Staff at Wellington Regional Council have been over-paid and under-taxed for almost a decade.
The mistake could mean it owes millions to Inland Revenue.
It realised the error when changing the payroll system, and found it had been miscalculating tax deductions for employer KiwiSaver contributions for nine years.
The Wellington Regional Council said the mistake occurred when the Employer Superannuation Contribution Tax system was introduced and set up in the pay system in 2012.
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"This is a complex issue spanning nine years. We are working with Inland Revenue to estimate and agree the extent and how to resolve the problem."
It said 394 of its 613 current employees were affected, and none would be asked to pay back the money.
"A full review of the underpayment of ESCT to Inland Revenue has been undertaken by PwC. Our employer contributions to KiwiSaver schemes will be corrected from April 1, 2021."