Manual payroll costs UK SMEs dearly as fines & errors rise

New research by Employment Hero finds that a significant proportion of UK SMEs continue to use manual payroll processes, leading to errors and financial penalties.

The study highlights that 31% of small businesses in the UK manage their payroll using spreadsheets or paper forms. The figure increases to 44% for firms employing between five and nineteen staff members.

This reliance on manual payroll methods has led to widespread challenges. According to the research, 84% of SMEs surveyed have experienced payroll errors. The most common mistakes include incorrect wage calculations, reported by 48% of those affected, followed by late or missing payments, which 38% of respondents have encountered.

Financial repercussions are common for businesses that make payroll mistakes. The study found that 40% of SMEs have paid fines due to errors such as underpayments, reporting failures, or the late processing of wages. These penalties can run into thousands of pounds, posing a substantial burden for small business owners.

Barriers to digital adoption

Despite the availability of digital tools designed to streamline payroll operations, many SMEs have not yet adopted such solutions. According to the research, 35% of small businesses cite the cost of payroll software as the main barrier to switching from manual processing. This cost concern is especially prominent in the smallest firms, where budgets are often limited and compliance obligations have become more complex.

To address these issues, Employment Hero has launched a free payroll software solution for all UK SMEs. The company says this move is intended to eliminate cost concerns while also reducing compliance risks for the UK's estimated 5.5 million small businesses.

Complex payroll landscape

Kevin Fitzgerald, UK Managing Director at Employment Hero, commented on the findings and the challenges facing small employers. In his statement, he emphasised the increasing complexity of payroll management due to recent changes in employment regulations:

"With the rising National Minimum Wage, increased National Insurance Contributions and tougher enforcement of employment law, there's 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 SMEs are trying to do the right thing, but outdated systems and limited resources are costing them dearly.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's why we're making payroll free. It's too fundamental to get wrong. If we want SMEs to power growth and employment, we need to level the playing field - starting with payroll."

The company's decision to offer complimentary payroll software aims to support small businesses in avoiding administrative penalties and managing payroll obligations reliably.

Research methodology

Employment Hero's survey was conducted with 1,000 UK business leaders, including owners, managing directors, senior executives, HR personnel, finance directors, and payroll heads. The survey was carried out by One Poll during May 2025 and reflects the experiences and perspectives of a broad cross-section of UK SMEs.

The report underlines the pressing need for affordable, accessible payroll solutions as regulatory demands increase and highlights ongoing digital divides in the adoption of business technology among small firms. The findings suggest that manual payroll practices remain widespread, and the associated risks and costs continue to affect a significant portion of the small business community.