A simple payroll error could have a significant effect on someone else’s daily life, and they may even decide to leave your business. Here’s how your payroll mistakes affect employees – and what you can do to prevent payroll errors
Payroll: it’s an important part of any organisation, but one many employees may not think about much – until there’s a problem. This particular business process has hit the headlines recently, but it’s been far from a good news story.
In July 2022, reports emerged that employees of grocery chain Asda were taking out loans, skipping bill payments and using food banks because regular payroll errors meant some had been underpaid by more than £500. Its payroll provider is said to have made 10,806 errors, affecting 5,529 people.
In the same month, an article by The Sunday Times revealed that thousands of employees of fashion and homeware retailer Next had been underpaid after a new payroll system was implemented in February. It was also reported pension contributions had been deducted without being invested in retirement funds.
What can you do to avoid this type of negative coverage for your brand, and how do these mistakes really affect your employees? We investigate the true cost of payroll errors, and how to avoid them happening in the first place.
How payroll errors impact your people
Some payroll mistakes can be more of an issue for your employees – and your organisation – than you may realise. For instance, being underpaid might be just an inconvenience for one colleague but could have a devasting financial impact on someone else, leading to numerous negative repercussions for all involved. Here’s how payroll errors can affect you and your teams.
1. Increased money concerns for employees
Your payroll errors – such as an inaccurate tax payment, underpayment, or late payment, for example – may lead to money issues for your employee. Their pay goes towards living expenses, transport, their mortgage or rent, and savings. Some may depend on their pay coming through correctly each time. So your payroll mistake could lead to an employee missing an important payment, and financial hardship.
2. More stress and poorer health
If you have a poorly-managed payroll, then this can lead to ill effects for your employees. In addition to the financial stress that stems from a delayed or wrong payment, it can cause emotional stress. This, in turn, could lead to a deterioration in someone’s mental health. It will then affect their motivation in wanting to perform well in their role.
3. Reduced productivity
These basic administrative errors could mean a colleague will take this personally, especially if it happens to them regularly. Which, of course, will negatively affect their morale. Low morale will impact on a person’s productivity, and their team spirit. So what does this mean? Ultimately, it could spell problems for your organisation.
4. Losing your best talent
Payroll plays an important part in retaining your employees, which can already be a difficult task – and a serious error can make that even harder. That’s because if a colleague’s salary payment doesn’t go smoothly, it will reduce their trust in you as an employer. A one-off error might be forgivable; repeated errors that cause financial problems will lead to employees looking for a new employer that can be trusted to pay them on time, every time.
5. Poorer brand reputation
Your current and former staff now have numerous channels on which to state the issues they’ve encountered during their time with your business. We’ve already seen that payroll problems at household name employers have hit the national headlines; smaller employers can still face reputational damage due to poor reviews on social media and platforms such as Glassdoor, which potential job applicants may come across when researching your company. The negative comments are more likely to cover basic items such as inadequate and irregular compensation, overworking hours and poor management, for instance – they’re unlikely to be about not having a games table. Develop a poor reputation as a reliable employer, and you’ll struggle to attract talent.
6. Increased costs
If employees decide to leave your brand after a payroll error, especially if this happens on multiple occasions, you’ll need to replace these people with new recruits. This means you’ll have increased costs for recruiting and training these latest additions to your workforce. So your budget will be affected, since you’ll have to spend more in this area because of the higher turnover from payroll errors.
There’s another cost implication from payroll errors, too: penalties. You might have fines to pay and have additional costs if you miss a payroll filing date because of administration issues. Your company will need to contact HMRC to update that month’s employer payment summary, because these payroll mistakes will affect tax deductions – and this also takes time to amend.
7. More time spent on correcting errors
Each of these payroll errors will need to be corrected: your records need to be right, while your employees will need to be paid what they’re due. So that means your payroll staff will need to spend time doing this, rather than working on another task. This could take longer to do than the original payroll work, because it can be difficult to identify errors and resolve them. It could affect your budget and bottom line, too.
How to avoid making payroll errors
Whether you want to fix a fault, or not make any: what’s the best way to avoid payroll errors?
1. Conduct an audit
A full audit is an important step here : regular reviews may be enough to prevent payroll errors, but some mistakes may be more fundamental in their source. Conducting an audit will let you assess your current process and help identify any opportunities to implement a more effective procedure. You’ll need to assess your HR and payroll software systems and practices so you can find any elements that are either old, inaccurate or aren’t secure enough. Carrying out this audit may be enough to find the cause of payroll errors, and possibly other negative activities.
2. Improve communication
Having a regular catch-up with your payroll staff is imperative, especially if their performance means they aren’t completing tasks on time or with accuracy. It’s easy to ignore small errors, but it’s important to analyse them and figure out how to prevent them from occurring again (or turning into bigger problems). By initiating regular performance reviews and giving feedback, your payroll team then has the chance to improve. Don’t forget to celebrate their successes, too; consistently running payroll on time and accurately is an achievement.
3. Check your data
Sometimes these payroll errors occur because of incorrect employee onboarding information. This can be easily rectified by using verification processes for new starters and their managers, so they can confirm their name, national insurance number, bank account details and other relevant information. Your new staff can complete this process online before their start date and verify information with e-signatures.
Don’t forget: your colleagues may experience significant life changes during their time at your company, so will need to update their details for new circumstances that could affect payroll. This may be their marital status, tax deductions, or even just a change of address. Be proactive about encouraging employees to review and amend their personal information; don’t assume they will remember to do so.
Data security is also something you’ll need to consider for payroll. People can steal employee information if you don’t have the correct safeguards in place, and completing payroll manually leaves you vulnerable to fraud. Using an HR solution that’s integrated with your payroll system will create a more secure environment for your people data, so that information is protected and stored safely.
4. Train your staff (or hire an expert)
If you have an in-house payroll team, you’ll need to make sure they are fully trained, with annual updates on changes to legislation. It’s your responsibility to check employee information is correct, even if you use payroll management software to increase efficiency in the process.
You may decide to outsource your payroll if your organisation doesn’t have the capacity to do this itself. The supplier that conducts these tasks on your behalf will employ experts in this area, who’ll know about new laws that will affect your business. Payroll outsourcing companies can help free up valuable time, reduce ongoing costs, and provide you with peace of mind that your employee payroll will be accurate and timely.
Unsure whether to choose in-house or outsourced payroll? Our handy guide will help you decide, or you can learn more about in-house vs payroll outsourcing costs.
5. Eliminate human errors and invest in payroll software
Carrying out payroll tasks manually isn’t just time-consuming : the most common mistakes are human errors that anyone can make. Getting your information from a range of sources can lead to data being miscalculated or missed, and manual collation of data can take a long time.
Using great payroll software is the best way to both prevent and identify errors. The top solutions will have automated features to highlight any issues, bulk processing (so there aren’t manual errors), plus reporting options so you can check and recheck your payroll before payments are made. As well as making your payroll process more efficient and compliant, great payroll software that’s integrated with your central HR system reduces the process’s dependence on human input – increasing its accuracy.
Payroll errors, no matter how small they may be, can have a significant impact on your employees and your business. Not only could you risk affecting productivity and morale, but you could also lose your best talent. It can have various financial implications, too, from higher costs to fines. Your reputation could be at risk, too. So make sure your payroll processes are as accurate and efficient as possible: contact Ciphr now to discuss how our payroll team could help you run payroll on time and accurately, every time.
You can also get an idea of how much you might be able to save by moving to outsourced payroll using Ciphr’s outsourced payroll calculator.
Additional reading: Roundup of payroll changes 2024/25: everything you need to know
This article was first published in November 2023. It was republished in November 2024 for freshness, clarity, and accuracy.