You Recovered the Payroll Overpayment. But Did You Fix the Payroll?

Recovering the money can feel like the end of anoverpayment problem. Payroll may have a different question to answer.

Recovering a payroll overpayment sounds primarily like a financialproblem. The employer paid too much, the employee received too much, so put themoney back where it belongs and the problem disappears. It is an entirelyreasonable assumption - and one that can conceal something important.

An employee is accidentally overpaid £500. The error is discovered,the employer recovers £500 through the following month's payroll and, acrossthe two months, the employee has received exactly the amount they should havereceived.

It is an appealingly neat solution. £500 went out by mistake; £500came back. What else is there to fix?

Imagine an employee who should have earned £2,000 in each of twomonths. Instead, they receive £2,500 in the first month and their gross pay isreduced to £1,500 in the second to recover the overpayment. Total earningsacross the two months are still £4,000 and, at those earnings levels, theNational Insurance calculation can produce exactly the same result as if theemployee had been paid correctly in the first place.

So far, so good. But now change the employee's earnings whileleaving everything else about the overpayment unchanged. The same £500 isoverpaid, the same £500 is recovered and total earnings remain the same. Thistime, however, moving £500 from one payroll period to another takes theemployee across a National Insurance threshold - and the National Insuranceresult changes.

That is where anapparently simple financial solution becomes a payroll question.

National Insurance is calculated by reference to earnings periodsand thresholds. It therefore matters not only how much someone earns, but whenthose earnings fall for National Insurance purposes. A £500 reduction in oneperiod does not automatically reverse the statutory effect of £500 that shouldnot have been included in another.

The first example is important precisely because it works. A methodproducing the expected result in one set of circumstances can look perfectlysound until the circumstances change.

HMRC's treatment of unintentional overpayments helps explain why thedistinction matters. Where an employee continues to be entitled to employmentincome, its guidance says the payroll error should be corrected by reportingthe correct total payments to date and net tax to date through the FPS. Itdeals separately with recovery from the employee, requiring the employer toretain a record of how the net pay was recovered - for example, by directrepayment or an agreed post-tax deduction from future pay.

That distinction is easy to overlook because money gives us such anintuitive measure of whether a problem has been resolved. If £500 was paidincorrectly and £500 has been returned, it feels as though everyone must beback where they started.

Payroll has anothermeasure: what should the statutory position havebeen if the error had never occurred?

For an employer dealing with an overpayment, that makes the usefulquestion slightly different. It is not only whether the money has beenrecovered, but whether the payroll has actually been put back where it shouldhave been. Sometimes the answer to both questions will be yes. The importantthing is knowing why.

Source note: This article is supported byBeePayWise Technical Review BTR-001, Correction of Erroneous PayrollOverpayments under RTI (v1.0, 16 July 2026).

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