Payroll insight
and the Equality Act 2010 effectively insert a clause into the employment agreement, if one does not already exist, giving the worker the right to the appropriate NMW rate or to equal pay. Therefore, entitlement to the higher pay (whether under NMW or equal pay provisions) arises at the time when the lower or discriminatory wages/salary were paid. Accordingly, the arrears of pay are subject to income tax in the tax years when the employee was entitled to the earnings – not the tax year in which payment of the arrears of pay occurs. Thus, under the ‘earlier of’ rule (see Rule 2, above) the arrears of pay must be broken down into the sums attributable to each of the tax years to which they refer. Under PAYE, the employer is to deduct income tax at the rates (including the Scottish rate) that should have been operated for the tax years to which the arrears are attributable. The Class 1 NICs treatment differs fundamentally from that for income tax where arrears of pay are allocated retrospectively to one or more prior (closed) tax years. The standard Class 1 NICs treatment continues to operate, with the arrears of pay being assessed to NICs using the rates and bands in force when actually paid. To assist employers in calculating the tax due on the arrears of pay and ensure that it is paid over to HMRC, special arrangements can ease matters for employers, employees and HMRC. There are some slight differences between the guidance in HMRC’s PAYE Manual (http:// bit.ly/2lcRi5s) and the CWG2 Employer further guide to PAYE and NICs (http:// bit.ly/2sv8SDw), so employers may wish
to review both sets of guidance. The following is based on the CWG2 guidance. Generally, employers should: ● use the tax code that applied in the tax year in which the arrears should have been paid. HMRC can confirm the tax codes that applied in closed years if the employer no longer has a record of them ● calculate and deduct tax for each closed tax year as if the additional pay had been paid at week 53 ● give each employee a letter showing the revised pay for each tax year and the tax and NICs deducted, and containing the message “If you think that you’ve overpaid tax or NICs for any of the years concerned you should contact HMRC National Insurance Contributions and Employer Office” ...retrospectively enrolled (possibly through manual intervention) and/ or additional employer and worker pension contributions paid ● submit an earlier year update (EYU) submission via real time information with the relevant data items completed. (Note an EYU can only be submitted for tax years when RTI was operational.) Where there are large numbers of employees involved with arrears of pay due to them for tax years prior to introduction of RTI, employers are to take the following action: ● contact HMRC’s Employer Helpline to explain the situation, quoting the CWG2 guidance ● request a ‘special arrangement’ to deduct and pay tax under an ‘Employer Amendment Class 6 Settlement’. A special arrangement for the deduction of tax is agreed on the basis that it is impracticable for both the employer and HMRC to obtain details of tax codes for the employees. This might mean HMRC authorising use of tax code BR (basic rate) for each employee. On receiving the employer’s written request explaining why it is impracticable
to operate PAYE and make deductions of tax, HMRC will confirm whether a special arrangement can apply. If the special arrangement can be operated the employer is to: ● follow the instructions for deduction of tax as set out by HMRC and agree the Employer Amendment Class 6 Settlement ● send to HMRC a list showing for each employee, their name, National Insurance number and the pay and tax for each year ● give each employee a letter showing the revised pay for each tax year and the tax and NICs deducted, and containing the message “If you think that you’ve overpaid tax or NICs for any of the years concerned you should contact HMRC National Insurance Contributions and Employer Office” ● make payment of the tax within thirty days from date of payment of the arrears of pay. (Note that interest will be chargeable on late paid tax from the due date.) Automatic enrolment For purposes of assessing both whether a worker is to be automatically enrolled and the calculation of pension contributions for the worker, the employer is required to assess not just what is paid to a worker in the pay reference period but what ought to have been paid in that period. The effect can be that a worker must be retrospectively enrolled (possibly through manual intervention) and/or additional employer and worker pension contributions paid. When handling backdated pay, care should be taken to understand when, under the worker’s contract, the backdated amount is payable. If the contract states that a pay award is payable at a point in time, then irrespective of when the backdated pay is actually processed and paid, it should be considered at the point when payable. If, however, payments for pay increases are simply due at the point they are processed/paid/agreed, then they will only need to be considered at this point. For example, if under the worker’s contract, pay is reviewed every April and any increase takes effect from this date, then were the pay award not actually processed until November’s pay reference period, what ought to have been paid in each pay reference period from April must be re-assessed. n
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| Professional in Payroll, Pensions and Reward |
Issue 35 | November 2017
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