A recent study has highlighted payroll compliance risks for small businesses, with payroll errors affecting 84% of them.  

The survey by Employment Hero of 1,000 small business leaders found that 40% have incurred penalties due to payroll issues, costing thousands of pounds.  

Despite spending an average of £2,724 ($3,629) a month to outsource payroll, many businesses struggle with outdated processes. Smaller SMEs (small and medium-sized enterprises) spend £1,625, while larger ones spend £3,408.  

More than half of the businesses reported making payroll errors more than once, largely due to outdated systems and processes. 

Manual processing remains prevalent, with 31% of businesses relying on spreadsheets or forms for payroll.  

This figure rises to 44% among the smallest SMEs with five to 19 employees. Common issues include incorrect wage calculations and late or missed payments. 

The most frequent payroll errors reported were incorrect wage calculations (48%), late or missing payments (38%), incorrect hours (36%) and incorrect tax calculations (27%).  

As employment legislation evolves, 67% of businesses expressed concern about employee complaints linked to payroll. 

Technology concerns exacerbate these challenges, with 70% of SMEs worried about keeping up with payroll technology.  

This concern is highest among businesses with 100–149 employees, as they struggle to stay compliant without the right tools. 

Top barriers to switching from manual payroll include limited expertise (38%), lack of time to manage (36%), cost (35%) and lack of time to onboard (31%).  

To address this challenge Employment Hero has announced free payroll software for all UK businesses.  

Employment Hero UK managing director Kevin Fitzgerald said: “With the rising National Minimum Wage, increased National Insurance Contributions and tougher enforcement of employment law, there has never been a more complicated time to be a small employer.  

“Our research shows payroll has become a compliance minefield. SMEs are trying to do the right thing, but outdated systems and limited resources are costing them dearly. No small business should face fines just for lacking the right tools – and that is why we are making payroll free. It is too fundamental to get wrong. If we want SMEs to power growth and employment, we need to level the playing field – starting with payroll.”