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A–Z of payroll

A–Z of payrollUnderstanding payroll terminology and establishing the correct tax and NIC treatment of paymentsThis note provides an alphabetical summary list of many of the common terms encountered by those operating a payroll. It also provides appropriate signposting, showing where additional guidance may be found Additional published official guidance, includes HMRC’s CWG2 further guide to PAYE and National Insurance contributions, which summarises the department’s technical views of how most payments should be treated.For additional reading on payroll matters, please refer to Simon’s Taxes, division E4.11.For new or smaller employers the Employer obligations for those running a small payroll guidance note may also be of use.Navigation tip: press ‘Ctrl + F’ to search for a particular term within the table.Payroll term or paymentFurther detailsReferencesAAbsences ― holiday payAn employer has a statutory obligation to pay holiday pay, and the general expectation is that this should be made at the employee’s normal pay rate. The statutory minimum in the UK is 5.6 weeks holiday pay per year, including bank holidays (pro-rated for part time staff). However employees may have additional rights, eg under their employment contract Holiday pay ― legal pointsAbsences ― statutory payments, maternity pay, paternity pay, adoption pay, shared parental leave pay and parental bereavement pay (SMP, SPP, SAP, SSPP and SPBP)An employer is obliged to make statutory payments to employees, if they fall within certain qualifying criteria covering parenthood or child bereavement. All statutory payments are paid

Tips and commission

Tips and commissionIntroductionTips and commission are both varieties of payment that employees may receive in addition to their regular wage or salary payments. Tips, in particular, are often paid by a customer or client rather than by the employer. This note also covers the position regarding the distribution to employees of service charges applied directly to customers’ bills.The starting point is that both tips and commission, however paid, are taxable as earnings in the hands of the employee. In the case of tips, there are a number of ways in which they can be paid and a number of routes they can take before ending up in the hands of the employee. It is the handling of the payments before they reach the employee that determines whether the payments are also subject to NIC, whether they are subject to PAYE and, if so, who should operate PAYE in respect of the payments. Tips and commission paid in vouchers rather than cash are still taxable as earnings. See also Simon’s Taxes E4.470, E4.1112 and E8.232. HMRC guidance is at EIM00520 and NIM02900CO.TipsAs mentioned above, there are a variety of ways in which tips may be handled and an employee may receive tips by a number of routes in the same employment. The tax and NIC treatment will depend on the method of handling.As there are different treatments depending on how the tips are handled, methods for ensuring that staff receive the highest take-home amount have been devised. Troncs are a

Salary sacrifice and national minimum wage

Salary sacrifice and national minimum wageIntroduction and backgroundA key feature of UK employment law is that all employees must be paid at least the National Minimum Wage (NMW), or where relevant, the National Living Wage (NLW). See our National minimum wage ― overview guidance note for more. Employers must pay people who do work for them at least the NMW / NLW if they are a ‘worker’ for NMW / NLW purposes and a specific exemption does not apply to them. Workers are those essentially engaged under a contract of service rather than a contract of apprenticeship or director’s service agreement (although, it is possible for a director to have a contract of employment and a service agreement running in parallel meaning they are covered by the NMW / NLW).Failure to comply with the NMW / NLW can not only lead to enforcement orders to compensate the workers for the wage they should have been paid but also penalties and even criminal sanctions including fines to the employer.Further guidance on who is and is not covered by the NMW / NLW is available on the GOV.UK website.Despite the NMW / NLW being a policy of the Department for Work and Pensions, enforcement is undertaken by HMRC (see the National Minimum Wage Manual).The rates of NMW are set out in the National minimum wage ― overview guidance note.The NMW / NLW is calculated by reference to an employee’s gross pay and gross pay in this context includes contractual salary, certain

Third party liability for PAYE

Third party liability for PAYEPAYE is an acronym for pay as you earn. Despite this label, the employee (‘you’ in the title) has little involvement in the PAYE process, other than suffering the income tax and NIC deduction from their wages or salary. In the majority of cases, it is the employer who administers PAYE on their employees’ earnings and is responsible for paying over the tax and NIC (plus any student loan repayments) deducted to HMRC. However, there are some circumstances where this is not the case and tax and / or NIC has to be accounted for by a third party.Taxed award scheme (TAS)Where employees receive incentive ‘awards’ from a third party, tax and NIC may be due on the value of the award. If the employer is not directly involved in the provision of the award by the third party, then the third party may opt to enter into a TAS. The agreement is between the third party and HMRC. Where a TAS has been entered into, the third party can choose to account for tax at either the basic rate or the higher rate. The tax liability needs to be calculated on the grossed up value of the award.Exemptions are however available for third party entertainment provided, as well as small gifts to third parties not exceeding £250 in value.For further details of third party incentives and awards, please refer to the Third party benefits guidance note, also Simon’s Taxes E4.471 and E4.11124.Payroll obligations on