The Cost of Getting It Wrong: HMRC Penalties for Payroll Errors

Managing payroll is about more than just paying people on time—it’s about getting it right. Inaccuracies, delays, or failures to comply with UK payroll legislation can lead to significant penalties from HMRC (His Majesty’s Revenue and Customs). Whether you’re an employer, payroll professional, or training new staff, understanding the risks is essential.

Below, we break down the key penalties you can face for payroll mistakes—and how to avoid them.

1. Late or Incorrect RTI Submissions

Real-Time Information (RTI) submissions must be sent to HMRC on or before the date employees are paid. Errors or delays can trigger penalties.

Penalty thresholds:

• 1–9 employees: Usually no penalty for first default in a tax year.

• 10–49 employees: £100 per month late

• 50–249 employees: £300 per month late

• 250+ employees: £400 per month late

Additional fines:

• Up to 100% of PAYE owed if HMRC believes there’s a deliberate attempt to withhold information.

Tip: Use payroll software with automated RTI submissions and set reminders before every payday.

2. Late Payment of PAYE, NICs, and CIS Deductions

When employers don’t pay their PAYE liabilities on time—including National Insurance Contributions (NICs), Student Loan deductions, and Construction Industry Scheme (CIS) payments—they face interest and penalties.

Penalties:

• 1–3 late payments in a year: 1% of the unpaid amount

• 4–6: 2%

• 7–9: 3%

• 10+: 4%

Plus interest is charged daily from the due date until payment is made.

Tip: Align your internal payroll approval process to allow time for payment before the 22nd of each month (or 19th if paying by post).

3. National Minimum Wage (NMW) and National Living Wage (NLW) Breaches

This is where penalties can be especially steep—and reputationally damaging. If you underpay any worker, even due to an administrative error, you can face both financial and naming-and-shaming consequences.

Common mistakes include:

• Not accounting for unpaid work time (e.g. prep or training)

• Deductions bringing pay below NMW

• Rounding hours or pay incorrectly

• Failure to increase pay after a birthday milestone

Penalties:

• Up to 200% of arrears owed (minimum £100, maximum £20,000 per worker)

• Public naming for amounts over £500 in arrears

• Requirement to repay all underpayments to workers

Tip: Review pay regularly—especially around birthdays and minimum wage rate changes each April. Keep accurate timekeeping and deduction records.

4. P11Ds and Benefits in Kind (BIK)

Benefits such as company cars, private health insurance, and loans must be reported annually via P11D forms—or through payrolling benefits.

Penalties:

• Late filing: £100 per 50 employees per month

• Incorrect return: Up to 100% of the tax lost

• Failure to notify HMRC of changes: Subject to further penalties and interest

Tip: Keep detailed records and communicate changes to benefits promptly.

5. Auto Enrolment Pension Failures

Employers must automatically enrol eligible workers into a pension scheme and contribute appropriately. Mistakes here can lead to enforcement action from The Pensions Regulator (TPR), not HMRC—but the cost is still very real.

Penalties:

• Fixed penalty: £400

• Daily escalating penalty: £50–£10,000 per day depending on number of employees

Tip: Regularly audit pension status, especially for starters, leavers, and those turning 22 or reaching the £10,000 threshold.

6. Construction Industry Scheme (CIS) Errors

If you’re a contractor in construction, submitting monthly CIS returns and paying subcontractors correctly is mandatory.

Penalties for late returns:

• 1 day late: £100

• 2 months late: £200

• 6 months late: £300 or 5% of the CIS deductions (whichever is higher)

• 12 months late: £300 or 5% again

• More than 12 months late: up to £3,000

Tip: Assign a dedicated CIS review step into your payroll schedule.

7. Failure to Keep Payroll Records

HMRC expects employers to keep PAYE and payroll records for at least 3 years.

If you don’t:

• HMRC may estimate what you owe

• You could face penalties of up to £3,000

Tip: Use secure cloud-based payroll software or regular backups to keep accurate digital records.

8. Deliberate Misreporting and Fraud

If HMRC believes a mistake was deliberate—such as misclassifying an employee as a contractor, or hiding pay—they can apply civil evasion penalties or even pursue criminal prosecution.

Penalties:

• Up to 100% of tax lost for deliberate errors

• 200% or more in serious fraud cases

• Directors may become personally liable

Tip: Ensure all payroll staff are trained in ethics and compliance—and consider regular independent audits.

Final Thoughts: Mistakes Cost More Than Money

HMRC penalties can quickly spiral into thousands of pounds—but worse, they damage employee trust and your business reputation. Whether you run payroll in-house or outsource, compliance isn’t optional.

At TCW and PAYIQ, we specialise in helping businesses and payroll professionals stay ahead of legislation, build strong internal processes, and reduce risk through training and upskilling.

Need help or a payroll health check?

Contact us today to audit your payroll practices, train your team, or explore our learning programmes.