Facing a PAYE Investigation? Key Steps to Protect Your Business

Discovering that your business is under a PAYE (Pay As You Earn) investigation by HMRC can be a stressful experience. Whether you received a letter or phone call notifying you of a compliance review, it’s important not to panic. PAYE investigations are a standard part of HMRC’s checks to ensure employers are meeting their tax obligations correctly, and they can often be resolved efficiently with the right approach.

In this guide, we’ll walk you through exactly what a PAYE investigation entails, why it might happen, and—most importantly—how to respond proactively to protect your business and reputation.

What Is a PAYE Investigation?

A PAYE investigation is HMRC’s way of checking that you are correctly operating your payroll system. It focuses on whether your business is accurately calculating, reporting, and paying:

Income Tax
National Insurance contributions (NICs)
Student loan deductions
Statutory payments (maternity, paternity, sick pay)
Auto-enrolment pension contributions (where applicable)

These investigations can be triggered for several reasons, including:

Discrepancies in submitted payroll data
Random compliance checks
Employee complaints
Industry-wide compliance sweeps

Whatever the cause, your priority should be to prepare effectively and co-operate fully.

Step-by-Step: What to Do If You’re Facing a PAYE Investigation

1. Don’t Ignore the Notification

As soon as you receive a notification, take it seriously. HMRC will usually send a formal letter outlining what they intend to investigate, what records they want to see, and when they expect a response.

Read this letter carefully and make note of:

The scope of the investigation
Deadlines for providing information
Contact details of the HMRC officer assigned

Ignoring or delaying your response can escalate the matter and increase the chances of penalties.

2. Get Expert Help Immediately

One of the smartest moves you can make is to engage an experienced tax advisor or accountant who specialises in PAYE compliance. They’ll help you:

Understand the scope and implications of the investigation
Organise the required documents and data
Represent you in correspondence and meetings with HMRC

A professional representative can also reduce the risk of saying the wrong thing or providing incomplete information.

3. Gather and Organise All Relevant Payroll Records

You’ll need to prepare a wide range of documentation, such as:

PAYE records (RTI submissions, P11Ds, P60s, P45s)
Employee contracts and payment summaries
Timesheets, payslips, and overtime records
Expense claims and benefits in kind
Details of off-payroll workers or subcontractors

Ensure all information is accurate, complete, and easy to present. If records are digital, check they are in a format HMRC can access.

4. Review Your Payroll Procedures Internally

While preparing for HMRC’s scrutiny, take this opportunity to conduct an internal audit. Look for:

Underpayments or overpayments of tax
Incorrect treatment of benefits or expenses
Misclassification of employees vs. contractors
Compliance with minimum wage and statutory pay rules

By identifying and correcting issues yourself, you can demonstrate to HMRC that you take compliance seriously.

5. Stay Transparent and Responsive

Communication is key. Be prompt in your responses and provide any additional information requested by HMRC within the specified timeframes.

Trying to hide errors or delay the process will only increase suspicion and could lead to more severe consequences, such as penalties or formal enforcement action.

What Happens During a PAYE Investigation?

Typically, the investigation will unfold in one of two ways:

Remote review: HMRC requests specific documents and assesses them without visiting your premises.
On-site visit: HMRC officers attend your workplace to examine payroll systems, interview staff, and assess compliance in real-time.

In both cases, the objective is to ensure you’re operating PAYE correctly and consistently. If errors are found, HMRC will calculate any underpaid tax and may impose penalties, interest, or even issue a formal warning.

Penalties: What’s at Stake?

If HMRC identifies non-compliance, the penalties can vary based on:

The extent of the error: Minor clerical mistakes may result in warnings or education.
Your behaviour: If HMRC believes the issue was deliberate or concealed, the penalties can be more severe.
Your cooperation: Demonstrating transparency and willingness to correct errors can reduce penalties.

In serious cases, financial penalties can reach up to 100% of the unpaid tax. Repeat offenders or deliberate evaders may face criminal investigation.

How to Prevent Future PAYE Investigations

Once you’ve dealt with the current situation, your next focus should be on preventing a repeat. Here are some steps to strengthen your PAYE compliance:

1. Conduct Regular Internal Payroll Reviews

Carry out routine checks on your payroll system to ensure:

PAYE and NICs are correctly calculated
Statutory payments are correctly applied
Expenses and benefits are accurately recorded

2. Automate and Digitise Payroll Processes

Using robust payroll software that integrates with HMRC’s systems reduces the chance of human error. It also makes it easier to generate accurate reports when needed.

3. Keep Training and Knowledge Up to Date

Tax legislation changes frequently. Ensure your HR, finance, and payroll staff receive regular training on:

PAYE rules and calculations
Employment law updates
RTI submission requirements

4. Maintain Detailed Records for All Payments

Keep detailed and accessible records for all employees and contractors. This includes contracts, timesheets, benefits, and communication relating to salary adjustments or bonuses.

Be Proactive, Not Reactive

A PAYE investigation doesn’t have to spell disaster. The key is to act quickly, prepare thoroughly, and seek expert help. Mistakes can happen, but how you respond makes all the difference.

By demonstrating good faith, strong record-keeping, and a willingness to cooperate, you can not only resolve the current issue but build a more compliant, resilient payroll system for the future.

Don’t wait until HMRC knocks on your door—take control of your PAYE compliance today and safeguard your business against future risk.