COMPLIANCE
Duplicate employment records Having a duplicate employment record can lead to many different complications; for example, HM Revenue and Customs (HMRC) may believe that the employee holds a second job. As a result of this, the individual may be taxed incorrectly. HMRC reiterated that employers must record the old payroll ID (PID) correctly when filing the full payment submission (FPS) with the new PID. If the old PID isn’t recorded correctly, this will lead to a duplicate record being created. In some cases, the FPS may incorrectly match to a PID from a previous employment period and incorrectly reopen that record. “If the employee hasn’t received equal pay or been paid at the correct rate for NMW, the employee will be entitled to a payment of arrears” Where a duplicate record is created for a continuing source of employment, HMRC officers have received instructions to update the PID on the other record to the latest PID on the FPS received so that they match. A monthly scan will be run in the first week that should auto merge the records. If the duplication has happened in the previous tax year or earlier and there is a ceased record that should be live and a duplicate record created by the employer, the PID on the ceased record should be updated by HMRC to match the latest PID held for that employment. Here are some tips to avoid a duplicate record being created: l record the new PID in the ‘payroll ID’ field on the FPS l record the previous PID in the ‘old payroll ID’ field on the FPS l tick the payroll ID update box so when the FPS is submitted it will match up the records l for new employees, it’s essential that full employee information is provided on the first FPS to allow HMRC to match the employee with the correct individual on the system l for new starters and leavers, the joining and leaving dates reported to HMRC should not be changed, even if there is a mistake. In these cases, the dates should be changed on the payroll software only
l avoid shortened names such Mike for Michael to remain consistent with HMRC systems / information l when changing payroll software provider, all details entered in the new software should match the details in the old software. The employees continuing their employment will be recorded as new starters by the software, but this shouldn’t be reported to HMRC.
entitled to for previous tax years, but that entitlement arose at a later date. Awards under the Equal Pay Act 1970 are arrears of pay, and the tax should be calculated for the tax year(s) that the award covers (Rule 2). This is because the Act inserts a clause into the employment agreement, entitling the employee to equal pay, at each pay reference period, even if the employee’s actual contract does not mention this. The National Minimum Wage, (NMW) Act (1998) has the same effect on employment agreements, meaning that the employee is entitled to be paid at the appropriate NMW rate for their age, in each pay reference period. Therefore, if the employee hasn’t received equal pay or been paid at the correct rate for NMW, the employee will be entitled to a payment of arrears (Rule 2). Tax treatment of pay arrears under Rule 1 Any payments made will be treated as taxable at the point the money is actually received / paid, most likely to be the same tax year / month if the amounts are paid all at once. The payment should be processed through payroll as additional employment income in the current month, using the employee’s tax code and the relevant thresholds as they stand at that date. The total payments should then be included on that month’s FPS report. Tax treatment of pay arrears under Rule 2 Any payments made will be treated as taxable in the tax year in which they should have originally been received. Pay arrears should be processed through payroll at the time they should have been paid, using the employee’s tax code and the relevant thresholds and rates that applied at that time, as that’s when the entitlement arose. An additional FPS report should be sent to HMRC for month 12 of those years, with updated year-to-date figures to include the arrears. National Insurance Insurance contributions (NIC) With regards to NIC, the same rules do not apply. Both employer’s and employee’s Class 1 NIC will be due on the full amounts of additional pay at the time of payment. This is because NIC is always applied in the year any payment of earnings is made, regardless of the tax year these payments relate to. n
Pay arrears arising from temporary promotions
We have recently been asked to consider the tax treatment of pay arrears which arose when some employees received temporary promotions but not an increase in pay. The retrospective review carried out therefore brought about the issue of when it is correct to apply tax. Rule 1 and Rule 2, sections 18(1) and 686(1) ITEPA 2003 Where an employee was / is entitled to additional earnings in a previous tax year, HMRC’s Rule 1 and Rule 2 contained within sections 18(1) and 686(1) ITEPA 2003 are used to calculate the treatment for tax purposes. Under Rule 1, earnings are treated as received when they are actually paid or when a payment on account of earnings is made. Under Rule 2, earnings are treated as received when a person originally becomes entitled to payment of or on account of earnings. In practice, this means that under Rule 1, earnings paid to employees in respect of their temporary promotions would be taxable in the tax year the owed amounts were paid. Under Rule 2, these amounts would be treated as taxable in the tax year in which they should have originally received them, or they were earned, i.e. the years in which they were temporarily promoted. Establishing whether Rule 1 or Rule 2 applies The key to establishing whether Rule 1 or Rule 2 applies lies within the payment received by the employee, namely, whether an amount relates to a payment of arrears or a pay award / bonus. Rule 2 has always been applied to genuine pay arrears, i.e. amounts which should have been paid to an employee in a previous tax year, while Rule 1 is applicable for any pay awards or bonuses which the employee became
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| Professional in Payroll, Pensions and Reward |
Issue 104 | October 2024
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