PayPerShop Forum

It has always been my understanding that a pay day has to fall within the relevant tax period you are actually processing.

I came across a difference to this yesterday, whereby a month 12 payroll and tax period will have a pay date of 10th April 2008.

Is this acceptable?

Hi Mark,
My understanding is that the actual date of payment determines when the tax and NI rates should be applied, therefore a monthly pay day of 10th April should be treated as Month 1 of the new tax year. However, in practice I too have seen cases where this is not strictly true. For example, a monthly payroll paying actual hours worked from 1st to 31st will not be calculated until after the 31st, and possibly not paid until a week or more into the following month. So, Month 12 payroll would be calculated as at 31 March, but not actually reach the bank accounts til after 6th April. I suppose that could be seen as incorrect, and perhaps the legislative experts will be able to tell us more, but from a practical point of view provided there are just 12 payments in the year I can't see the harm. The alternative would be paying March salary on an April payslip, which could have personal tax implications, e.g. on P45s for leavers. Having said that, if the payday is actually fixed at the 10th of the month, and that's what's on the payslip, I think it would have to be Month 1. An interesting question!

I'm a sad person - I love these types of questions because they force me to rethink everything and go back to HMRC's guidance and the statutory rules on which they are based!

Booklet CWG2(2008) is quite clear - PAYE is operated on the earlier of (1) when you actually make the payment, and (2) when the employee is entitled to be paid, even if the pay is not drawn until later. (page 7)

Similarly, booklet E13(2008) instructs that, when paying an employee for the first time (page 23) or on subsequent occasions (page 6), you use the week or month number appropriate for the pay date. The weekly and monthly tax calendar charts on page 24 are used to identify the correct tax week of month to use.

The statutory basis for these rules is found in sections 16 and 18 of the Income Tax (Earnings and Pensions) Act 2003.

There is no doubt, therefore, that earnings paid on a payday that falls on the 10th of each month should be taxed using the tax month that ended on the 5th prior to that date. It is the tax month that starts on the 6th of that month that must be used.

It is irrelevant for these purposes when the pay was earned. Pay due for the period 1 to 31 March but paid on 10 April is paid in the new tax year and and the liability for the tax only arises in the new tax year.

I would suspect that the practice of taxing payments made on the 10th of a month in the preceding tax month was caused by some historical situation that now appears too difficult to correct. To correct the situation, it would be necessary to tax the payment on 10 March at month 12 instead of month 11, taking twice as much tax as normal, an unpalatable situation for the employees concerned. It may be that the employer's tax office is aware of the situation and is allowing it to continue as an exceptional situation.

Do any readers have any suggestions as to how this situation could be corrected with minimum pain to the employees concerned?

Morning everyone,

I must admit that I looked at this one and decided to wait for Ian's reply before commenting (coward!).

At first glance I felt this was completely incorrect, the rules, to me, are so simple that pay day is the tax indicator and nothing can ever interfere with that.

However, Ian's reply sparked a dim and distant memory of the 1970's where a number of companies, faced with appalling financial turmoil and sky high interest rates did many interesting things in an effort to keep trading.

One of these was to delay payment of wages or salary until funds were available (neither companies nor individuals could borrow money unless they met the strict rules laid down by the International Monetary Fund who were effectively running the country at this time and this included overdrafts).

I can fully imagine that if this was taking place and remained unchanged then the practice would become part of the terms and conditions of the company, albeit creating an odd situation.

They may be relying on the expression used by Ian that the tax was being calculated based on the day payment becomes due even if the actual transfer of funds takes place later.

I think Alison is correct that because only 12 payments are made a year and no attempt is being made to create a tax advantage out of the arrangement there can be no problem and I have no doubt that the tax officer knows full well that the situation exists.

Correction of it would, as Ian suggests, be difficult and could be costly for the employees but I cannot help thinking that in time it must be necessary to bring the practice back to fit the normal rules because there will be an effect on a persons self assessment taxation situation if they were forced to account for their pay in the correct tax years.

Ian Whyteside

Hi all,
I'm sad too - I think this is a good one! To correct it going forward, could you run April's payroll (pay day 10.5.08) at Month 2, giving 2 months' allowances instead of one? I may be missing something, but wouldn't that be beneficial to the employees?
Alison

That has made me question the point I made in the last but one paragraph of my response.

What if the employer treated the payment on 10 March as a month 12 payment instead of month 11. That would not take extra tax, but less tax - the employees would have the benefit of the full amount of tax free pay for the tax year but against 11 months' salary.

Then the payment on 10 April would be the first month's salary in the new tax year, with the first 1/12th of the tax free pay to offset against it.

Or, as Alison suggests, the same thing could be done in May, by treating that as month 2.

So, is in fact the solution quite straightforward?

Hi All

Many thanks for your responses. I'm glad i'm not going loopy!!

I'm really surprised about this one as the payroll i'm taling about is currently being administered by a firm of accountants so would have thought they would apply the appropriate rules and regs?

However, the case is a bit more simple for me as we are taking on these group of employees and they are reverting to a 4 weekly frequency and it just so happens that their first pay period with us will be week 4 so it sorts itself out as their last payment with the old emoloyer will be month 12.