In this the second article on payroll matters the focus will be on income tax and national insurance (NI) queries.
Income tax and NI calculations may be simple enough, but an employee’s situation may not be. So, in an attempt to save the busy bookkeeper or agent the stress of researching the answers, below are some typical queries that can arise.
One common error that can occur is that incorrect details are sent to HMRC on the FPS. The error may not come to light until the following tax year when, on discovery, momentary panic may set in. The situation can easily be resolved however, by adjusting the figures on an EYU (Earlier Year Update) and then paying any amounts due to HMRC.
If the casual labour is earning above the Lower Earnings Limit (LEL) then the individual’s details must be entered into the payroll system. Though there may be no PAYE liability the individual will be eligible for statutory benefits and their pay will need to be recorded.
If the individual is casual labour, regardless of whether the individual earns below the LEL (and therefore has no national insurance or income tax liability) then, subject to certain exceptions, the normal PAYE procedures must be followed. The exceptions to this rule are for Harvest casuals and casual Beaters. Follow this link for more information click here.
Be careful when giving advice on casual labour. It probably makes more sense, though more work, to enter all employee details into the PAYE system regardless of the length of time employed. The old adage comes to mind ‘better safe than sorry’.
Another question that may come up is whether a sole trader who pays himself must set up a PAYE scheme and would he have to pay company taxes. If a question like this is asked the bookkeeper needs to find out if the business is incorporated, if it is then, the owner is a director and both PAYE and corporation tax is due on company profits. If he is unincorporated then he is a sole trader, has drawings not wages, and reports profits assessable for income tax and NICs on a self-assessment tax return.
The above may seem obvious, but don’t expect the client to know the difference. They are seeking an expert to handle all their tax and statutory obligations, and because they do not have specialist knowledge the terminology they use will be often be inaccurate or muddled.
There are two ways that director NICs can be calculated. The first method is called the ‘Standard annual earning period method’, and the second is called the ‘Alternative method’.
The first method is used for directors who are paid irregularly.
- For each payment made to the director, work out the total national insurance contributions due for total pay to date, including bonuses.
- To calculate the contributions due on the current payment, take off the total national insurance contributions paid so far this year.
The second method is designed for directors who are paid regularly.
- Each time the director is paid, work out the National Insurance due on the pay for that period, including bonuses.
- At the end of the tax year, use payroll software to calculate whether more employee national insurance is due, and if so, deduct from the last payment.
Following the above methods ensures that directors pay the correct amount of national insurance and that the employer has made the lawful amount of tax and national insurance deductions.
Finally, brief outline of the K code and how this is managed. The K code is used to collect tax when the amount of tax owed from previous tax years is more than the individual’s Personal Allowance.
To work out how much should be added to their taxable pay before deductions are calculated, multiply the tax code number by ten.
An example would be for an employee with a tax code of K285 a salary of £28,500 becomes taxable pay of £31,350 (£28,500 plus £2,850). Once taxable pay has been calculated deduct income and national insurance as normal subject to the 50% regulatory limit.
The 50% regulatory limit sets the amount of total deductions taken to half the pre-tax income.
In the example above, if the employee was paid monthly and therefore received £2,612.50, no more than £1,306.25 could be deducted in total.
Finally, a situation that can arise when an employee leaves.
An employer has let a member of staff go with no notice. The employer wants to enter the date of leaving onto the P45 date, but final payments have yet to be confirmed.
Though in an ideal world the P45 would have all the final details on it, sometimes this is not possible. In this instance process the pay post P45 using code 0T and tax at basic rate. No Personal Allowance is to be given.
These are some typical queries that can arise and halt the work of the bookkeeper or agent while they hunt for the answers or seek advice. It is hoped that the above have in some small way answered those questions and thereby helped the bookkeeper complete their work, (and keep their sanity).
Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.