detailed guidance and calculators.
• Utilise HMRC's online calculators or reliable payroll software to ensure accurate calculations. These tools are regularly updated with the latest rates and rules.
• Keep detailed records of absences, average weekly earnings, and all statutory payments made.
• Understand the recovery rules for statutory payments from HMRC, as employers can reclaim a percentage of these payments.

7. Not Issuing P60s by 31 May

Employers must provide a P60 to every employee working for them on 5 April (the last day of the tax year). The P60 summarises an employee's total pay and deductions for the tax year and must be issued by 31 May following the end of the tax year [5]. This document is crucial for employees for various purposes.

How to Avoid:

• Mark the 31 May deadline in your calendar as a critical payroll year-end task.
• Ensure your payroll year-end process includes P60 generation and distribution as a priority.
• Use payroll software that automates P60 generation and can distribute them electronically, securely, and efficiently.
• Communicate clearly with employees about when and how they will receive their P60, and provide guidance on what to do if they haven't received it.

8. Missing P11D Deadline (6 July)

Employers must report expenses and benefits provided to employees (that are not processed through payroll) on forms P11D and P11D(b). The deadline for submitting these to HMRC is 6 July following the end of the tax year [6]. This includes benefits in kind such as company cars, private medical insurance, and interest-free loans.

How to Avoid:

• Maintain meticulous records of all expenses and benefits provided to employees throughout the tax year.
• Understand what needs to be reported on P11D and what can be payrolled (often a more efficient option).
• Submit P11D and P11D(b) forms electronically via HMRC's online services or through payroll software.
• Ensure Class 1A NICs are paid by the deadline to avoid additional penalties and interest.

9. Incorrect Expense Reimbursements

Reimbursing employees for business expenses seems straightforward, but errors can arise if expenses are not legitimate business costs, are not adequately evidenced, or are treated incorrectly for tax and National Insurance purposes. For example, paying mileage allowance above HMRC's approved rates without reporting it can lead to issues [1]. For 2026/27, the approved mileage rate for cars is 45p per mile for the first 10,000 business miles, then 25p per mile thereafter [1].

How to Avoid:

• Establish a clear, comprehensive expense policy that aligns with HMRC rules and communicate it effectively to all employees.
• Require employees to provide receipts and clear justifications for all expenses claimed.
• Understand HMRC's approved mileage rates and advisory fuel rates for company cars, and ensure your reimbursement policy adheres to these.
• Use expense management software to streamline the process, automate compliance checks, and ensure proper record-keeping.

10. Not Keeping Payroll Records for 3 Years

HMRC requires employers to keep accurate payroll records for a minimum of three years from the end of the tax year they relate to [1]. These records include payslips, P45s, P60s, expense records, and details of statutory payments. From April 2026, employers will be legally required to retain holiday pay and annual leave records for a minimum of six years [7].

How to Avoid:

• Implement a robust, organised record-keeping system, whether digital or physical, ensuring all payroll-related documents are securely stored.
• Ensure all payroll-related documents are easily retrievable for HMRC inspections or internal reviews.
• Regularly back up digital records to prevent data loss.
• Be aware of specific record retention periods, such as the upcoming six-year requirement for holiday pay records.

Conclusion

Navigating UK payroll can be challenging, but by understanding and proactively addressing these common mistakes, employers can significantly reduce their risk of penalties and ensure a compliant, efficient payroll process. Investing in reliable payroll software and staying informed about legislative changes are key steps towards payroll peace of mind.

References

1. GOV.UK: Rates and thresholds for employers 2025 to 2026
2. GOV.UK: What happens if you do not report payroll information on time
3. The Pensions Regulator: Earnings thresholds
4. GOV.UK: 2025 to 2026: Employer further guide to PAYE and National Insurance contributions
5. JSB Accountants: FPS & P60 Deadlines Explained
6. Ross Martin: P11D deadline 2025-26
7. Blick Rothenberg: Payroll and key statutory changes from April 2026