Payroll
...calculated as if the payment had been made in the year the employee was entitled to receive the payment, rather than when it is received...
circumstances arising. As readers may be aware, these
compensatory payments are similar in nature to the ‘equal pay’ settlements that have been made by local authorities over the past fifteen–twenty years. Characteristics of both include settlements based on losses arising in prior years where employees could claim to have been discriminated against. In the case of the equal pay settlements, HM Revenue & Customs (HMRC) agreed with councils a specific arrangement which involved the employer making a global settlement of liabilities based on a composite rate of tax and NICs. The composite rate is effectively an average based on the marginal tax rates and NICs bands of the employees involved. In agreeing this approach, HMRC accepted, in principle, that where an employer failed to make a payment to which an employee was legally entitled in an earlier year then ‘rule 2’ can be applied. In such cases, the tax liability may be calculated as if the payment had been made in the year the employee was
entitled to receive the payment, rather than when it is received, which would usually result in a lower tax rate. There is no indication that any employer has so far requested a ‘rule 2’ approach in respect of these holiday pay settlements, but this could potentially be relevant, especially as some employees may have earned below the level of personal allowances during prior tax years. Another point of interest here relates to whether settlement negotiations are based on numbers that are ‘net’ or ‘gross’ of tax/NICs. Clearly, if the parties agree a ‘net’ settlement figure, the employer will then need to gross it up to account for the tax/NICs deductions that would be required. If this whole area is not complicated enough, there are other related issues that should also be considered regarding
holiday entitlement and pay, including the following: ● In the case of employees with variable pay – please note that this does not include term-time workers – the decision in the case of Brazel v The Harpur Trust (2019) ruled that a holiday pay reference period of twelve weeks (now 52 weeks following rule changes in April 2020) should be applied in the case of a music teacher and that a percentage-based calculation should not be applied. ● The amount of holiday entitlement could have an impact on the calculation of any redundancy payments, so this needs to be carefully considered. If any readers are considering settlements for their term-time only staff due to incorrect annual leave entitlement calculations, professional tax advice is strongly recommended. n
TERMINATION PAYMENTS
Currently being delivered
via virtual classroom
HALF DAYCOURSE
Fromdetailing the variety of common payments which formpart of a termination package, this course examines their correct tax/NIC treatments and their correct application in a variety of circumstances, from redundancies to contractual breaches, retirement and death in-service.
This course covers: l Outlining the contractual implications of termination payments l Outlining the tax & NIC treatment of termination payments l Identifying the components of a Termination Payment l Administer Post Employment Notice Payments (PENP) l Outlining correct practices for termination payments for death in service and retirement
Book online at cipp.org.uk/training or email enquiries@cipp.org.uk for more information.
cipp.org.uk CIPP_UK cipp.org.uk @CIPP_UK
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| Professional in Payroll, Pensions and Reward |
Issue 64 | October 2020
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