The survey of 1,000 small business leaders found that 40% have incurred penalties due to payroll issues.

Despite spending an average of £2,724 a month to outsource payroll – ranging from £1,625 among smaller SMEs to £3,408 for larger ones – many businesses are still getting it wrong, largely due to outdated processes and systems that haven’t kept up with rising compliance demands.

Payroll errors are widespread and often repeated

Over half of businesses reported making payroll errors more than once. Manual processing remains common, with 31% still relying on spreadsheets or forms to run payroll. This figure jumps to 44% among the smallest SMEs with 5-19 employees.

The most frequent issues reported were incorrect wage calculations, followed by late or missed payments.

Most common payroll errors

• Calculating wages incorrectly (48%)
• Late/missing payments (38%)
• Late/missing payments (38%)
• Incorrect tax calculations (27%)

As employment legislation evolves and enforcement becomes more active, businesses face growing compliance risks – 67% said they are concerned about employee complaints linked to payroll, while 54% describe payroll errors as a “significant and recurring challenge”.

Technology concerns exacerbating pressure

Seventy percent of SMEs are worried about keeping up with payroll technology, with concern highest among those with 100-149 employees. As reporting requirements evolve, businesses are struggling to stay compliant without the right tools.

Top barriers to switching from manual payroll

• Limited expertise (38%)
• Lack of time to manage (36%)
• Cost (35%)
• Lack of time to onboard (31%)

Like a lot of small businesses, Rohan Simon, CEO of Medical Defense Society, has a small team with no HR function. As the CEO, he was spending five to six hours every month on payroll alone, taking him away from more strategic work. Juggling multiple systems over the years, he was frustrated by software that required constant manual intervention. When he switched to software that synced with his accounting, pension provider, and HMRC, he immediately saw the benefits.

“Previously, there were months where I fell short on payroll deadlines, which I hated because employees should always get paid on time. I needed something that could sync with my accounting, my pension provider and HMRC – without me having to fix things manually. Now, everything is automated, I only need to download the banking file, and that’s it. It’s a game changer," says Simon.

Employment Hero launches free payroll to support SMEs and a competition with Payroll Ninjas

Employment Hero has announced it is offering free payroll software to all UK businesses, helping to reduce compliance risk and ease financial pressures.

As part of this commitment, they have also launched a new competition offering £5,000 and a one-on-one payroll consultation with Sarah Sharpe, Head of Payroll Ninjas. UK-based small businesses that sign up and carry out a pay run using Employment Hero’s free payroll tools by 31st October 2025 will be automatically entered into the draw.

Commenting on the data, Employment Hero UK Managing Director Kevin Fitzgerald said: “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.”

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