MY CIPP
The CIPP's Advisory Service team provides answers to popular questions
Tax treatment of payments for injury to feelings Q: Our human resources department has informed us we must process a payment in respect of injury to feelings to an ex-employee. A termination payment was paid to the individual when his contract ended. Can this payment be made tax-free? A: It’s our understanding that payments for injury to feelings are taxed based on the actions that led to the payment being awarded. It can be treated as tax- free when the payment solely reflects compensation for discrimination that occurred before the termination. However, if the injury to feeling was because of the termination process itself, then the payment would have to be considered alongside any previously paid termination payment(s) for the purposes of the £30,000 exemption limit under Section 401 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). It's also worth mentioning that payments for compensation in respect of injury to feelings should be proportionate to the ‘Vento’ guidelines as mentioned in the case of Vento v Chief Constable of West Yorkshire Police (2002), which limit the amount that can be paid for injury to feelings. For reference, see: https://bit. ly/3NcK9tM. How to treat a refund of NI for a previous tax year Q: Due to a payroll systems error, an employees’ National Insurance (NI)
liability was incorrectly calculated in March 2022, resulting in an
were applicable in tax year 2020/21 to the payment? A: The issues of pay and the Equal Pay Act 1970 were highlighted for payroll professionals in the well-publicised tribunal case, Samira Ahmed v BBC. The Equal Pay Act 1970 effectively says that an individual has a right to the same contractual pay and benefits as a person of the opposite sex in the same employment. The employer will need to report corrected figures for the tax years affected. If reporting corrected figures, they should calculate the tax due on the backdated payments as if they had been paid in week 53 of each closed tax year, using the tax code that applied in the tax year that the arrears should have been paid. With regards to the NI position, NICs will be due at the time payment is made, so the 2022/2023 rates and thresholds will apply to the payment For reference, see: https://bbc.in/3FIouHK and https://bit. ly/3yxwR7a. Record-keeping for maternity pay and leave Q: Should an original MATB1 certificate be kept by the company and, if so, for how long? A: A photocopy of the MATB1 is acceptable as HMRC guidance states that employers are required to retain: “Proof of pregnancy – usually a doctor’s note or a MATB1 certificate (a photocopy is fine)”. With regards to the retention of the document, Section 97 (8) for ITEPA 2003 advises that employers retain all payroll
overpayment. We advised the employee to contact Her Majesty’s Revenue and Customs (HMRC) to request a refund; however, HMRC has advised it’s our responsibility to ensure the refund is paid. As the overpayment related to the previous tax year, is it possible for us to make the refund in the new tax year? A: If the employee is still in employment with the company, then it would be the employer’s responsibility to correct the record and refund the overpaid NI to them in the next available pay period. HMRC guidance states: “If the mistake was in the 2021 to 2022 tax year, send an FPS with the amount you should have deducted. You’ll need to write to HMRC if both the following apply: ● the difference is negative because you deducted or reported too much National Insurance ● you still owe your employee a refund, for example because they’ve left your employment.” For reference, see: https://bit. ly/3sveJar. Q: An ex-employee has agreed to a settlement in relation to an equal pay claim. Our understanding is for tax purposes, this payment should be processed through the payroll as if it arose in the year it relates to. The person’s employment ended in 2020, so could you advise if we should also apply the NI rates and thresholds that
| Professional in Payroll, Pensions and Reward | July - August 2022 | Issue 82 6
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