PAYE Audits: What You Need to Know (and How to Avoid Costly Mistakes!)
If you’re an employer, you’ve got responsibilities when it comes to PAYE (Pay As You Earn). But did you know HMRC can check whether you’re doing it right? That’s where a PAYE audit comes in.
This is when HMRC investigates how you’re handling PAYE and National Insurance deductions, making sure you’re following the rules. Get it wrong, and you could face penalties, backdated tax bills, or even legal trouble.
So, how do PAYE audits work, and what should you do if HMRC comes knocking? Let’s break it all down.
What Is a PAYE Audit?
A PAYE audit (also called a PAYE compliance check) is an investigation into whether an employer is meeting all its obligations under PAYE rules. HMRC will check:
- Whether you’re operating PAYE correctly
- If you’re deducting the right amount of National Insurance Contributions (NICs)
- How you’re handling Benefits in Kind (company cars, medical insurance, etc.)
- The employment status of workers (Employed vs. Self-Employed)
- Whether IR35 rules apply (for contractors and freelancers)
- If you’re dealing correctly with student loans, pensions, and statutory payments
Why Would HMRC Audit You?
HMRC doesn’t randomly select businesses for PAYE audits. They focus on employers they suspect might be doing something wrong. Reasons HMRC might investigate include:
- ✔️ PAYE or NIC discrepancies – If your reported payroll figures don’t match what’s expected
- ✔️ Late or incorrect submissions – Repeated mistakes in RTI (Real Time Information) submissions
- ✔️ A whistleblower report – A current or former employee tipping off HMRC
- ✔️ A contractor-heavy workforce – If they suspect you’re wrongly classifying employees as self-employed
- ✔️ Industry focus – HMRC regularly targets certain industries where PAYE errors are common
How Will You Know If You’re Being Audited?
HMRC will write to you, explaining they are conducting a PAYE compliance check. This letter will tell you:
- The time period they’re investigating
- The specific areas they’re reviewing
- What records they want to see
If you get one of these letters, don’t ignore it! The sooner you respond, the easier it will be to resolve.
What Happens During a PAYE Audit?
- A PAYE audit usually follows this process:
- 1. The HMRC officer asks for payroll records – This includes payslips, RTI reports, contracts, and expense claims.
- 2. They may request a meeting – HMRC often wants to meet with company directors, payroll staff, or accountants.
- 3. They will analyse deductions – Ensuring tax and NICs are correctly calculated.
- 4. They’ll check for errors – Looking at expenses, Benefits in Kind, and employment status.
- 5. They issue a report – HMRC will tell you if you owe money, need to change anything, or if everything is fine.
Common Mistakes That Trigger PAYE Issues
HMRC is looking for mistakes—here are the most common ones that land businesses in hot water:
- Misclassifying employees as self-employed – If HMRC thinks someone should be on PAYE but is paid as a freelancer, they’ll demand backdated tax and NICs.
- Not applying IR35 rules – If you use limited company contractors incorrectly, you could owe PAYE and NIC.
- Not reporting Benefits in Kind – If you provide perks like company cars or health insurance, you need to report them correctly.
- Underpaying NICs – Some businesses try to reduce NIC bills by artificially lowering salaries—HMRC is wise to this trick.
- Late RTI submissions – HMRC fines businesses for consistently filing payroll information late.
What Happens If HMRC Finds Errors?
If HMRC finds something wrong, it’s not necessarily the end of the world—but it could be costly. Here’s what can happen:
- Backdated Tax & NIC Bills – If you’ve underpaid tax, HMRC will demand repayment.
- Penalties – Mistakes can mean fines of up to 100% of the unpaid tax (if they think it was deliberate).
- Interest Charges – If you’ve owed money for a while, you’ll have to pay interest too.
- Increased Scrutiny – If they find serious issues, HMRC might audit you more frequently.
What If You Disagree With HMRC’s Findings?
- If HMRC claims you owe tax but you think they’re wrong, you can challenge their decision.
- Ask for an internal review – HMRC has to re-examine the case with a fresh pair of eyes.
- Use Alternative Dispute Resolution (ADR) – A mediator helps resolve the dispute without going to court.
- Appeal to a tribunal – If all else fails, you can take the case to a tax tribunal.
- Tip: If you’re facing a big tax bill, get a professional on board—an accountant or tax advisor can argue your case effectively.
How to Avoid PAYE Audits (and Penalties!)
The best way to avoid problems with HMRC is to get PAYE right in the first place. Here’s how:
- Double-check employment status – If you hire freelancers, make sure they really qualify as self-employed.
- Submit PAYE records on time – Late RTI submissions raise red flags.
- Report all Benefits in Kind correctly – Use a P11D form for perks like company cars.
- Review NIC calculations regularly – Make sure you’re deducting the correct amount.
- Get professional payroll help – A good payroll provider can prevent mistakes.
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