I Accidentally Overpaid an Employee, How Do I Fix It

Introduction

Overpaying an employee can occur for many reasons a typo in payroll, a missed deduction, or an error when calculating overtime or holiday pay. Regardless of the cause, the law allows employers to recover overpaid wages, but there is a right and wrong way to do it.

Dealing with the issue promptly and clearly helps prevent disputes, maintains trust, and keeps your payroll accurate for tax and National Insurance purposes.

Step 1: Confirm that an overpayment occurred

Before taking any action, check your records to confirm the overpayment. Review:

The employee’s contract, pay rate, and timesheets.

Payroll calculations for the affected period.

Bank statements or payroll reports showing the actual payment made.

Sometimes what appears to be an overpayment may be legitimate, such as approved overtime or a bonus. Confirm the details before contacting the employee.

Once you are certain that an overpayment has occurred, calculate:

The total amount overpaid.

The pay period(s) affected.

Any tax or National Insurance that needs to be adjusted.

Accurate calculations are essential before moving to the next step.

Step 2: Inform the employee immediately

Once you have verified the mistake, inform the employee as soon as possible. Explain clearly:

How the overpayment happened.

The exact amount overpaid.

How you propose to recover the money.

Be polite, transparent, and understanding. Employees are rarely at fault for payroll errors, and how you handle the conversation can affect morale.

It is often best to communicate in writing after an initial discussion, so both parties have a clear record of the agreement.

Step 3: Agree on how to recover the money

Under the Employment Rights Act 1996, employers are legally entitled to reclaim accidental overpayments, even if this means making deductions from future wages. However, deductions must be handled reasonably.

There are several ways to recover the overpayment:

Single deduction: The simplest method if the amount is small and the employee agrees.

Gradual deductions: For larger amounts, spread repayments over several pay periods to reduce financial strain on the employee.

Direct repayment: The employee can transfer the overpaid amount back to the company’s bank account.

Always get written confirmation of the agreed repayment plan.

If the employee no longer works for you, contact them in writing to explain the error and request repayment. You can negotiate a repayment schedule or, as a last resort, pursue the matter through the civil courts if they refuse.

Step 4: Adjust payroll and tax records

Once repayment terms are agreed, correct your payroll records. You may need to:

Reverse the overpayment in your payroll system.

Recalculate PAYE tax and National Insurance for the affected period.

Submit an amended Full Payment Submission (FPS) to HMRC through your payroll software.

If the overpayment occurred in the current tax year, HMRC adjustments are usually straightforward. For previous tax years, contact HMRC for guidance before making changes.

Accurate corrections ensure that both the employer and employee’s tax and pension contributions remain correct.

Step 5: Update pension and benefits contributions

If the overpayment included pension or other benefit deductions, you must review these as well. Contact your pension provider to report the error and confirm how to correct any overpaid or underpaid contributions.

If your organisation provides benefits based on salary, such as life cover or bonuses, update those calculations to reflect the correct earnings.

Step 6: Learn from the mistake

Once the issue is resolved, review your payroll processes to prevent future overpayments. Common causes include:

Incorrect data entry when updating pay rates.

Errors in timesheet or overtime processing.

Duplicate entries for one pay period.

Misunderstanding of statutory pay calculations (for example, sick pay or maternity pay).

Introduce additional checks or approvals before payroll is finalised each month. Consider using automated payroll software or outsourcing payroll to a professional provider if errors happen regularly.

If the employee refuses to repay

In most cases, employees cooperate once the situation is explained. However, if they refuse to repay or dispute the amount, you can:

Provide detailed evidence showing the overpayment.

Try to reach a written agreement or mediation.

As a last resort, make a claim in the small claims court to recover the money.

Avoid making unauthorised deductions that breach your agreement or cause the employee hardship. A cooperative approach usually achieves faster results.

Handling overpayments after employment ends

If an employee has already left your company, you can still request repayment. Write a clear, polite letter outlining:

When the overpayment occurred.

The total amount owed.

How they can repay (for example, by bank transfer).

Attach a copy of payslips or calculations as proof. Keep a record of all correspondence in case further action is needed.

If the employee has left the UK, recovery may be more difficult, but you can still seek legal advice about pursuing repayment.

Maintaining good employee relations

While employers have the legal right to recover overpaid wages, handling the issue fairly is crucial. Offer flexible repayment options and show understanding, especially if the error was not the employee’s fault.

A respectful approach helps maintain trust and avoids damaging morale or your organisation’s reputation.

Common mistakes to avoid

Making deductions without the employee’s knowledge or agreement.

Failing to correct payroll records properly.

Ignoring pension or tax adjustments.

Not documenting repayment agreements in writing.

Clear communication and accurate records protect both you and your employee from future disputes.

Conclusion

Accidentally overpaying an employee is a common payroll mistake, but it can be fixed quickly with the right approach. Verify the error, communicate openly with the employee, agree on repayment, and correct your payroll and tax records.

Employers have a legal right to recover overpayments, but fairness and transparency are key to resolving the situation smoothly. By learning from the mistake and improving payroll procedures, you can reduce the risk of it happening again.