21 September 2025

Every payroll professional strives to be accurate and on time, every time, so overpayments are something that no one likes to deal with. I delivered a BeKnowledgeable webinar on this very topic in June, as it’s something that you – our wonderful members – asked for in the recent Quick Poll.

This article provides a high-level overview of the steps to take when processing overpayments through the payroll.

Why and when do overpayments occur

Overpayments often occur due to external factors the payroll function can’t control. During the BeKnowledgeable session, I asked delegates to vote for “the most common reason for overpayments occurring on the payrolls you process”, and the results are shown in the chart below.

It’s no surprise that late payroll data and last-minute changes topped the list. So, what can we all do to mitigate this happening moving forward?

Some ideas include:

  • Using National Payroll Week (NPW), which this year ran from 1–5 September, as the perfect opportunity to remind line managers and staff/clients of the payroll cut-off dates for the remainder of the tax year.

  • Providing the same information outside NPW in an email update to line managers and staff/clients, reminding them of payroll cut-off dates.

  • Updating staff handbooks or client collateral ahead of the new tax year, detailing payroll cut-off dates.

Human error was the lowest-rated reason overpayments occur, but it does happen. Lessons learned are a great way to explore how those occurrences don’t happen again.

Overpayments can occur during any payroll period, but the way you process them will depend on whether they occur:

  • In the current tax year

  • In a previous tax year

  • Or as a combination of the two

HMRC provides useful guidance in the CWG2 on how to deal with each situation: Read the full guidance here.

Key Steps in the Overpayment Process

In any overpayment scenario, there are four essential steps that must be taken:

  1. Inform the employee promptly.
    You may be informed of the overpayment before the employee notices—perhaps due to a late leaver notification arriving after the Bacs has been processed. In this case, reach out to the individual before the money credits their account to inform them of the overpayment.

  2. Follow company processes and policies.
    A process is there for a reason—follow the steps outlined in your organisation’s overpayment guidance.

  3. Be as flexible as possible.
    If the overpayment has occurred over months, seek to recover it over the same period.
    Example: If an employee reduced their hours but payroll wasn’t notified until two paydays later, so they were overpaid for two months, seek recovery over two months.

  4. Notify HR or your client.
    Ensure other departments are aware, in case the impacted employee reaches out to them for guidance or support.

The Payroll Process: Correcting Overpayments

Now we can consider the nitty-gritty of what needs to happen within the payroll system itself.

You must:

  • Calculate the gross value of the overpayment.

  • Calculate the net value, as this is the most accurate way to recover an overpayment. This net amount is the value to be repaid by the employee.

  • Amend the gross values to reflect the correct year-to-date (YTD) values if the overpayment was made within the current tax year. Show this in your next Full Payment Submission (FPS).

  • Submit a revised final FPS with the correct YTD values if the overpayment was made within a previous tax year.

A Key Point to Note

Strictly speaking, adjustments should not be processed via payroll until repayment has been made to the employer.

However, HMRC states that adjustments can be made to amend year-to-date values if the employer has a robust recovery process in place.

It’s worth stressing that this is very much an employer’s choice. In practice, we wouldn’t usually amend YTD values until the employee has repaid the overpayment in full. That said, each employer should decide their own approach.

Take this as an opportunity to review or produce overpayment processes and policies, so you can determine your stance (or your client’s) on this issue.

Considerations Before Recovery

The last thing we want to do is cause financial hardship by recovering a full month’s salary and leaving someone with nothing.

Financial wellbeing is something our research has found people are increasingly focused on. The Payslip Statistics Report 2024 (read here) shows more people believe payroll should play a role in supporting employee financial wellbeing.

Before recovery, you should:

  • Review the reason for the overpayment and determine what types of pay the employee is due to receive.

  • Understand whether recovery will impact National Minimum Wage (NMW). Some overpayments can be recovered without affecting NMW, while others might.

  • Check for any agreement in place—this could be contractual or written authorisation. Always try to obtain employee consent before recovering overpayments, even if the employment contract includes such a clause.

Considering the above will help you decide which payments you can recover the overpayment from.

Further Learning

If you’d like to explore this topic in more depth, we offer a fantastic Overpayment and Recovery Half-Day Workshop that dives deeper into all the areas discussed here.

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