Overpayment of wages: what to do if you’ve overpaid an employee

If you’ve accidentally paid an employee too much, you’ll naturally want to get the money back. Perhaps you’ve entered the wrong salary into your payroll system, paid someone twice or failed to account for a period of unpaid leave.

Fortunately, you can usually recover an overpayment of wages, even if the mistake was yours. But there are rules to follow, and you’ll need to correct your payroll records as well as recover the money.

Here’s what you should do.

Can you legally recover overpaid wages?

Yes. In Great Britain, section 14 of the Employment Rights Act 1996 allows employers to deduct genuine wage overpayments from an employee’s future pay.

This is an exception to the usual rules restricting deductions from wages, so you don’t generally need the employee’s written consent.

Before making a deduction, establish exactly how the overpayment happened and check the amount against the employee’s contract, payslips and payroll records.

An apparent overpayment may turn out to be money the employee was entitled to receive.

How should you ask an employee to repay overpaid wages?

Speak to the employee as soon as you’ve discovered the mistake.

Explain what happened, how much they received and how you propose to recover it. Give them a written breakdown so they can check your calculations.

If the error only affects one month’s wages, the employee may be happy for you to deduct the overpayment from their next salary.

Larger amounts can be more difficult. For example, if you’ve been paying someone £200 too much every month for a year, their gross pay will have been overstated by £2,400.

Recovering everything immediately could leave them struggling to meet their bills.

Acas recommends agreeing a repayment plan, particularly when an overpayment is substantial or has continued for some time. You could arrange smaller deductions over several months.

Although the law generally permits deductions for genuine wage overpayments, agreeing the arrangements with your employee can help prevent unnecessary disputes.

What if the employee has already left your business?

Discovering an overpayment after someone has left makes recovery more complicated. After all, there’s no future salary from which you can deduct the money.

Start by contacting your former employee in writing. Explain the mistake, provide your calculations and ask them to repay the amount owed.

They may agree to return the money in one payment or by instalments.

If they refuse, you may be able to pursue the debt through the courts. Before taking legal action, consider the amount involved and whether the cost of recovery is worthwhile.

If the employee disputes the overpayment, you may also need specialist employment law advice.

How do you correct a payroll overpayment with HMRC?

Recovering the money is only part of the job. You’ll also need to correct any affected Income Tax and National Insurance.

For example, if you’ve accidentally paid someone an extra £500 in gross salary, they probably won’t have received the full £500 because tax and National Insurance were deducted.

How much they should repay depends on how you recover it and whether your payroll correction refunds those deductions. You’ll need to work through the figures rather than simply ask for £500 back.

Under HMRC’s payroll correction guidance, you can normally correct a mistake made during the current tax year by updating the year-to-date figures in your next Full Payment Submission (FPS). Alternatively, you can send an additional FPS before the next regular submission.

For errors relating to tax years between 6th April 2020 and 5th April 2026, HMRC instructs employers to submit another FPS with corrected year-to-date figures.

You’ll also need to check any affected student loan repayments and workplace pension contributions. HMRC has separate rules for correcting student loan and National Insurance deductions.

Keep records of the original overpayment, repayments received and corrections made.

Need help correcting a payroll mistake?

Payroll errors happen, but an overpayment can create difficulties for your business and your employee if it’s handled badly.

If you’ve overpaid someone, THP can help you check the figures, correct your payroll records and make sure the appropriate information is reported to HMRC.

Find out more about our outsourced payroll services or get in touch with our friendly team for advice.