Last updated: 14 October 2026
How do you recover overpaid wages and PAYE after a payroll error?
If a payroll clerk overpays an employee by mistake, the employer can usually recover the net overpayment from the employee, and correct the PAYE and National Insurance through payroll. The simplest fix is to reduce gross pay in the next pay run (or across several), which automatically corrects tax and NIC in the same tax year. If the error crosses a tax year, you’ll need an Earlier Year Update or a corrected Full Payment Submission, depending on timing.
Ways to correct an overpayment
| Situation | What to do |
| Spotted in the same tax year | Recover the gross overpayment through payroll by reducing pay; tax and NIC adjust automatically |
| Employee repays the net amount directly | Record a negative gross adjustment in payroll so the tax and NIC are put right |
| Spotted after the tax year ends | Correct the year-to-date figures with an FPS by 19 April, or an Earlier Year Update after that |
| Employee has left | Ask for repayment of the net amount; reclaiming the tax and NIC needs a correction to the leaver’s record |
Can you take the money back without consent?
Under the Employment Rights Act 1996, deductions from wages are normally unlawful unless authorised. But there’s a specific exception for recovering an overpayment of wages. Even so, it’s good practice to:
- tell the employee in writing what happened and how much was overpaid
- agree a repayment plan if a single deduction would cause hardship
- not reduce pay below the National Living Wage, currently £12.71 an hour for those aged 21 and over
Example
In May 2026, Aston Retail’s payroll clerk keys £4,200 instead of £2,400 for a monthly-paid employee. The extra £1,800 gross produced about £1,224 net after tax and NIC. In June, the company reduces gross pay by £600 a month for three months, with the employee’s agreement. The PAYE and NIC recalculate in each pay run, so the employee repays only the net amount and HMRC’s figures end up correct.
Employer’s NIC and pension
Employer NIC on the overpayment is corrected automatically when gross pay is reduced in the same tax year. Pension contributions deducted on the overpaid amount also need correcting, and you should tell the pension provider.
Student loans
Student loan deductions are recalculated through payroll in the same way. If the error goes across tax years, the employee may need to ask the Student Loans Company for a refund.
Preventing errors
- Have a second person check unusual amounts before each pay run
- Use exception reports in your payroll software
- Lock pay rates so they can only be changed with approval
Records to keep
Keep a note of how the error happened, the amount overpaid gross and net, the letter or email sent to the employee, any repayment agreement and the payroll reports showing the correction. If HMRC or the employee later questions the figures, these records show exactly how the overpayment was put right.
Frequently asked questions
Does HMRC refund the tax directly?
Not usually; the payroll correction does it.
What if the employee refuses to repay?
You may be able to recover it through the courts, but take advice first.
Do I report the error to HMRC?
Corrections in later FPS submissions are the report.
Can I write off the overpayment?
Yes, but it is then taxable pay.
Related: employee tax codes with no P45, casual workers and payroll and checking your tax code.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with payroll corrections. See our payroll accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
