Overpaid: what to do when mistakes are made

19 August 2024

Samantha O’Sullivan ChMCIPPdip, CIPP policy and advisory lead, provides an overview of how to process overpayments and recovery through the payroll

Every payroll professional I know 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 will provide you with a high-level overview as to what steps to take when processing overpayments through the payroll.

Why and when do overpayments occur

Overpayments will 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 / last-minute changes topped the list. So, what can we all do to try to mitigate this happening moving forward?

Some ideas that spring to mind include:

using National Payroll Week (NPW), which this year runs from 2-6 September, as the perfect opportunity to remind line managers and staff / clients what the payroll cut-off dates are for the remainder of the tax year
providing the same information outside of NPW in an email update to line managers and staff / clients reminding them of the payroll cut-off dates
updating staff handbooks / collateral for clients’ employees ahead of the new tax year, detailing the 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 within the payroll will depend on whether they occur:

in the current tax year
in a previous tax year
or a combination of the two.

HMRC sets out useful guidance in the CWG2 as to how to deal with each situation here: https://ow.ly/8izC50SmgxK.

Key steps

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

inform the employee promptly. You may be informed of the overpayment prior to the employee noticing, maybe due to a late leaver notification coming through after the Bacs has been processed, so it’s in your power to reach out to that individual before the money credits their account, to inform them of the overpayment
follow company processes / policies. A process is there for a reason, so follow the steps laid out in said guidance
be as flexible as possible. If the overpayment has occurred over months, seek to recover it over the same time period. For example, if an employee reduced their hours but payroll wasn’t notified until two paydays after the change occurred, so they were overpaid for two months, seek recovery over two months
notify human resources or your client so other functions are aware should the impacted employee reach out to them for guidance or support.

The payroll process

So now we can think about the nitty-gritty of what we need to do within the payroll. You must:

first calculate the gross value of the overpayment
then calculate the net value. Net value is the most accurate way to recover an overpayment. This is the value which you will seek the employee to repay
amend the gross values to reflect the correct year to date 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 year to date values if the overpayment was made within a previous tax year.

Key point to note

Strictly speaking, adjustments should not be processed via the payroll until repayment has been made to the employer. However, HMRC states adjustments can be made to amend year to date values, if the employer has a robust recovery process in place.

Now, I must stress this is very much an employer’s choice. Personally, in practice, we wouldn’t amend year to date values until the employee has repaid the overpayment in full. This isn’t to say it’s the right way to do it, but it’s the employer’s choice. Take this as an opportunity for you to review / produce overpayment processes / policies, to determine your / your client’s steer on this.

Considerations before recovery

The last thing we want to do is cause someone financial hardship by recovering a month’s salary, leaving them with nothing. Financial wellbeing is something our research has found people are getting more involved in and we’ve seen an increase in the number of people who believe payroll should be assisting with employee financial wellbeing (Payslip Statistics Report 2024, https://ow.ly/LzX850SmiBj).

You need to review the reasons for overpayment and what types of pay the employee is due to receive. Once you have done this, it will allow you to determine how you can recover the overpayment. Some overpayments can be recovered without an impact on national minimum wage (NMW), whereas some will impact on NMW.

Is there any agreement in place? This could be contractual or written authorisation. We would always suggest obtaining employee consent prior to recovering overpayment, even if a clause within a contract of employment already states this.

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

Further learning

We offer a fantastic overpayment and recovery half-day workshop if you would like to learn about any element of this article and the topics discussed in further detail: https://ow.ly/p7gr50Smiq1.