Our new ‘Back to Basics’ series covers the fundamentals of employment tax and is aimed at companies or teams who are new to the UK tax system, and anyone who would benefit from a refresher.
Our first article focusses on payroll. Employees are entitled to several payments as part of their employment, some of which are taxable via HM Revenue & Customs’ PAYE system (the system HMRC uses to collect income tax) and others which are not.
So what should I, as an employer, put through payroll?
|Base salary excluding benefits and allowances. The full amount will be taxable via PAYE.
Pay received for annual leave. Its calculated as though the employee was working for that period. The full amount will be taxable via PAYE.
If an employee leaves their job with accrued holiday entitlement outstanding, payment is due for the holiday remaining. This is known as “payment in lieu of holiday”. The full amount is taxable via PAYE.
|Payment made for extended sick leave which qualifies for statutory sick pay. The payment is reported and taxed as normal wages via PAYE.
|A sum of money in addition to standard pay. Reported in the same way as basic pay.
Payment made during maternity or paternity leave is reported as normal earnings and will be taxed via PAYE.
Taxation of termination payments is a complicated area and each type of payment will need to be assessed separately for tax and National Insurance purposes.
Broadly, redundancy payments above £30,000 are subject to PAYE tax if they are for employment related services (salary, holiday pay and bonuses).
If an employee is contractually entitled to receive pay for the termination of employment, the £30,000 threshold does not apply and the payment will be treated as earnings taxable via PAYE.
Pay in Lieu of Notice” (PILON) This refers to a payment made by an employer who terminates a contract without giving the employee notice. Payment is made as though the notice period had been worked and is treated as earnings taxable via PAYE.
If during the period of employment the employee was subjected to an injury, illness or disability which prevented them from continuing to work, a payment may be made for the termination of employment. This amount would be fully exempt from income tax.
Although uncommon, another payment exempt from income tax is payments made to an employee by their employer to cover living costs while they are studying full-time at university.
Some employers make payments to support an employee who is enrolled on a sandwich course at a qualifying university. This is usually a course that will enhance job specific knowledge and performance. This type of payment will be exempt from income tax but there is a limit to the amount that can be paid.
|Share Options (unapproved)
|There is an obligation for an employer to operate PAYE when Share Options are exercised. The obligation sits with the company who was the employer at grant regardless of where the employee is at the time of exercise. Advice should be sought as Option Agreements often contain special clauses that affect the tax/National Insurance treatment.
|Employee Share Purchase Program (ESPP)
|A company may offer employees the opportunity to purchase shares for a discount. The amount of the discount applied goes through payroll as a taxable amount when the shares are purchased by the individual.
|Benefits e.g. medical
|It is possible for a company to elect to put benefits through payroll rather than reporting them on a P11D and a P11D(b). However this needs to be agreed with HMRC in advance.
|How this appears on the payslip will depend on which type of scheme the company operates. For example if it is salary sacrifice the individual payslip will simply contain the narrative employer pension contribution because the employee has agreed to a reduced salary and the employer then pays the difference into the employees’ pension in addition to their employer contribution. If the company operate a defined contribution scheme there will be both employer and employee contributions noted on the payslip. The employee’s contribution is deducted before tax is calculated and the employer’s contribution isn’t considered for tax purposes.
|A monthly deduction paid by both the employee and the employer at a rate governed by salary level. This payment does not reduce taxable income and is withheld before payment is made to the individual.
|Non taxable items
|Sometimes a non taxable payment will go through payroll such as reimbursed expenses. Whilst the narrative may appear on a payslip, it will be coded as non taxable so that it is not included in the tax calculation.
The above covers the core payments. Each company will have a specific way of doing things (or engage with a payroll provider who sets things out on payslips using a specific format).
If you would like help with any of the issues raised in this article, please contact a member of the team.
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