Payroll Audits: Identifying and Fixing the Most Frequent Errors During Audits
Table of Contents
Why are Payroll Audits Important?
Common Payroll Errors Uncovered During Audits
1. Incorrect National Insurance (NI) Table Letters
2. Incorrect Treatment of Pensions
3. Errors in Calculating Mid-Month Starters, Leavers, and Contract Changes
4. Failure to Assess Employees for Automatic Enrolment
5. Incorrect Application of Tax Codes
Practical Steps to Strengthen Payroll Auditing
Final Thoughts on Payroll Audits
You've probably heard the saying, "Happy employees create a happy workplace." The bottom line is, it’s all about pay! Employees who are paid correctly and accurately are happy employees, and for schools, happy employees result in better outcomes for students. And at the forefront of ensuring accuracy is payroll audits.
Payroll audits are essential for ensuring the accuracy and compliance of payroll processes. Errors in payroll can lead to significant issues for both employees and employers, including financial losses, legal problems, and employee dissatisfaction.
In this blog post, we will explore some of the most common payroll errors that I have uncovered during audits and will provide actionable steps to overcome them. I hope that by identifying these potential errors and implementing the suggested solutions, you can maintain a smooth and error-free payroll system.
Why are Payroll Audits Important?
Payroll audits are a critical process for any organisation, ensuring that payroll operations are accurate, compliant, and transparent. While it may seem like an administrative task, its importance cannot be overstated. Here are the key reasons as to why payroll auditing is essential:
Ensuring Compliance. Payroll is governed by complex and ever-changing rules, from tax codes and National Insurance contributions to pension auto-enrolment regulations. Mistakes in these areas can result in costly fines, penalties, or legal challenges. Auditing ensures compliance with UK laws and keeps organisations on the right side of HMRC and other regulatory bodies.
Avoid Financial Losses: Errors in payroll calculations, such as overpayments, underpayments, or incorrect deductions, can directly impact your company’s bottom line. Payroll audits help identify discrepancies early and before they escalate, reducing the risk of financial losses.
Build Employee Trust: Employees expect to be paid accurately and on time. Payroll errors can damage trust and reputation, decrease morale, and lead to workplace dissatisfaction. Auditing reinforces confidence by demonstrating a commitment to fairness and accuracy of your payroll.
Identifying Process Improvement: Audits aren’t just about finding errors; they’re opportunities to uncover inefficiencies and weaknesses in payroll systems. By identifying areas for improvement, organisations can optimise their processes, reduce the likelihood of future errors occurring, whilst also saving time and resources.
Peace of Mind: External inspections such as from HMRC or The Pensions Regulator can happen unexpectedly. Regular payroll audits ensure your records are accurate, compliant, and ready for scrutiny, giving you peace of mind should an inspection arise.
Audits are not just about finding errors; they are opportunities to strengthen your payroll system and ensure it operates efficiently and accurately. By proactively addressing payroll issues, you can create a more reliable and transparent payroll process, ultimately benefiting both employees and the organisation as a whole.
Common Payroll Errors Uncovered During Audits
In this section, we'll delve into the most frequent payroll errors that I encounter during audits. Understanding these common pitfalls and knowing how to tackle them can make a significant difference in maintaining an accurate and compliant payroll system.
Without further ado, let's dive in and explore these errors so you can ensure your school's payroll (and any payroll really) process operates smoothly and efficiently.
1. Incorrect National Insurance (NI) Table Letters
The Problem: National Insurance table letters determine the amount of National Insurance Contributions (NICs) that employees and employers must pay. Using the wrong table letter can result in overpayments, underpayments, and compliance issues. For instance, if an employee is under 21 or an apprentice, they may qualify for reduced NICs. Failing to apply the correct letter could lead to unnecessary costs for the employee or penalties imposed by HMRC.
How to Overcome:
Regularly Validate NI Table Letters: Regularly check that employees' National Insurance (NI) table letters are accurate by cross-referencing them against your employee records. Ensure dates of birth are correct, and use the official NI category letter rates on the HMRC website to identify the correct table letters. Most employees will fall under NI letter A, while those under 21 should be assigned NI letter M, or letter H if they are apprentices under 25. Employees over state pension age should be assigned NI letter C.
Utilise Payroll Software: Many payroll systems can generate NI validation reports for each payroll cycle. These reports flag discrepancies, allowing you to address inconsistencies early on.
2. Incorrect Treatment of Pensions
The Problem: Pensions are frequently a source of payroll errors, particularly with schemes like Teachers’ Pensions and The Local Government Pension Scheme. Each scheme's unique rules can lead to various issues. These mistakes can result in employee grievances and, in some cases, financial penalties for you as the employer due to incorrect application of the scheme rules. Some common issues I regularly encounter include:
Miscalculating employee banding percentages for both the Teachers Pensions scheme and the Local Government Pension Scheme.
Incorrectly deducting pension on elements that should not be pensioned and vice versa. First Aid payments for example are considered non-pensionable under the Teachers Pensions scheme, whilst for Local Government Scheme this is considered pensionable.
Not applying assumed pensionable pay (APP) for employees in the Local Government Pension Scheme when on reduced pay (sickness or injury, relevant child-related leave or reserve forces leave).
How to Overcome:
Understand Scheme Rules: Familiarise yourself with the scheme rules of each pension scheme you manage and ensure that you are operating deductions per these rules. One particular case I came across, the clients payroll provider was operating the scheme incorrectly by operating the Teachers Pensions Scheme as relief at source and not under a net pay arrangement, thus, resulting in overpayments of PAYE for staff.
Regular Reviews: Conduct regular checks to ensure contributions align with pension scheme requirements. Perform regular audits to ensure that contributions are being correctly calculated and deducted according to the scheme's rules. Personally, I would advise checking the deductions each payroll cycle by multiplying the pensionable pay by twelve and seeing where the annualised earnings fall within the relevant pension contribution bandings for the Teachers’ Pensions and The Local Government Pension Scheme. This is just a quick check, any discrepancy would need to be looked at. For example, if an employee left mid-way through a month and received reduced pay, adjustments would be required under Teachers' Pensions to correct the banding. However, for the Local Government Pension Scheme, the employee percentage rate would remain unchanged.
3. Errors in Calculating Mid-Month Starters, Leavers, and Contract Changes
The Problem: Handling employees who join, leave, or change roles mid-month can be challenging. Errors in these calculations can lead to incorrect payments and potential disputes. Errors often arise from:
Miscalculating pro-rata payments.
Applying incorrect end dates.
Overlooking contractual obligations.
How to Overcome:
Refer to Employment Contracts: Always base calculations on the terms outlined in employment contracts or HR handbooks. Verify that the calculations are in line with the terms of the employment contracts and reflect any recent changes.
Verify Payroll Adjustments: Cross-check pay calculations against contractual terms for starters, leavers, and employees with changing hours or roles.
Audit Your Processes: Regularly audit your payroll processes to ensure they align with contractual terms and legal requirements. Do not assume that current practices are correct without verification.
4. Failure to Assess Employees for Automatic Enrolment
The Problem: While automatic re-enrolment occurs every three years, employers are required to assess their workforce for pension eligibility during every payroll cycle. Failing to do so can result in non-compliance with auto-enrolment regulations with The Pensions Regulator imposing fines.
How to Overcome:
Assess Every Payroll Cycle: Ensure that all employees are assessed for automatic enrolment in each pay period. This continuous assessment helps maintain compliance and prevents any potential penalties for non-compliance. This includes checking age, earnings thresholds, and employment status.
Maintain Documentation: Keep clear records of your assessment process and outcomes. These records can be invaluable during audits or in the event of an inspection by The Pensions Regulator.
5. Incorrect Application of Tax Codes
The Problem: Tax code errors are common in payroll, especially when changes are processed manually. Issues such as failing to apply a tax code update from HMRC or misapplying emergency tax codes can lead to employees paying too much or too little tax.
How to Overcome:
Check Issued Tax Codes: Regularly cross-check tax codes issued by HMRC with your payroll records. Ensure that any updates are correctly applied.
Automate Where Possible: If tax codes are currently applied manually, consider automating this process within your payroll system. Automation can significantly reduce the likelihood of errors and ensure consistent application of tax codes. To do this, look at integrating your payroll system with HMRC’s Government Gateway service to receive automatic updates of tax codes.
Practical Steps to Strengthen Payroll Auditing
To conduct effective payroll audits, consider the following tips:
Establish a Regular Schedule: Set a regular schedule for payroll audits, such as quarterly or biannually, to ensure consistency and thoroughness.
Involve Key Stakeholders: Include key stakeholders, such as HR, finance, and payroll personnel, in the audit process to ensure a comprehensive review.
Use Audit Checklists: Develop and use audit checklists to ensure that all critical areas are reviewed during the audit.
Document Findings: Document any findings, discrepancies, and corrective actions taken during the audit. This documentation can serve as a reference for future audits and help track improvements.
Follow Up on Issues: Ensure that any identified issues are promptly addressed and resolved. Follow up on corrective actions to verify their effectiveness.
Final Thoughts
Payroll errors can be costly and time-consuming to correct, but regular audits and proactive measures can minimise these issues.
Regular payroll audits not only improve accuracy and compliance but also contribute to employee satisfaction, financial savings, and overall process improvement. By implementing the strategies discussed in this blog post, you can enhance the accuracy and reliability of your payroll, ensuring that both your employees and your organisation benefit from a well-managed payroll process.
By investing in payroll auditing today, you safeguard your business against costly mistakes tomorrow. I hope this guide has empowered you to take back control of your payroll operations, improve accuracy, and ensure compliance with confidence.
If you’ve found this post useful or if you’ve encountered an issue during an audit and were able to resolve it using these tips, please share your experience in the comments—I’d love to hear your feedback.
How I can help with your payroll audit
For tailored support, explore my payroll auditing service. I use a comprehensive checklist to give your payroll a thorough health check-up, identifying issues and ensuring everything is running smoothly. Whether you're addressing specific challenges or seeking reassurance that your payroll processes are efficient and compliant, I'm here to assist. Together, we can enhance accuracy, streamline operations, and ensure compliance. Get in touch today to learn more.
