The errors HMRC finds most and how to avoid the penalties that follow
With mandatory payrolling set to begin in April 2027, the compliance window is tighter than ever. These are the mistakes we see most often at SKZ Accountants, and they’re all preventable.
Let me be straight with you. Most payrolling mistakes don’t happen because employers are careless or trying to cut corners. They happen because the rules are complex, the transition from P11D to real-time payrolling is creating new ways to go wrong, and many payroll software providers have not yet caught up with what HMRC expects.
We see the fallout at SKZ Accountants regularly. Benefits reported twice. Taxable values understated by thousands. Employees are hit with unexpected, entirely avoidable tax bills. And none of those outcomes is good for anyone, not for the employer who faces the penalty, not for the employee who gets the nasty letter, not for the working relationship between them.
The mandatory payrolling transition starting in April 2027 is creating new ways to get this wrong, even for employers who’ve been doing it right for years. So let’s go through the ten mistakes that actually matter with the penalty exposure that comes with each one.
Be honest-when did you last audit your benefits reporting against HMRC’s actual valuation rules for each benefit type? For most employers, the honest answer creates a small amount of dread.
The 10 mistakes-tap each one to expand
How many have you already avoided?
- Penalty exposure: double taxation for employee + HMRC correction required
This one catches employers who voluntarily payrolled in 2025/26 and then forgot to remove that benefit from the P11D filing. The employee ends up taxed twice on the same benefit, once through payroll and once through the code adjustment that follows the P11D. It’s not a small error. For an employee with a company car worth £5,000 annually, that’s £1,000 in extra tax they shouldn’t owe. HMRC expects you to correct it, and the employee’s trust in your payroll function takes a significant hit in the meantime.
How to avoid it
Before filing any P11D, cross-check every benefit against your payroll records for the same tax year. Any benefit that appeared in taxable gross on a Full Payment Submission must not appear on the P11D. Keep a simple spreadsheet mapping each benefit to its reporting route-it takes 20 minutes and prevents a hours-long correction process later.
- Penalty exposure: up to £3,000 per incorrect P11D form
Company car valuations are the single most common error HMRC finds on compliance checks. The taxable value depends on the list price, the CO₂ emissions percentage, any capital contributions, pro-rata adjustment if the car wasn’t available all year, and the electric range for plug-in hybrids. Miss one of those elements and the number is wrong. And an incorrect P11D carries its own separate penalty of up to £3,000 per form, on top of any late filing penalty, regardless of whether the form was otherwise submitted on time.
How to avoid it
Use HMRC’s online company car calculator for every vehicle, every year. Don’t carry last year’s percentage forward without checking CO₂ percentages change annually, and new electric range rules affect plug-in hybrids. If a car was only available for part of the year, apply the pro-rata calculation precisely.
- Penalty exposure: £300 per late P11D + £60/day + 5%/10%/15% on unpaid Class 1A
The P11D and P11D(b) filing deadline is 6 July. Class 1A NIC payment is 22 July if paying electronically, 19 July by cheque. These are two separate deadlines and two separate failure consequences. HMRC charges a penalty of up to £300 per late P11D, plus up to £60 a day for continued failure, and separately up to £100 per 50 employees for each month the P11D(b) is late. If Class 1A isn’t paid within 30 days of 22 July, a 5% penalty applies, rising to a further 5% at six months and another 5% at twelve months.
How to avoid it
Treat 6 July as a hard deadline, not a soft one. Start compiling benefit values in May rather than late June. Book the P11D filing into your calendar as a concrete task in early spring, not a vague “to do before July.” The Class 1A payment should go into your cash flow model at the start of the tax year, so it doesn’t surprise you in July.
- Penalty exposure: understated P11D up to £3,000 per form
If you provide private medical insurance that covers an employee’s spouse or children, the full cost of the policy, not just the employee-only portion, must be reported. Same with travel passes or life cover extended to dependants. Here’s what most people miss: it doesn’t matter whether the employee requested family cover or you offered it as part of the package. The taxable benefit is the full employer cost, and HMRC checks this on compliance reviews.
How to avoid it
When pulling benefit values from your provider invoices, always check whether the cost shown is per employee or includes dependents. Ask your benefits provider to split the cost if needed; many will do this on request. Build the family coverage question into your annual benefits data collection process.
- Penalty exposure: overstated benefit = employee overtaxed; understated = HMRC liability
Where an employee contributes to a benefit that pays toward their company car, makes a payment toward private medical, or contributes to accommodation costs, that contribution reduces the taxable benefit value. Miss this, and you’re either overtaxing the employee (they’ll notice and complain) or understating if you accidentally reduce the wrong way. Under payrolling, this calculation has to be right in real time, every pay period, not discovered and corrected once a year on the P11D.
How to avoid it
When setting up each benefit in your payroll software, record the employee contribution alongside the gross benefit value. The net taxable amount is gross benefit minus the employee’s annual contribution. Document this for each employee separately. Contributions vary, especially for company cars, where capital contributions affect the calculation differently.
- Penalty exposure: incorrect RTI submissions + double taxation risk
Employment-related beneficial loans and employer-provided living accommodation are permanently excluded from mandatory payrolling; they must still go through P11D. But in the rush to comply with mandatory payrolling from April 2027, some employers are inadvertently including these in their FPS submissions. If you want to voluntarily take out payroll loans or accommodation, a separate registration service opens in November 2026 with a deadline of 5 April 2027. Without that registration, including these benefits in payroll creates compliance problems on both sides.
How to avoid it
Create a definitive list of every benefit you provide and categorise each as Phase 1 mandatory (April 2027), Phase 2 mandatory (April 2028), or permanent P11D (loans and accommodation). Share this list with your payroll provider before April 2027. If you want to apply for voluntary payroll loans or accommodation, register through HMRC’s service in November 2026.
- Penalty exposure: inaccurate RTI returns interest on underpaid Class 1A from 23 July
Under-payrolling, where the exact annual value of a benefit isn’t known at the start of the year, third-party supplier arrangements, variable car fuel, and benefits that change mid-year, you’re required to use a reasonable estimate and then correct it. The correction window runs to 6 July following the tax year end. Miss that window and the inaccuracy becomes a permanent underpayment, with interest running on Class 1A NIC from 23 July. In the first year of mandatory payrolling (2027/28), HMRC has confirmed a light-touch approach to penalties for inaccuracies that aren’t deliberate, but interest on late Class 1A still applies even in 2027/28.
How to avoid it
Build an “end-of-year correction” process into your payroll calendar from day one. Mark 6 July as a secondary review date, not just a P11D filing date. Check estimated values against actual invoices received before that date and submit corrections via the BIKs update process. HMRC is expected to introduce a “month 13” facility for this purpose.
- Penalty exposure: no direct HMRC penalty, but employee disputes and morale damage
This isn’t an HMRC fine. But it creates problems that feel just as painful. When mandatory payrolling starts in April 2027, employees with company cars, medical insurance, and other benefits will see their payslips change. Their taxable gross goes up. Their net take-home may drop. If nobody has explained this to them in advance, the first payslip triggers a wave of “is there an error?” queries that your HR and payroll teams will be fielding in April 2027, right when they’re also dealing with the mechanics of the transition itself.
How to avoid it
Send a clear, plain-English communication to all affected employees before April 2027, ideally in January or February. Explain that benefit tax is now collected monthly rather than annually through a code adjustment. Include a worked example for someone with a company car. Suggest employees set up their Personal Tax Account with HMRC to monitor their position.
- Penalty exposure: 5% of unpaid Class 1A after 30 days; further 5% at 6 and 12 months
Employers who haven’t voluntarily payrolled in 2026/27 will face a specific problem in July 2027. The lump sum Class 1A NIC for 2026/27 (the last full P11D year) falls due by 22 July 2027 at the same time as real-time Class 1A payments are already running for 2027/28. That’s two liabilities overlapping in the same month. For employers with significant benefits packages, this cash flow collision can be the most expensive surprise of the entire transition.
How to avoid it
Model your combined July 2027 Class 1A exposure now, not next spring. Calculate your 2026/27 annual Class 1A liability (benefits value × 15%) and add it to the April–July 2027 real-time payments that will already have been made. Build a dedicated cash reserve across 2026/27 specifically for this month. Brief your finance director or board before the end of the year.
- Penalty exposure: no inaccuracy penalties in 2027/28 (non-deliberate), but late RTI and late Class 1A penalties still apply
HMRC has confirmed a light-touch approach to inaccuracy penalties in the first year of mandatory payrolling (2027/28) for errors that aren’t deliberate. That’s reassuring, but it’s being misread by a surprising number of employers as permission to delay preparation until 2027. The soft-touch applies to inaccuracies in benefit values. Late filing penalties for RTI submissions still apply from day one. Interest on late Class 1A payments still applies from day one. And from 2028/29, the full penalty regime is live. The compliance infrastructure you need for 2028/29 takes longer to build than most employers realise.
How to avoid it
Treat the 2027/28 soft-penalty year as a gift to get your processes right without financial consequence for honest mistakes, not as an excuse to start late. The preparation work, software confirmation, benefits categorisation, employee communication, payslip template updates, and cash flow modelling should be completed before April 2027, not in January 2028.
The real-world cost of getting this wrong
Example
A mid-sized facilities management company came to us in spring 2026 with around 80 employees, a mix of company cars, private medical, and fuel benefits. They’d been voluntarily payrolling some benefits for three years and were fairly confident about compliance. But when we ran a full benefits audit ahead of the mandatory transition, we found two significant errors that had been quietly compounding.
First, private medical insurance covering employee spouses and children was being reported at the employee-only premium rate, meaning the family cover element had been understated on every P11D for three years. Second, two employees who’d made capital contributions to their company cars in 2023 had those contributions correctly applied in year one, then forgotten about in subsequent years, meaning the benefit was consistently overstated, and those employees had been overtaxed every year since.
The remediation wasn’t catastrophic; we corrected the open years, avoided the inaccuracy penalties through voluntary disclosure, and briefed the affected employees. But the point is: a routine audit found three years of compounding errors in a business that considered itself on top of this. If you haven’t audited your benefits data recently, there’s a reasonable chance something similar is waiting to be discovered.
The honest verdict
Here’s the thing about benefits in kind compliance: the consequences of errors aren’t always immediate. They compound quietly over multiple tax years, often because the same miscalculation gets carried forward unchallenged until an HMRC compliance check surfaces it. By that point, you’re not dealing with one year of incorrect data. You’re dealing with several.
The mandatory payrolling transition creates a natural audit moment. If you’re rebuilding your benefits data for real-time reporting anyway, do the audit properly rather than just lifting last year’s values into a new format. That’s where the most expensive mistakes live.
The bottom line
The soft-penalty year in 2027/28 doesn’t protect you from late filing, late payment interest, or from the penalties that will be fully enforced from 2028/29 onwards. The employers who come out of this transition well are the ones using 2026/27 right now to audit their benefit data, confirm their software, model their July 2027 cash position, and communicate clearly with employees.
At SKZ Accountants, we’ve been helping employers do exactly this for the past year. The mistakes on this list aren’t unusual or exotic. They’re the standard pattern of issues we see when payroll compliance hasn’t had a proper review in a while. If any of the ten resonate with your own setup, the right time to address them is before mandatory payrolling forces the issue, not after.
Want a benefits compliance audit before April 2027? Talk to SKZ Accountants.
We’re payroll services and employer tax specialists in Ilford, helping UK businesses get their benefits reporting right ahead of the mandatory payrolling transition. From P11D accuracy reviews to cash flow modelling and employee communications.
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