Payroll has always been a moving target for business owners, but 2025 has brought some of the most significant changes in recent years.
From the sharp rise in employer National Insurance contributions and lower thresholds, to increases in the National Minimum and Living Wage, alongside new statutory entitlements like neonatal leave, the cost and complexity of employing staff has never been higher. Add to that adjustments to statutory sick pay, expanded Employment Allowance, and stricter reporting requirements on the horizon, and it’s easy to see why many businesses are feeling overwhelmed.
Yet even amidst this whirlwind of legislative change, data shows that the majority of business owners are still getting payroll wrong. A recent survey found that 84% of small business owners admit to making payroll errors, while 40% have faced penalties as a direct result (Simply Business UK). The most common slip-ups include miscalculating wages, late or missing payments, and getting hours wrong.
While the data doesn’t speak for every business owner in country, what is clear is that not only is payroll complicated, but it’s costly, compliance-risky and fraught with human error. This article is here to cut through the noise. We’ll highlight the most common payroll pitfalls companies face, explain how the latest changes could impact your bottom line, and share practical steps to keep your business compliant while protecting profitability in an ever-shifting landscape.
Miscalculating wages and deductions
Perhaps the most common payroll mistake is miscalculating wages and deductions. Payroll isn’t just about multiplying hours by an hourly rate—there are layers of complexity with overtime, holiday pay, bonuses, pensions, and statutory deductions. A wrong tax code, an error in applying National Insurance thresholds, or even forgetting to factor in a small allowance can throw off an employee’s pay. In 2025, this risk is even greater as National Minimum and Living Wage rates have increased sharply, and underpayments can quickly result in HMRC fines or even tribunal claims. Beyond compliance, miscalculated pay damages employee trust, lowers morale, and can be costly to correct retroactively. The best way to avoid these errors is to use payroll software that automatically updates with new tax codes and statutory rates, while also running test calculations and spot-checking payslips against contracts to confirm accuracy.
Missing PAYE and RTI deadlines
Late submissions to HMRC are another frequent and expensive payroll pitfall. Employers are required to report payroll information via Real Time Information (RTI) “on or before” payday, but many small businesses miss this deadline. Even one late submission can trigger fines, while repeated issues may invite closer inspection from HMRC. A common oversight is failing to send an Employer Payment Summary (EPS) in periods where no wages are paid—business owners often assume nothing is required, only to be penalised later. These mistakes are avoidable with proper scheduling and automation. Building payroll deadlines into a monthly calendar, setting reminders, and using software that can automate RTI submissions ensures compliance. It’s also wise to nominate a backup person who can process payroll in case the primary administrator is unavailable.
Poor record-keeping
HMRC requires businesses to keep complete payroll records for at least three years, but many employers fall short. Timesheets, overtime logs, holiday entitlements, and proof of statutory payments are often stored inconsistently—or worse, not retained at all. Without this paper trail, employers are vulnerable in the event of an audit or employee dispute. For example, if an employee claims they were underpaid for overtime six months ago and records are incomplete, the employer may have no defence. Poor record-keeping also slows down day-to-day processes, as staff must scramble to verify information. To prevent these issues, employers should adopt digital record-keeping systems that centralise payslips, timesheets, and statutory documentation. Regular audits of payroll records can also highlight gaps before they become compliance problems.
Misclassifying workers
Another costly mistake is misclassifying staff as self-employed contractors when, in practice, they meet the criteria for employees. Employment status is judged on factors like supervision, control, and regular working hours, and if HMRC decides someone has been wrongly classified, the employer can be hit with backdated tax, NICs, penalties, and interest. This is especially relevant under IR35 rules, which have tightened the definition of employment status. Many small businesses rely heavily on freelancers for flexibility, but failing to check employment status can have serious consequences. Misclassification also denies workers their statutory rights, such as holiday pay or sick leave, exposing the business to potential legal claims. Employers can reduce the risk by reviewing contractor arrangements regularly, using HMRC’s CEST (Check Employment Status for Tax) tool, and seeking legal or tax advice before entering long-term agreements.
Failing to communicate with employees
Even when payroll is calculated accurately and on time, poor communication can cause as many problems as technical errors. Employees have a legal right to receive itemised payslips, but they also need to understand them. Confusion about deductions—whether pensions, student loans, or childcare vouchers—can quickly erode trust. Staff may assume errors have been made, even when everything is correct, simply because changes weren’t explained. This creates unnecessary disputes, undermines morale, and increases HR workload. Employers who take time to explain payslips, provide clear guidance, and respond quickly to payroll queries not only stay compliant but also build stronger relationships with their teams. Simple measures like training managers to answer payroll questions, issuing clear explanatory notes alongside payslips, and communicating upcoming changes well in advance can prevent these problems entirely.
Payroll in 2025 is more complex, more regulated, and more closely scrutinised than ever before. With higher National Insurance costs, rising wage rates, and new statutory entitlements, the margin for error has never been smaller. Yet the reality is that most payroll mistakes aren’t the result of malice or neglect—they stem from small oversights that snowball into costly problems. Miscalculations, missed deadlines, poor records, worker misclassification, and weak communication can each undermine compliance and employee trust in different ways, but they all share a common theme: they’re preventable.
By investing in the right systems, staying informed about changes, and embedding payroll as a core part of good business management—not an afterthought—employers can transform payroll from a recurring headache into a process that supports both compliance and staff satisfaction. For many businesses, that means taking time now to review their payroll processes, identify weak spots, and decide whether to strengthen in-house systems or seek professional payroll support.
In short, when payroll is handled properly, it doesn’t just keep HMRC satisfied—it builds trust with your workforce and strengthens the foundation of the whole business. The message for 2025 is clear: take payroll seriously, stay proactive, and don’t be afraid to get expert help when you need it.
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