How salary overpayments can impact accounting and bookkeeping

Unidentified monthly salary overpayments cause headaches for payroll departments and accountants alike. Here’s how to mitigate such errors.

New research from Global Payroll Association (GPA), which surveyed nearly 7,000 UK office workers, found that a relatively small number of employees (one in 10) say they’ve been accidentally overpaid in the past. A quarter of those respondents admitted that they didn’t tell their employer, while 77% decided to flag the issue to their employer or HR department as soon as possible.

Employers’ reactions varied too: 63% deducted any salary overpayments from monthly salaries going forward, but 37% chose to take no action at all, deciding to write the error off altogether.

Meanwhile, some employers identified the errors themselves (28%) while 1% took an entire year to notice.

From an accounting perspective, salary overpayments can cause big issues, such as:

• Inflated payroll costs.
• Skewed balance sheets and anomalies in reporting.
• Inaccurate forecasting.
• Inaccurate deductions for tax and benefits.
• Cash flow issues.

We spoke to accountants and those in specialist payroll departments to talk through exactly how salary overpayments are likely to impact both the accounting function and the business itself – and advise how such errors can be mitigated.

Some overpayments require complex adjustments to address errors

Ben Rose MAAT, Partner, Martin Seitler & Co

Smaller clients who don’t produce management accounts or monthly budgets will not usually be affected if they accidentally overpay staff. However, if the employer allows the member of staff to keep the overpayment, it will cause discrepancies in the books at year-end.

Smaller businesses would usually be able to sort out any overpayment errors with a simple adjustment the following month.

Saying that, depending on the reason for the overpayment, the adjustment could be more complex than just a NET pay adjustment and essentially the entire error needs to be reversed so that tax and NI, if applicable, are taken into account otherwise the client may overpay PAYE to HMRC.

I try and encourage our clients to amend the payroll within the month we are dealing with, if that’s possible, but some clients leave their payroll to the last minute and it’s the next month by the time the issue is spotted.

I think employers need to have procedures in place that enable errors to be flagged up sooner rather than later so that the adjustments can be done without skewing the figures too much. 

Verdict: Some overpayments may require complex adjustments to address errors.

Consequences can be far-reaching

Yasmine Thompson, Payroll Clerk, The Accountancy Partnership

Generally, salary overpayments fall into two categories: those where the overpayment is processed through payroll, and those where the payslip is correct but the payment is made for the wrong amount.

Overpayments processed through payroll tend to be more common and can happen for many reasons – sickness, for example, or an employee leaving and this not being reported to payroll in time.

Overpayments can mean deductions are incorrect, which can impact things like benefits or other entitlements. For example, an employee might be entitled to Statutory Sick Pay, but not receive it if absence is reported incorrectly. Overpayments can even affect the remaining balance of an employer’s Employment Allowance, so the consequences can be far-reaching.

We recommend making the deduction the following month if staff have already been paid or received their payslip. HMRC does not recommend adjusting the figures for previous months if the RTI has been filled.

If the payslip hasn’t been sent to the employee, we can adjust the payslip and year-to-date figures will be corrected with the next submission.

Clients are well within their rights to recover overpayments, but a tactful approach can help them get the money back without affecting their relationship with their employees.

Verdict: Consequences can be far-reaching – deductions should be made the following month, but always maintain a tactful approach.

Overpayments can add costs, cash flow issues and reconciliation issues

Kerrie Given, Associate Director, Prime Accountants Group

Salary overpayments can make payroll costs look higher than they are. There will be a control account on a business’s balance sheet and when everyone is paid, it should balance. If it doesn’t, a bookkeeper or accountant needs to take action to balance it back to zero, which takes time and knowledge.

Taxes and benefits are calculated based on an employee’s salary, so overpayment leads to inaccurate deductions for tax and benefits and a huge amount of backtracking.  

From an accounting side, knowledge and training is especially important, particularly if they are only checking the figures against payroll.

Overpayment can cause cash flow issues and make reconciliation harder. Aside from the numbers, it can also harm the employer/employee relationship if the latter hasn’t been honest about the overpayment.

Also, from April next year when employers’ National Insurance increases to 15%, any overpayment not corrected will be even more expensive.

Salary overpayments can come down to human error. For example, if a business still relies on manual timesheets. It can also be an issue with leavers who aren’t taken off the payroll, so, again, knowledge of the company and passing that information on is important.

I’ve seen situations where staff have similar names and are paid each other’s salaries. In one case, two brothers were on the same payroll and one was paid the other’s salary.

Salary overpayments can be avoided by implementing better payroll controls, audits, multiple touchpoints and professionals who can cross-check. Automation can also help, where technology and modern systems can take away the need for manual inputting. But sometimes, it’s a feeling! 

For example, if you regularly check a payroll and you know someone always does five hours’ overtime, and then one month that goes up to 500, you will know that’s down to an error. It can be down to just knowing your staff and clients well.

Verdict: Salary overpayments can increase payroll costs, create cash flow issues and make reconciliation harder – building in multiple controls, audits and automation can help.

Would you like to contribute to future articles like this one? If so, please get in touch with Annie Makoff-Clark at [email protected].

Annie Makoff is a freelance journalist and editor.