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payroll errors hmrc

HMRC says that some employers are incorrectly processing workplace pension contributions. Why is this a big problem and how can you correct it?

Tax relief

As you’re probably aware, most employers are required to have a workplace pension scheme . Employers collect employees’ contributions from salaries and pass these, with their own contributions, to the pension company. That seems straightforward but HMRC says some employers are getting it wrong and are underpaying PAYE.

Trap. As an employer you’re liable for any shortfall in PAYE. You can recover it from employees but this can be tricky, especially if an employee has left. This will leave you to foot the PAYE bill.

First pitfall

Tax relief for pension contributions is allowed through either a“net pay” or “relief at source” arrangement. If net pay applies you must deduct the full amount of employees’ contributions from their gross pay. With relief at source you must deduct a reduced contribution. Some employers are using the relief at source field in their payroll software when the net pay scheme should apply. This results in insufficient PAYE tax being deducted from the employees’ pay.

Tip. The pension company determines which method of tax relief should be used. Contact it if you’re not sure which method applies.

Second pitfall

This occurs if you have a salary sacrifice arrangement for pension contributions, i.e. your employees accept a lower salary in exchange for you paying extra pension contributions for them. According to HMRC, some employers continue to show the contributions in their payroll software as coming from “employees” instead of “employers”. This results in the employees concerned receiving double tax relief.

Tip. Make sure your payroll manager is using the correct method. If an error has been made in the current tax year it can be corrected without notifying HMRC, but if it relates to an earlier year HMRC must be notified.

The errors cause underpayments of PAYE. As an employer you’re liable for the shortfall. Check with the pension company whether to use “net pay” or “relief at source” for contributions and make sure your payroll reflects this.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.

20th Sep 2023 20:10

HMRC Payroll

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