TAXguide 05/24: Payroll and reward update webinar Q&As

ICAEW’s Tax Faculty delivered a payroll and reward update webinar on 10 April 2024. The webinar was presented by Ian Holloway, payroll professional and member of ICAEW Tax Faculty Employment Taxes & NIC Committee, and Peter Bickley, ICAEW Tax Faculty. The webinar is available to watch on-demand. Answers to questions asked during the webinar are provided below.

See gov.uk guidance on holiday pay and leave: Holiday Entitlement.

For more detail, see ACAS holiday entitlement guidance How much holiday someone gets and Calculating holiday pay. Separate rules and ACAS guidance apply to irregular hours and part year workers for whom see Building up holiday and Holiday Pay.

1. Please explain what is the situation, that now holidays cannot be paid and employees have to take them? Is this correct?

It was always the situation that holiday leave had to be allowed by the employer and the worker had to be able to take the days off. This is all for the purposes of RRR (rest, relaxation and recovery). Before the latest change, technically holiday leave had to be paid at the time the worker took the leave and a payment could not be made in lieu (except on the termination of employment).

It is still the situation that the employer must allow the worker to take holiday leave. The main difference now is that for some workers (part-year and irregularly paid (eg zero-hour)) the employer has the option of paying holiday leave in advance of when the worker uses the leave. This is known as RHP (rolled-up holiday pay).

The 'issue' with this is that the employer must still allow the worker to take the leave; however, when it is taken, some workers perceive it to be unpaid (because they have been paid for it up front). This is why RHP was ruled unlawful in the European Court of Justice: C D Robinson-Steele & Others v R D Retail Services Ltd & Others [2006] (C-131/04 & C-25704) required holiday pay to be paid at the time as leave was taken.

However, following the laying of the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, employers can use RHP as an additional method for calculating holiday pay, for irregular hours and part-year workers only, for leave years beginning on 1 April 2024.

2. For the holidays, if the leave year is per calendar year, the “issue” with 2023/24 and 2024/25 is not an issue because it's just to do with the Easter bank holidays and when they fall?

That is correct. It is all about leave years that start on 1 April and run through to 31 March. It has always been an issue because Easter is a Christian ‘moveable feast’ governed by the phases of the moon.

It has been highlighted because of the increased number of Bank Holidays in 2023/24 (ten) and the date on which Easter falls in 2024 resulting in a reduced number of Bank holidays in 2024/25 (seven).

3. Please clarify the obligations regarding pay on the different numbers of bank holidays in both 2023/24 and 2024/25.

The “issue” that was highlighted was because of Easter being later in 2025, impacting a leave year that starts on 1 April. If the contract says that the worker will be paid 20 days leave + (unnumbered) Bank Holidays, in 2023/24 they must be paid for 20 days + 10 Bank Holidays. Failing to do this would breach the terms of the contract (governed by employment law).

In the 2024/25 leave year, there are only seven Bank Holidays between 1 April and 31 March, so if the employer pays 20 days + 7 Bank Holidays then they are paying per the contractual terms. However, the employer will be in breach of the Working Time Regulations 1998 which say that the worker must be paid 5.6 weeks, (which is based on 20 days leave + 8 Bank Holidays, the usual number of Bank Holidays).

It was really making the employer aware that failing to pay 5.6 weeks holiday (28 days) where the contact says the worker will be paid 20 days + Bank Holidays will be a breach of Working Time legislation (a different branch of employment law) even though 27 days paid holiday is all that the contract allows.

4. I understand the Easter issue - it happens from time to time. However, the employee is being overpaid by 2 days in 2023/24 - is the advice that one day should be deducted as there is no right of offset?

If the contract is specific in that the worker will be paid 20 days + Bank Holidays, they will have been paid as per this contractual term in leave year 1 April 2023 to 31 March 2024, ie 20 days+ 10 Bank holidays. If they were not paid this then this breaches the contract. There was no overpayment as the worker is being paid according to what the contract said.

In the leave year 1 April 2024 to 31 March 2025, paying only 20 days +7 breaches the Working Time legislation that says 5.6 weeks (28 days) is the statutory minimum. The employer will therefore need to give the worker an extra day’s paid holiday leave.

5. With seven bank holidays for 2024/25 and the leave year starting on 1 April, would that mean for zero hours contracts that you would pay 11.6% for holiday rather than 12.07%?

12.07% is the ratio of 5.6 weeks to 52 weeks. 52 weeks minus holidays of 5.6 weeks equals 46.4 working weeks. 46.4 is the maximum number of weeks that a full-time worker is assumed to be working. In 2024/25, the annual working year will be 46.6 weeks (52–5.4) – this gives a ratio of 11.6% so we can see how you arrive at 11.6%.

However, it will not be correct to pay less RHP as that will mean that the worker will receive pay for leave of only 5.4 weeks whereas there is a statutory entitlement to 5.6 weeks paid leave. In order to comply with the Working Time law that says that employees should receive 5.6 weeks paid leave, in 2024/25 you will need to pay 12.07% RHP and allow the worker to take 28 days paid leave in total (which could be 21 days paid holiday plus 7 paid bank holidays) (subject to a pro-rata number of days paid leave for non-full time workers).

6. Are there rules around the calculation of the holiday rate for leavers? i.e when they have not used their full entitlement?

Regulation 14 of the Working Time Regulations 1998 (in Great Britain) governs the calculation of the leave to be paid. The rate at which it is paid is the same as the pay the worker would have received had they still been employed – Regulations 13 and 13A.

See official guidance Taking leave before leaving a job.

7. Please can you clarify that final point, the slide noted that the holiday leave and pay is for leave years commencing on/after 1/1/24 but you just noted April 2024.

There were three things mentioned about holiday pay and leave:

1. the fact that employers need to be aware of leave years that run 1/4 to 31/3 and where the contract says they will be paid 20 days + Bank Holidays,
2. the definition of what is included in ‘pay’ from 1 January 2024 which applies regardless of when the holiday leave year starts, and
3. the change for leave years starting on and after 1 April 2024 affecting workers who are classified as part-year and / or irregularly paid.

8. What is your view as to what counts as “regular” pay? How frequently do bonuses/ commissions need to be paid to be considered as in scope?

There is a legal definition now – see reg 3ZA of the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 for Great Britain (GB) (there is equivalent legislation for Northern Ireland (NI) which mirrors that for GB). The problem with this legislation is that it is open to interpretation (which DBT has done in guidance) but it has not been tested in the UK courts. The previous versions of pay were derived in 1998 and since then have been added to time and time again by different pieces of case law.

With regard to bonuses and commission, employers need to ask the question “Is the payment intrinsically linked to the duties that are expected of the employees under their contract?”. For example, a discretionary bonus based on the company’s profitability would not be intrinsically linked – however, there is an argument to say that the profitability of the company is because of the workers’ efforts. A commission payment based on sales would be included, as would be regular payments like Christmas bonuses.

Keep in mind that the fundamental of holiday pay is that the worker should not be placed in a financially worse position for taking leave versus not taking leave. The GB legislation has always talked about payments in the last 52 full weeks of work, looking back a maximum of 104 weeks if there are gaps in full employment (in NI, payments in the last 12 weeks but with no maximum look-back).

A difference would be, though, if a bonus was paid because of work under the contract once every three years.

At the end of the day, it is the employer’s decision but bear in mind that this decision may not always agree with what an Employment Tribunal (or in NI, an Industrial Tribunal) may say if it ever got that far in a dispute.

9. Should a car allowance be included as an “other payment regularly paid in the last 52 weeks”?

Yes. A car allowance could fall into each of the three categories cited in the regulations:

1. it is one that is intrinsically liked to the duties under the contract (say a salesperson who needs to travel), or
2. it is one relating to personal of professional status (maybe all staff at, say, grade 5 get a car allowance), or
3. it is one that has been paid regularly.

10. What is considered 'intrinsically linked' pay - would subjective bonuses be included or bonuses that are awarded based on “team’s performance” rather than individual’s performance?

It is a bonus that the worker has a reasonable expectation of receiving because of what they do under their contract. Remember that the team’s performance is reliant on the work of all individuals in it. But, if the bonus is a one-off / is discretionary, it would be less likely to be regarded as intrinsically linked. It is where this bonus becomes an expectation – “I know that if I work hard then I shall get a bonus”.

As above, we anticipate that there will be Employment Tribunal (or, in NI, Industrial Tribunal) cases in the coming years fully to establish a definition of what should be included in pay.

11. For the RTI matching data, are there any plans to expand the different options for current gender details?

We are not aware of any plans to expand these options. In tax legislation, there are only two legal genders, male and female, and RTI reporting follows what the legislation says. HMRC does realise that this may not be reflective of gender perception but we are not aware of any plans to expand the options.

12. RTI matching data – does HMRC still have a habit of creating assumed additional employments for the same person if their internal employee number changes without being flagged up (eg on change of payroll supplier)? Tax code chaos...

Yes, this can still happen with accompanying tax code chaos if the change is not flagged in the RTI full payment submission (FPS).

HMRC’s RTI data item guide for payroll software says that where an employee’s payroll ID changes, the current (ie replacement) ID should be entered at Box 38 on the FPS, the former ID in Box 40, and the flag in Box 39 indicating that the payroll ID for this employment, if present on the previous submission, has changed in this pay period, should be set to “yes”.

In addition, experience suggests that it is best to change payroll software in Month1 / Week 1, but we appreciate that commercially this is not always viable. It should not be necessary provided that the aforementioned entries are made in all of Boxes 38, 39 and 40.

13. We have seasonal staff (who work from April to October) and we give them P45 when they leave and then put them back on payroll the following tax year. We do sometimes end up with staff for whom we get two tax codes despite them having the correct NIC numbers, address, name, etc. This proves virtually impossible to resolve as HMRC will not speak to us and the employees do not want to call HMRC. Do you have any ideas?

When the employees return, are they treated like a new employee with a new payroll ID or is their old payroll record just opened up again?

HMRC should not issue multiple tax codes provided the correct leaving and starting entries have been made on the RTI full payment submissions (FPS) and the employee is given a new payroll ID when they restart.

As an alternative to reporting such employees as leavers on the FPS and issuing forms P45 and then treating them as starters with a new payroll ID when they return in the following year, you could treat these employees as remaining on the payroll. This would involve setting to “yes” the Irregular employment payment pattern indicator in Box 40A on every FPS for such employees.

The irregular employment payment indicator is designed for casual or seasonal employees whose employment contract continues, and also for employees on maternity leave, long term sick leave or leave of absence, who will not be paid for a period of three months or more but who you still regard as employees. The irregular employment payment indicator overrides HMRC automatically deeming employees to have left the employment if the employees have not been paid by that employer for a few months.

As to employers communicating with HMRC, ICAEW Tax Faculty has long been trying to get HMRC to talk to employers who contact them about employees’ tax codes, etc, but to no avail. HMRC advises that the employee and employer should be together when calling HMRC as this enables the employee to authorise over the phone the HMRC officer to speak to the employer in that call. However, having the employee in the same room as the employer when the employer needs to call HMRC is not always possible.

We recommend that employers suggest to such employees that they look at their Personal Tax Account (via the HMRC App or the Government Gateway) to see if there is anything on there that indicates that they have a duplicate or incorrect employment.

14. We have a payroll to pay out on 12th April but this includes leavers from the last week in March. Will it cause a problem with HMRC if we process them in the first April FPS as leavers with the March date?

Tax and NIC are calculated based on when the employee is paid (April); the fact that they might have left before this (in March) is not a concern. So, pay in April (2024/25) and enter the leave date (which will be in 2023/24 tax year) onto that final full payment submission. The P45 will show 2024/25 taxable pay and tax, with a 2023/24 leave date. This is reflective of the fact that payroll is often advised of a leave date after the event.

15. How HMRC collect tax for student loan from someone who is working in EU?

When someone goes abroad and is no longer within the UK tax system, HMRC stops being involved in student loan repayments.

The individual should inform the Student Loan Company (SLC) and make repayments to them. The SLC will probably ask the individual to set up a direct debit payment, the amount of which will depend on the overseas earnings.

Please refer to guidance Repaying your student loan and a tool Update your employment details.

16. When will HMRC require student loan repayments to be put on P60 so tax returns can be done accurately?

This is something that we have long asked HMRC to do.

Presently the employee or their agent completing their tax return must obtain their final payslip for the tax year to find out the details, which if they have moved jobs will necessitate contacting their ex-employer if access to payslips is via an intranet, or the employee can check their online account with Student Loans Company.

As an option, employers may choose to send each person repaying student loans a letter / report after the end of every tax year “for your information to help you complete your tax return if necessary”.

17. What is the difference between national minimum wage and national living wage?

The national minimum wage is the minimum pay per hour that almost all workers are entitled to. The national living wage is higher than the national minimum wage – workers must be paid at this rate if they are aged over 23.

For more information, please see official guidance National minimum wage and living wage.

18. When is extension of auto-enrolment effective?

Currently, enrolment is automatic for people aged 22 or over earning a minimum of £10,000 from a single job.

The Pensions (Extension of Automatic Enrolment) Act 2023 received Royal Assent on 18 September 2023. It reduces the qualifying age to 18 and starts contributions from the first £1 earned (so employers and employees will have to contribute more as they will lose the £6,240 exemption (NB auto-enrolment lower qualifying earnings threshold is no longer the same figure as the NIC lower earnings limit)).

The date on which the new provisions come into effect has not yet been announced – the government has committed to “consult on the detailed implementation at the earliest opportunity and report to Parliament before using the powers in the Act.” See parliamentary briefing Pensions: automatic enrolment – current issues published in December 2023. We do not envisage that the changes will come into effect before April 2026.

19. If you missed claiming child benefit, for how many years can you backdate your claim?

If you are eligible for child benefit when HMRC receives your claim, child benefit can be backdated for up to three months.

20. How do we report hours worked in pay period when employer pays employers before the end of month as they are on fixed salaries? Madness!

For workers not paid by the hour, draft secondary legislation provides for a simplified method of calculation of hours for salaried workers based on contractual hours. However, neither the draft legislation nor the guidance so far available explains how, for example, to convert a contract expressed in number of working hours per week into a pay period number of hours, whether and if so how to account for the different numbers of working days in each calendar month, or paid and unpaid leave, or other absences owing to sickness, etc. The draft legislation also includes a list of types of earnings that may be reported as Nil hours but the list is incomplete.

HMRC has been consulting on the draft secondary legislation. In our response ICAEW REP 43/24 we requested clarification of numerous points and await HMRC’s guidance.

21. Is a P11D required if we are payrolling benefits?

Employers who have registered with HMRC to payroll benefits-in-kind (BIK) do not have to complete forms P11D for BIK included in the registration but must complete form P11D(b) to account for Class 1A NIC. Registering to payroll BIK is the important thing. HMRC’s systems are set up to expect a P11D – when the employer registers that expectation disappears.

We understand that the proposed mandating of payrolling of BIK from April 2026 is intended to eliminate the need for form P11D, and, we assume, form P11D(b) as well as Class 1A NIC will be paid in-year. However, we believe that these forms will still be needed in certain circumstances. Mandating payrolling of BIK will presumably also obviate the need for employers to register to payroll BIK as this will be the default.

We have raised numerous points with HMRC asking how mandatory payrolling will work in practice and await clarification.

22. When BIK are added to the payroll, will they be removed from tax codings?

Yes – the advantage of payrolling BIK which can be valued in time to be reported accurately in payroll is that tax is paid via payroll in real time on BIK rather than the BIK being reported on form P11D and coded out either in the following year or, for ongoing BIK, on an estimated basis in the current year (and potentially under mandatory payrolling of BIK from April 2026, for Class 1A NIC, to be paid in-year alongside other PAYE liabilities rather than accounted for in the subsequent year via form P11D(b)).

For BIK which cannot be valued in real time or where there are delays in getting the information to payroll, mandatory payrolling of BIK will presumably necessitate using estimated values in-year with corrections needing to be made in the subsequent tax year. We await consultation on and clarification by HMRC of how and by when corrections must be made and how and when the tax (and NIC) will be accounted for on corrections.

23. We have a PAYE Settlement Agreement (PSA) in place to pay the P11D charges on behalf of staff – will this change from April 2026 if mandatory reporting of benefits-in-kind through payroll is implemented?

We are not aware of proposals to change the PSA because of mandatory payrolling of BIK.

24. Please could you explain how removal of P11D and processing benefits through payroll will work for things like staff entertainment?

Under mandatory payrolling of BIK, BIK presently reported on form P11D will need to be included in employees’ taxable pay. As regards NIC, the class and the liability depend on whether the costs incurred were paid by the employee and reimbursed by the employer or the employer paid for the entertaining.

Please see guidance Expenses and benefits – Entertainment which explains the three situations which remain unchanged:

• Non-business entertainment – you arrange and pay,
• Non-business entertainment – employee arranges, you pay, and
• Non-business entertainment – employee arranges and pays, you reimburse.

25. What is the best way for an employer to pick up the tax for an employee when the employee has an award provided by a third party under a Tax Award Scheme (TAS) and the third-party has settled no tax on the TAS?

We think that this is very odd. Unlike for a PSA, liability for the tax under a TAS is primarily that of the employee, so if the third-party provider does not pay the tax, the employee is liable.

If the employer wants to pay the tax element which should have been settled by the third-party provider, we are not sure that HMRC would cover this under a PSA. Therefore, as the employer would be settling a pecuniary liability of the employee, this itself is a taxable BIK and should be processed through the payroll to account for tax and Class 1 NIC, grossed up for tax and employee (primary) and employer (secondary) NIC.

We would point to HMRC’s guidance at EIM11240 - Incentive award schemes: Incentive Award Unit (IAU). A TAS is, effectively, a contractual agreement between the provider and HMRC. As the third party has not kept to its side of its bargain with HMRC, the employer should report it to HMRC’s IAU (for contact details, see HMRC’s guidance).

For more details about TAS please see HMRC’s guidance Expenses and benefits – Third party awards which at the end links to HMRC’s technical guidance in its Employment Income Manual and its National Insurance Manual.