Payroll insight
Current calculations ● National Insurance contributions – In the NICs calculation, rounding can occur at several stages. NICable earnings can be rounded, the calculation itself involves rounding, and certain procedures such as holiday pay in advance also have rounding implications. When calculating NICs using the exact percentage method, NICable earnings are not rounded. When using the table method, however, rounding NICable earnings is built into the tables. In the weekly tables, NICable earnings are rounded down to a whole pound (the pence are ignored). In the monthly tables, the calculation is made on the mid-point of each £4 band. Every NICable earnings figure that falls in the band is ‘rounded’ to the mid-point figure, so some are rounded up by as much as £2 while others are rounded down. This explains why the two methods produce different NICs results and why HMRC insists that you do not switch between them without good reason. Rounding occurs throughout the NICs calculation. Each time that a percentage rate is applied to an earnings band, the result is rounded down to four decimal places. After the results for each band are added together (and there may only be one band involved), the result is rounded to the nearest penny with ½p rounded down. This involves ignoring the fourth decimal figure and using the third decimal to round up or down: a figure five rounds down and a figure six rounds up. For example, £52.6558 rounds down to £52.65, whereas £52.6562 rounds up to £52.66. In circumstances that involve a series of NICs calculations, the point at which to round can vary. For example, when calculating NICs on holiday pay paid in advance using the attribution method, earnings are allocated to their appropriate weeks and the NICs calculated on each week separately. HMRC’s guidance says you can choose whether to round each week’s NICs before totalling or to add up the unrounded NICs and round the total. Similarly, if you use the average method, and calculate NICs on an average week’s earnings, you can either round the average week’s NICs or multiply it by the number of weeks and round the total. ● Income tax – By contrast, the income tax calculation is much simpler. Pay is
£148.9165, rounded up to the whole penny: £148.92. (If the daily rate were incorrectly rounded up to £29.79, five days’ SSP = £148.95.) ● Student loan deductions – Specific rules apply to SLD calculations. Rounding occurs when the annual earnings threshold is pro-rated and at the end of the calculation. It is built into HMRC’s SLD tables. The pro-rata earnings threshold is calculated to four decimal places and then rounded down to a whole penny. After calculating the deduction, the result is rounded down to a whole pound. percentage of the pay bill minus the pro- rated amount of the levy allowance. The percentage of the pay bill is rounded down to the pound, the pro-rated levy allowance is rounded down to the penny and the levy due is rounded down to the pound. An example illustrates this more clearly. Example Total pay bill for April is £348,693.40. This is multiplied by 0.5% to give £1,743.467, which is rounded down to the whole pound. The employer has a reduced annual levy allowance of £11,000 so the monthly levy allowance is £916.6667 which is rounded down to the penny: £916.66. The levy charge for the month is £826.34 (£1,743 less £916.66), which is rounded down to the pound: £826. Conclusion The calculations we encounter in payroll have different rounding rules, and sometimes none at all (such as gender pay gap reporting) often because they originate from different government departments. This complexity could lead to errors, especially when different terms may be used, but it is essential that the appropriate rule is applied, particularly for statutory calculations. It is worth knowing which method your payroll software uses so that you can use the same method in any manual calculations. HMRC’s guidance on GOV.UK often explains the rounding rules but, where they are not given, the rules are normally available from the software developer specifications that are also on GOV.UK. n ● Apprenticeship levy – The apprenticeship levy payment is a
rounded to the whole pound before looking up the tax amount in the tax tables or applying the relevant tax rate. Because pay has been rounded, the ‘tax due’ figure never has more than two decimal places so it is ready to use. ● Statutory payments – Eligibility for statutory payments such as sickness and maternity (and sometimes their amount) depends on the employee’s average weekly earnings (AWE). The AWE is ‘calculated to’ five decimal places (another way of saying ‘rounded down’) before comparison to the lower earnings limit (LEL) to establish eligibility.
...essential that the appropriate rule is applied,
particularly for statutory calculations
Example AWE of £112.99860 fails the eligibility test because it is below £113, the current LEL. However, if the AWE were rounded up to the nearest penny before testing it against the LEL, AWE would be £113 and the eligibility test would be passed. Statutory maternity and adoption pay includes payments at the earnings-related rate, which is 90% of the AWE. Use unrounded AWE in this calculation and round up the final result to a whole penny. One more rounding example relating to statutory payments concerns daily rates of statutory sick pay (SSP). An individual’s daily rate is the statutory weekly amount (£89.35) divided by the number of qualifying days (QDs) in the week for that person, truncated (or calculated) to four decimal places. Example The daily rate for a week containing three QDs is £29.7833. The unrounded daily rate is multiplied by the number of days of SSP payable in the period and the result is rounded up to a whole penny. For example, if a monthly-paid employee with three QDs a week is due 5 days’ SSP, then SSP due is 5 x £29.7833 =
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| Professional in Payroll, Pensions and Reward |
Issue 35 | November 2017
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