Payroll Errors

HMRC have identified payroll errors where some employers are incorrectly processing workplace pension contributions resulting in PAYE tax being underpaid.

Under auto-enrolment there are two methods of calculating pension scheme contributions:

Relief at source – where the pension contribution is reduced by 20% and deducted from net pay.
Net pay arrangement – where the pension contribution is deducted in full from the gross pay before tax is calculated.

HMRC found that some employers are using the relief at source field in their payroll software when the net pay arrangement should be used. This results in insufficient PAYE tax being deducted from the employees’ pay. (The pension provider determines which method of tax relief should be used.)

Another area HMRC found some employers have made errors is with a salary sacrifice arrangement for pension contributions. Employees give up a portion of their salary in exchange for the employer paying extra pension contributions for them. However, HMRC found some employers were showing the contributions in their payroll software as coming from employees instead of employers. This results in the employees receiving double tax relief.

It should be noted the employer is liable for any shortfall in PAYE. It can be recovered from employees, but this can be tricky, especially if an employee has left. This will leave the employer to foot the bill.

It is important to apply the correct method to calculate and deduct pension contributions. You should contact your pension provider if you’re not sure which one you should be using.