4 in 10 small businesses have been penalised for paying staff wrong

UK small businesses are being subject to penalties after making mistakes in payroll runs, new research has found. The data suggests evermore complex tax regulations are turning payroll compliance into a considerable risk for SMEs.

In a survey of 1,000 small business leaders, carried out by payroll software Employment Hero, 84% said they have made payroll errors, inadvertently impacting employees.

It’s potentially, also, hurting cash flow. Nearly half (40%) of this group have incurred penalties due to payroll issues, with more than a third having faced significant fines amounting to thousands of pounds.

In part, the issue is due to a wealth of employer costs introduced this April. Employment Hero UK Managing Director Kevin Fitzgerald comments: “With the rising National Minimum Wage, increased National Insurance Contributions, and tougher enforcement of employment law, there’s never been a more complicated time to be a small employer.”

Payroll errors are widespread

According to Employment Hero, over half of small business leaders surveyed reported making payroll errors more than once. The most common errors committed were:

• Calculating wages incorrectly (48%)
• Late/missing payments (38%)
• Calculating correct hours (36%)
• Incorrect tax calculations (27%)

Within Human Resources (HR), any mistakes that can impact a person’s financial wellbeing or livelihood must be taken seriously. Repeat payroll errors can erode trust among employees, leading to demotivation and a decline in productivity.

The supermarket giant, Asda found out firsthand what the fallout can be from a payroll blunder. Last March, an IT glitch resulted in nearly 10,000 workers receiving incorrect pay, leaving thousands either missing two weeks’ wages or reimbursing the company.

Asda employees then participated in a 48-hour strike in May following what they described as a “litany of workplace issues”.

Payroll expertise top concern for SMEs

Part of the issue is that many SMEs are still relying on outdated processes to manage their payroll. Manual processing is common, with Employment Hero finding that 31% still rely on spreadsheets to calculate wages (44% among those with fewer than 20 employees).

HMRC has introduced various initiatives to try and digitalise the tax process for SMEs, as part of its Transformation Roadmap. They include a new online Pay As You Earn (PAYE) service, for 30 million taxpayers to check and update their income, reliefs, and expenses.

However, last August, it was forced to delay plans to require employers to provide more detailed employee hours data via RTI payroll software until at least April 2026, amid concerns from employers they would not have time to implement the change.

As reporting requirements evolve, 70% of SMEs say they are worried about keeping up with payroll technology, reports Employment Hero. 38% say they are also held back by limited expertise, while 36% say they don’t have time to manage the process properly.

The answer for many is to outsource payroll to a third-party provider. However, the cost of payroll outsourcing can quickly climb as the business grows and takes on more staff.

Employment Hero found that small businesses are spending an average of £2,724 a month to outsource payroll – ranging from £1,625 among smaller SMEs to £3,408 for larger ones.

Employment Hero launches free payroll

With payroll outsourcing costs growing, and tax obligations becoming more complicated, many small businesses are turning to HMRC-approved payroll systems to manage staff payments.

As a DIY alternative, payroll software allows companies to stay compliant and reduce costs by managing payroll in-house rather than paying third-party fees. Some brands even often free payroll tiers to help firms get their foot on the payroll ladder.

Employment Hero has announced it will begin offering free payroll software to all UK businesses. As part of this commitment, the company has also launched a new competition offering £5,000 and a one-on-one payroll consultation. Businesses that sign up to the new, free plan before 31 October 2025 will be automatically entered into the draw.

Fitzgerald adds: “Payroll has become a compliance minefield. SMEs are trying to do the right thing, but outdated systems and limited resources are costing them dearly.

“No small business should face fines just for lacking the right tools – and that’s why we’re making payroll free. It’s too fundamental to get wrong. If we want SMEs to power growth and employment, we need to level the playing field – starting with payroll.”