PAYE troubleshooting guide

Everyone makes mistakes with payroll. Fixing them quickly and correctly minimises penalties and keeps your employees happy.

Choose your problem:

Paid an employee the wrong amount
Deducted wrong tax or NI
Used wrong tax code
Submitted RTI late
Paid HMRC late
Received letter from HMRC
HMRC compliance check

Paid an employee the wrong amount

If you've overpaid or underpaid an employee:

Identify the error

Work out exactly what went wrong and how much the difference is.
Correct in next pay run

For small errors, adjust in the next pay period with the employee's agreement.
Update your FPS

The corrected pay will be reported in your next FPS automatically.
Communicate with employee

Explain what happened and how you're fixing it.

Overpayment recovery: You can deduct overpayments from future wages, but cannot reduce pay below minimum wage. Get written agreement for larger deductions.

Deducted wrong tax or NI

Tax and NI errors are usually caught by payroll software year-to-date calculations:

Correct tax and NI errors

Step-by-step guide to correcting PAYE deduction errors

Employee underpaid tax: Deduct extra in future pay runs to catch up (year-to-date figures will balance).

Employee overpaid tax: Refund through payroll - they'll see it as reduced deductions.

After tax year ends: HMRC will usually adjust the employee's tax code for the next year.

Used wrong tax code

Tax code errors are common, especially for new starters:

Understanding tax codes

If you're not sure whether a tax code is correct, here's how they work:

A PAYE tax code tells employers how much tax-free income an employee is entitled to before tax is deducted. It consists of numbers and letters that indicate the tax calculation method.

Standard code 2026/27: 1257L (£12,570 tax-free allowance)
Numbers meaning: Multiply by 10 to get annual tax-free amount (1257 = £12,570)
L suffix: Standard Personal Allowance applies
M suffix: Marriage Allowance - received 10% of partner's allowance
N suffix: Marriage Allowance - transferred 10% of allowance to partner
T suffix: Other calculations required (review needed)
0T code: No Personal Allowance - all earnings taxed
BR code: All income taxed at basic rate (20%) - no allowance
D0 code: All income taxed at higher rate (40%)
D1 code: All income taxed at additional rate (45%)
NT code: No tax to be deducted

Regional prefixes

S prefix: Scottish taxpayer (e.g., S1257L) - Scottish income tax rates apply
C prefix: Welsh taxpayer (e.g., C1257L) - Welsh income tax rates apply
No prefix: English or Northern Irish taxpayer - UK rates apply

Week 1/Month 1 basis (W1/M1)

If a code shows W1 or M1 (or X), tax is calculated on each pay period separately, not cumulatively. This prevents large refunds or bills when HMRC is still determining the correct code.

K codes

A K code (e.g., K475) means the employee has deductions greater than their allowance (e.g., company car benefit, unpaid tax from previous years). Tax is added to their pay for calculation purposes.

Tax codes explained (opens in a new tab)

HMRC sent wrong code: Apply the code HMRC gives you, even if you think it's wrong. The employee should contact HMRC directly.

You applied wrong code: Correct it and the year-to-date calculation will adjust the tax automatically.

Emergency tax code: Only use when you have no P45 and no starter checklist response.

Emergency tax codes

When emergency codes apply and how they work:

An emergency tax code works out tax on each pay period in isolation, because the employer does not have the details needed to work out the employee's code. It ends in W1 (weekly pay), M1 (monthly pay) or X (pay dates that vary).

Emergency code, starter statement B: 1257L W1/M1 (2026/27)
Emergency code, no starter declaration: 0T W1/M1
W1/M1 basis: Tax worked out on that week or month only
Payroll software wording: Some software shows NONCUM
Time for HMRC to update the code: Up to 35 days from the start date

When you use an emergency code

The employee has no P45 and chooses starter statement B: use 1257L on a week 1/month 1 basis, with starter declaration code B.
The employee has no P45 and you cannot get a starter declaration: use 0T on a week 1/month 1 basis, with starter declaration code C.
Starter statement A is not an emergency code: use 1257L on a cumulative basis.

How emergency tax works

Tax is worked out on what the employee is paid in that week or month only, not on the whole year.
The employee is taxed as if they were paid the same amount every week or month of the year, so they may pay the wrong amount of tax.
If the employee has not paid enough tax they stay on the emergency code until they have paid the correct tax for the year; if they have paid too much they can claim a refund from HMRC.

Replacing an emergency code

HMRC usually updates the code once it has details from the new and previous employers, and sends it to the employee and the employer.
Use the tax code HMRC sends you, including where the employee gives you a P45 or starter checklist after you have first paid them.
Do not carry the W1/M1 part of a code into the next tax year.

Emergency tax codes (employee guidance) (opens in a new tab)

Work out your new employee's tax code (opens in a new tab)

Submitted RTI late

FPS should be submitted on or before payday. If you're late:

Late filing penalties

HMRC penalties are based on how many employees you have and how often you're late:

HMRC charges a monthly penalty when a Full Payment Submission (FPS) is late, or when you do not send the expected number of FPSs or an Employer Payment Summary (EPS) for a month in which you paid nobody. The amount depends on how many employees you have, and HMRC sends penalty notices every quarter.

1 to 9 employees: £100 a month
10 to 49 employees: £200 a month
50 to 249 employees: £300 a month
250 or more employees: £400 a month
3-day rule: No penalty if every reported payment is within 3 days of payday
New employer: No penalty if the first FPS is sent within 30 days of paying an employee
First failure in a tax year: No penalty (annual schemes excepted)
Several PAYE schemes: Penalties can be charged for each scheme

When no penalty is charged

The FPS is late but all reported payments are within 3 days of payday, although employers who regularly file late may be contacted or considered for a penalty
You are a new employer and sent your first FPS within 30 days of paying an employee
It is your first failure in the tax year to send a report on time, unless you are an annual scheme
You sent an EPS to say you paid no employees in the month

Specified charges and appeals

If you do not send an FPS or the EPS, HMRC may raise a specified charge based on an estimate of what you should pay. Only sending the missing report replaces the charge with the amount actually due. You pay no interest on a penalty if you pay it within 30 days of the notice. You can appeal if the penalty is not due, the amount is wrong, or you had a reasonable excuse.

What happens if you do not report payroll information on time (opens in a new tab)

Reasonable excuse: If you have a genuine reason (serious illness, bereavement, HMRC system failure), you can appeal the penalty.

3-day easement: FPS submitted within 3 days of payday will not attract penalties in most cases.

Paid HMRC late

Payment deadlines are strict - electronic by 22nd, cheque by 19th:

Late payment penalties

Penalties escalate based on how often you pay late:

First default in tax year: No penalty (first failure does not count)
Defaults 1-3: 1% of amount late
Defaults 4-6: 2% of amount late
Defaults 7-9: 3% of amount late
Defaults 10+: 4% of amount late
6 months late: Additional 5% penalty
12 months late: Further 5% penalty
Interest: Daily interest charged from due date to payment date

Late payment penalties for PAYE and National Insurance (opens in a new tab)

Pay PAYE now

Make a payment to HMRC to reduce penalties and interest

Interest: HMRC charges interest from the due date until payment, regardless of whether penalties apply.

Prevention: Set up a Direct Debit so HMRC collects the payment automatically shortly after the 22nd.

Received letter from HMRC

HMRC sends different types of letters. Identify yours and respond appropriately:

Tax code notification: Apply the new code from the date shown - no response needed
Penalty notice: Pay within 30 days or appeal if you have reasonable excuse
Estimated bill: Submit missing FPS/EPS to correct - often happens when RTI not submitted
Compliance check notice: Do not ignore - see compliance check section below
Discrepancy query: Check your records and respond with explanation

Do not ignore HMRC letters. They do not go away and penalties increase over time.

HMRC compliance check

If HMRC announces a compliance check, do not panic - most are routine:

Prepare for HMRC compliance check

What to expect and how to prepare when HMRC reviews your PAYE records

Your rights:

Usually 7-14 days notice before visit
Right to choose location (your premises or HMRC office)
Right to have an accountant or adviser present
Right to appeal any penalty decisions

Getting help

If you're stuck or the problem is complex:

gov.uk

HMRC employer helpline (opens in a new tab)

Call 0300 200 3200 for PAYE queries (Monday to Friday, 8am to 6pm)

gov.uk

Find a payroll provider (opens in a new tab)

Consider outsourcing payroll if errors are frequent

When to get professional help:

Large discrepancies (more than one tax period)
Multiple employees affected
HMRC investigation or compliance check
Historical errors from previous years
Complex situations (TUPE, business sale or similar)

Fix PAYE problems

PAYE troubleshooting guide

Paid an employee the wrong amount

Identify the error

Correct in next pay run

Update your FPS

Communicate with employee