Ask the Taxwise Expert: Recovering PAYE underpayments from employees

Peninsula Team

October 29 2013

Q) I run a small supermarket and employ several members of staff who work various shifts etc.   Because I did not have time to deal with much of the paperwork I employed someone to deal with payroll processing.  This appeared to work for some time however the new RTI system has caused some confusion and my payroll processor made several errors with the monthly wages.  This has caused underpayments of PAYE with insufficient deductions from the employee wages.  Can the underpayments be collected from my employees? A) To begin with it will depend on what a person’s contract says as to whether or not the money can be recovered out of their pay.  While tax deductions in the ordinary course of events are allowed in law, it would seem reasonable that where the employer made a mistake and is now looking to recover it, some other factors of fairness should come in. An employer is not allowed to make deductions from an employees pay unless: It is required or allowed by law, for example income tax, national insurance and student loan repayments
  • the employee agrees in writing
  • the employees contract of employment says that the employer can
  • it is a result of statutory disciplinary proceedings
  • there is a statutory payment due to a public authority
  • the employee has not worked due to taking part in a strike or industrial action
  • it is a result of a court order or Employment Tribunal decision
  • A deduction must also not reduce the pay below the National Minimum Wage.
If an employee can show that the employer did not take reasonable care and the error was not made in ‘good faith’ then you the employer may not be able to recover the underpayment.  In describing a ‘failure to take reasonable care’, this means failing to follow proper instructions to deduct PAYE tax from the pay or by failing to use tax codes issued in respect of employees.  Not made in ‘good faith’ means that an employer may have known that they were not deducting the right amount of tax from but took no action to correct the mistake. The following list describes some of the most general errors made by employers in deduction of PAYE:
  • Failure to operate the right tax code upon start of the employment
  • Using a tax code without HMRC authority
  • Failure to use the same tax code for a new tax year, where no new code has been issued
  • Failing to operate tax codes sent electronically by continuing with out of date codes
  • Incorrect use of the PAYE taxable pay tables
  • Mistakes in setting up software for use in the new tax year
  • Failure to follow guidelines in the Employers Help books
  • Addition or mistype of pay figures
It is therefore necessary to consider the above points and to perhaps discuss the position with your employees.

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