PAYROLL - 04.01.2024

Payroll: making sure it’s correct

Workplace pension

As you’re probably aware, most employers are required to have a workplace pension scheme. Employers collect employees’ contributions from salaries and pass these, with their own contributions, to the pension company. That seems straightforward enough, but HMRC has warned that some employers are getting it wrong and as a result are underpaying PAYE.

Net pay v relief at source

Tax relief for pension contributions is allowed through either a “net pay” or “relief at source” arrangement. If net pay applies you must deduct the full amount of employees’ contributions from their gross pay. With relief at source, you must deduct a reduced contribution.

Mistake. Some employers are using the relief at source field in their payroll software when the net pay scheme should apply. This results in insufficient PAYE tax being deducted from employees’ pay. Tip. The pension company determines which method of tax relief should be used. Contact it if you’re not sure which method applies.

Salary sacrifice

The other problem that can occur is for those that have a salary sacrifice arrangement for pension contributions, i.e. the employee accepts a lower salary in exchange for the business paying extra pension contributions for them.

Mistake. HMRC says some employers continue to show the contributions in their payroll software as coming from “employees” instead of “employers”. This results in the employees concerned receiving double tax relief. Tip. Make sure your payroll manager is using the correct method. If an error has been made in the current tax year it can be corrected without notifying HMRC, but if it relates to an earlier year HMRC must be notified (see The next step ).

Correcting payroll and pay

If you don’t deduct the correct amount of PAYE tax or NI from a payment made to an employee, the action to take depends on the nature of the mistake and when it was discovered. Tip. If you deducted too much PAYE tax or NI refund the over-deduction to the employee the next time they are paid. Trap. If you’ve not deducted enough PAYE or NI you are a liable for the shortfall, which you must pay to HMRC as soon as possible after the error is discovered. For PAYE purposes, you will normally be able to recover the underpaid tax from any later earnings paid to the employee in the same tax year (see The next step ).

Timing

If you don’t discover the mistake until after the end of the tax year, provided it was made in good faith and you took reasonable care to make things right, you can ask HMRC to make a direction to recover the underpaid tax from the employee. If you’ve not deducted enough NI, you can recover this from later payments made to the employee in the same and following tax years. However, the amount that can be recovered from any one payment cannot exceed the normal primary (employees’) Class 1 NI due on that payment. If you overpay an employee salary or a pension contribution and the mistake is discovered in the same tax year and the employee continues to receive earnings in that tax year, the overpayment can be recovered in a later pay period by reducing their post-tax pay in that period, or you can ask the employee to repay the overpayment to you.

For information on correcting employees’ pay