I work with small businesses every week and one recurring worry is always the same: “Have we missed something in payroll that could trigger a PAYE or NIC liability later?” HMRC doesn’t always come knocking immediately — sometimes liabilities build quietly over months. A targeted payroll audit checklist will help you uncover those hidden risks before they become costly surprises.
Why run a payroll audit?
Payroll is one of those areas where small errors can snowball. Missed student loan deductions, incorrect tax codes, misclassified workers, or payroll software settings that haven’t been updated can all create backdated liabilities plus interest and penalties. I’ve seen businesses reduce their PAYE exposure significantly just by running a structured audit and fixing a few items.
How to use this checklist
Run this audit every quarter or whenever you have a significant change (new payroll software, new payroll provider, major hires, or reorganisations). Treat it like a forensic review — keep written notes, export reports and store screenshots. If you spot complex or historical issues, get professional tax or payroll advice and consider voluntary disclosure to HMRC to reduce penalties.
Payroll audit checklist — what to include
- Employee and worker status
- Confirm all people on payroll are correctly classified: employee, worker, contractor or director. Misclassifying an employee as a contractor is a common source of missed PAYE/NIC.
- Check written contracts and IR35/Off-payroll working status for contractors (if applicable).
- Starter/leaver records
- Ensure P46 or starter form information has been collected and retained for all starters.
- Verify P45s for leavers are recorded and put on file; ensure leaver pay and final FPS are submitted correctly.
- Tax codes and student loans
- Match tax codes in your payroll software (S, BR, NT, emergency) to HMRC notices. Investigate emergency tax codes or unexplained NT codes applied for long periods.
- Check student loan plan types (Plan 1, Plan 2, Plan 4, Postgraduate) and ensure correct deductions.
- PAYE and National Insurance calculations
- Reconcile payroll totals to your accounting ledgers and bank payments. Basic checks: Gross pay, PAYE, employee NIC, employer NIC, student loan, pension, and net pay.
- Run a cumulative year-to-date check for each employee against RTI reports and payslips.
- Real Time Information (RTI) submissions
- Confirm all Full Payment Submissions (FPS) and Employer Payment Summaries (EPS) were submitted on time.
- Identify late or missing FPS/EPS and note any in-year corrections (or “Earlier Year Update” / EYU) required.
- Benefits and expenses
- Compare benefits reported on payroll to P11D records. Ensure taxable benefits were reported and Class 1A NIC calculations were completed and planned for July payment.
- Check company car records: CO2, P11D values, fuel benefit and any cash alternatives.
- Pension auto-enrolment
- Verify all eligible staff are enrolled and employer contributions match scheme rules.
- Check re-enrolment schedules, opt-ins/opt-outs and contribution processing timetables.
- Payroll software settings
- Confirm payroll software is set to the correct tax year and that all statutory rates (NIC thresholds, tax bands, National Minimum Wage where relevant) are updated.
- Check integration settings (e.g. payroll posting to Xero, Sage, FreeAgent) and ensure duplicate or missed entries haven’t occurred.
- Director pay and dividends
- For limited company directors, ensure PAYE on salary is correct, and that dividends are declared separately (dividends are not subject to PAYE but need board minutes and correct records).
- Confirm whether directors are on cumulative or non-cumulative pay—this affects tax code treatment and year-to-date calculations.
- Statutory payments and reimbursements
- Check SMP, SSP, SAP and maternity/adoption payments and ensure SSP reclaim via EPS has been claimed where eligible.
- Reconcile any reimbursed statutory amounts to HMRC reclaim records.
- Payroll reconciliations and bank matches
- Reconcile total PAYE liabilities to the PAYE account on HMRC’s Online Services — payments recorded vs payroll figures.
- Match payroll disbursements in the bank to staff net pay and PAYE/NIC payments to HMRC.
Red flags that usually indicate hidden liabilities
- Long-standing emergency tax codes or unexplained “NT” codes.
- Multiple manual adjustments to FPS or lots of ad-hoc payslips outside normal pay runs.
- Benefits or expense payments not declared on P11D or payroll.
- Contractors paid via payroll without correct PAYE assessment—or conversely, employees treated as contractors.
- Payroll system hasn’t been updated to the current tax year or statutory rate changes.
Quick templates and reports to pull now
When I audit a payroll I ask for a small, specific set of exports from the payroll system:
- Employee master list with NI numbers, start/end dates and tax codes.
- Year-to-date payslip summary for each employee.
- FPS and EPS history (including timestamps) for the last 12 months.
- PAYE & NIC summary and payroll journal entries posted to the accounting system.
- Benefits/expenses register and P11D values.
| Document | Why it helps | Frequency |
| FPS/EPS history | Shows submissions timing and corrections | Quarterly or after any payroll changes |
| YTD Payslip summary | Checks cumulative tax/NIC matches RTI | Monthly/Quarterly |
| Payroll journal | Reconciles payroll to cash and ledgers | Monthly |
Practical fixes when you find issues
- Correct tax codes by contacting HMRC or via PAYE online and update in the next pay run.
- Submit corrections: late FPS should be followed by corrected FPS and EPS as required. Use EYU for earlier tax years if necessary.
- Adjust payroll classifications and reprocess historical PAYE where misclassification occurred—seek specialist advice for complex cases.
- Claim any eligible SSP/SMP reimbursements via EPS and ensure documentation is retained.
- Make voluntary disclosures to HMRC if you uncover material historical underpayments — this reduces penalties in many cases.
Payroll audits aren’t glamorous, but they’re one of the highest-return checks a small business can run. A few hours of focused review can save you a hefty HMRC bill, reduce stress and ensure your team is being paid correctly. If you’d like a downloadable checklist or a simple spreadsheet I use to run these audits, tell me which payroll software you use (Xero Payroll, Sage, FreeAgent, BrightPay, Iris, etc.) and I’ll tailor the template.
