Five Mistakes Startups Make When Managing Payroll

Startups face many challenges, and managing payroll can be one of the most complex, because it’s not just about paying your team. It’s a legal obligation with significant financial consequences if you get it wrong. And at Ellis & Co, we’ve seen startups make the same mistakes time and again. Which is why we believe that understanding and avoiding these common payroll errors is crucial for ensuring your business stays compliant and your team stays happy.

Hence, here are the top five payroll mistakes startups make and a detailed guide on how to navigate them successfully:

1. Misclassifying Workers: The Employee vs. Contractor Trap

One of the most significant and potentially costly mistakes a startup can make is incorrectly classifying a worker. 

While it may seem easier and cheaper to hire a contractor to avoid the complexities of payroll, HMRC has very strict criteria that distinguish an employee from a self-employed contractor, A.K.A. a freelancer. Getting this wrong can lead to serious consequences, including backdated tax liabilities, penalties and interest.

So, What Are The Key Differences?

• Management: An employee is typically told when, where and how to work. A contractor has much more autonomy and control over their work.
• Equipment: An employee is usually provided with the necessary equipment by the employer. A contractor uses their own tools and resources.
• Exclusivity: An employee usually works for one employer. A contractor is often free to work for multiple clients.

How to Avoid This Mistake: 

Don’t just rely on the job title or the contract you’ve signed, and take a look at the actual working relationship! 

If the worker is integrated into your business, has set working hours and is managed by you, they are likely an employee. For peace of mind, use HMRC’s online employment status checker tool. If the situation is complex, always seek expert advice before making a final decision.

2. Failing to Register as an Employer on Time

As soon as you hire your first employee, you have a legal obligation to register as an employer with HMRC. And you’ll have to ensure that this is done before their first payday. Registering for a Pay As You Earn (PAYE) scheme is the first step in this process, and failing to do so on time is an immediate red flag for HMRC and can lead to penalties.

How to Avoid This Mistake: 

The process can take up to two weeks, so act quickly after making a hire! 

The PAYE scheme allows you to deduct Income Tax and National Insurance Contributions (NICs) from your employees’ pay. You must then pay these deductions to HMRC. So remember, this responsibility falls on you, the employer.

3. Missing PAYE & RTI Deadlines

HMRC’s Real Time Information (RTI) system requires you to report employee pay and deductions on or before their payday. This is a significant shift from the old annual system and is a common source of penalties for startups. A single missed submission can trigger an automatic fine, and repeated failures can lead to larger penalties.

How to Avoid This Mistake:

• Understand the Timelines: The PAYE payment is due by the 22nd of the month following the tax month (or the 19th if you pay by post). For example, the PAYE bill for the tax month ending on the 5th of June is due by the 22nd of June.

• Utilise Payroll Software: Manual calculations and submissions are not only time-consuming but are also prone to error. Professional payroll software automates these processes, calculates the correct deductions, and submits the necessary reports (Full Payment Submissions) to HMRC on time. This is the single best way to ensure compliance and avoid penalties.

• Be Aware of Penalties: HMRC penalties for late RTI submissions are based on the number of employees you have. A business with up to 9 employees can face a £100 monthly penalty for a late submission.

4. Incorrect Tax and National Insurance Calculations

Mistakes in calculating tax and National Insurance are incredibly common, especially for startups with a mix of full-time, part-time and casual staff. And overpaying or underpaying can cause employee frustration and lead to a build-up of liabilities with HMRC.

How to Avoid This Mistake:

• Accurate Employee Data: Ensure you have the correct tax code and National Insurance number for every employee from their first day. A P45 from their previous employer is the best way to get this information.

• Rely on Software: The tax rates and thresholds for Income Tax and National Insurance change every tax year. Which is why manual spreadsheets are difficult to keep up-to-date and one small mistake can snowball. However, with payroll software, everything is automatically updated, ensuring every calculation is accurate and compliant with the latest regulations.

5. Ignoring Workplace Pension Auto-Enrolment

This is a legal requirement that many founders overlook. By law, every UK employer must automatically enrol their eligible employees into a workplace pension scheme and make regular contributions. Neglecting this duty can lead to significant penalties from The Pensions Regulator, including daily fines.

How to Avoid This Mistake:

• Know Your Duties: You must assess your employees’ eligibility, choose and set up a compliant pension scheme, and contribute to it regularly. This is a complex, multi-step process that involves providing specific information to your employees.

• Don’t Wait: The Pensions Regulator can impose penalties for non-compliance, so it’s vital to address this from the moment your first employee starts work.

Why Ellis & Co Can Help

For a startup founder, every hour spent on administrative tasks is an hour not spent on growing the business. While payroll is a non-negotiable part of employing a team, it’s also a process full of traps and potential for costly errors.

As mentioned by our director, John Moorhouse,

“Navigating payroll can be a real headache for startups, but getting it right is non-negotiable. At Ellis & Co, we’re dedicated to helping new businesses avoid these costly mistakes, and we believe that by taking care of the complexities, we’re giving founders the freedom to focus on what they do best — building a successful company and a great team. It’s about turning a compliance burden into a seamless process.”

At Ellis & Co, we take the stress out of payroll. Our expert team can handle the entire process for you, from setting up your PAYE scheme and managing your auto-enrolment duties to processing payroll on time and submitting all the necessary reports to HMRC. We ensure your business is fully compliant, your employees are paid correctly, and you have the peace of mind to focus on your company’s success.

So are you ready to simplify your payroll and avoid these common pitfalls? 

Get in touch with our expert team for a no-obligation consultation.