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Low-paid employees – start spring with LITRG's pay and tax health check!
05/04/2017, by Low Incomes Tax Reform Group, Tax Articles - General
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On 1 April, National Minimum Wage rates changed, and on 6 April, the new tax year starts: a good time to check your tax situation, suggests LITRG.

Introduction

There is no better time to make sure that you are clear on what should be in your pay packet and whether you are paying the right amount of tax. You should also keep a check on other entitlements, such as paid holidays and whether you qualify for state benefits.

This article by the Low Incomes Tax Reform Group (LITRG) covers:

  1. Pay – including information about the minimum you should be paid
  2. Tax – checking your tax deductions for the year just gone and the one ahead
  3. Holiday pay – making sure you get your entitlement, especially if you leave a job
  4. Tax credits and benefits – make sure you claim in-work support if you can.

Pay

From 1 April 2017, the National Living Wage (NLW) and National Minimum Wage (NMW) rates are:

  • £7.50 for workers aged 25 and over (up from £7.20 per hour) – this is the NLW
  • £7.05 for 21- to 24-year-olds (up from £6.95 per hour)
  • £5.60 for 18- to 20-year-olds (up from £5.55 per hour)
  • £4.05 for 16- to 17-year-olds (up from £4.00 per hour).

The NMW rate will be £3.50 for apprentices (up from £3.40 per hour). Apprentices qualify for the lower apprentice rate if they are under 19, or still in the first year of their apprenticeship contract.

If your employer provides you with living accommodation, the maximum they can deduct from your pay to cover the cost (from April 2017) is £6.40 a day or £44.80 a week.

Pay for minimum wage purposes is the gross pay before deduction of tax and NIC, and before other deductions from pay such as employee pension contributions.

GOV.UK contains information about how to work out if the minimum wage is being paid.

For further information on how the minimum wage should be calculated, including how the accommodation offset works and how things like travelling time, tips and uniform deductions should be dealt with, please see Useful Links at the end of this piece.

The government has now aligned the NMW and NLW cycles so that both rates are amended on 1 April each year as from 2017. Previously the NLW rate was changed in April and the NMW rate (and accommodation rate) was changed in October.

When exactly should the new rate start?

The new pay rate will only affect your pay from the first full pay period after 1 April 2017. For example, if you are paid weekly on a Monday to Sunday basis, the first full pay period after 1 April 2017 will be the week beginning Monday 3 April 2017. This means that if you work on Saturday 2 April, your pay will be based on the old rates.

You should check your payslip after 1 April 2017; if you do not receive the extra that you are expecting, speak to your boss or talk to ACAS for advice (you can find a link to ACAS at the end of this piece).

These rules also apply when an employee has a birthday that pushes them up a rate. For example, if an employee’s birthday falls on 25 May 2017 but their next pay period is 1 June to 30 June, the employee becomes entitled to receive the £7.50 per hour rate on 1 June and not their birthday.

Tax

The current tax year (2016/17) ends on 5 April. Employees have tax taken off them throughout the year via Pay As You Earn (PAYE). In most cases, this means you pay the correct tax by the end of the year, but not always. Now is a good time to compare what tax you should have paid with what you have actually paid in 2016/17.

If you have not paid the correct amount of tax, HMRC should send you a tax calculation (a ‘P800’).  You may find the LITRG’s P800 factsheet helpful with that.

Thinking ahead to the new tax year (2017/18), it is important that you check:

  • your 2017/18 tax code (this tells your employer how much tax-free pay you are entitled to each pay day so that they can calculate tax on the rest);
  • that HMRC have used information about you correctly in working out your tax code;
  • that your employer is using the correct tax code for you.

Normally HMRC send out ‘P2’ PAYE coding notices out in January or February before the beginning of the tax year. The notice tells you what your tax code is and how it has been worked out. Read the LITRG’s step-by-step guide to checking your tax code.

Please note that not everybody will receive a P2 PAYE coding notice. For example, you may not receive one if your tax code is just the normal personal allowance (£11,500 in 2017/18, which translates to a tax code of 1150L, or S1150L if you are a Scottish taxpayer).

Are you married or in a civil partnership?

Married couples and civil partners might also be entitled to transfer part of their personal allowance to their spouse or civil partner. This 'marriage allowance’ can apply if neither partner pays tax above the basic rate of income tax. You can claim for 2016/17 and back to 2015/16 if you have not already done so, and also make sure that you claim for the 2017/18 year ahead, if it applies. Read the LITRG’s guide, to see if you can claim.

Holiday pay

Some employees’ ‘holiday years’ will follow the tax year and will thus run from April to March or 6 April to 5 April. There is often confusion around what exactly employees are entitled to, so here is a rundown on the basics of holiday leave and pay. 

The starting point is that full-time workers have the right to a minimum of 5.6 weeks’ paid leave per leave year. This works out at 28 days. Contrary to popular belief, you do not have to be given paid time off for bank and public holidays. However, where you are not, you may be able to arrange with your employer to take such days off as part of your holiday entitlement. As long as they give you the proper notice, your employer is also able to fix some or all of your holidays for you, for example to operate a Christmas shutdown.

Part-time workers have a right to a ‘pro rata’ proportion of the minimum annual leave entitlement. If you work on a casual basis or very irregular hours, your holiday entitlement will probably be calculated as a percentage of your hours. The holiday entitlement of 5.6 weeks is equivalent to 12.07% hours (the 12.07% figure is 5.6 weeks’ holiday, divided by 46.4 weeks (being 52 weeks - 5.6 weeks)).

Example: Mary works 17 hours one week, 20 hours the next week, and then 15 hours for the next two weeks. After a month of working, she has built up entitlement to approximately 8 hours of paid leave (67 hours x 12.07%).

What happens if I leave my job and have not taken my holiday?

Very importantly – if you leave your position having taken fewer holidays than you are entitled to, you should be paid in lieu of the untaken holiday.  So, carrying on Mary’s example, if her employment ended before she could take the leave she had built up, she would be entitled to be paid in place of taking the leave. This means that if she earned £8 an hour, she would be entitled to £64.

If you do not think you have been paid for holiday you were entitled to, talk to ACAS about your rights (find the link below). In the case of agency work, you can report the agency concerned to the Employment Agency Standards Inspectorate.

How should I be paid during my leave?

If you normally have fixed hours and pay, you should be paid the same rate while you are on holiday as you are normally paid in your job. The payment will be due at the same time as your normal wages (usually weekly or monthly) and will be treated as earnings for PAYE tax and NIC purposes.

If your pay or hours of work vary from week to week, the amount you get should be based on the average amount you earned in the past 12 weeks.

You can find basic information on holiday leave and pay on GOV.UK. There is lots of information about holiday entitlement on the ACAS website.

Tax credits and benefits

If you are a low-paid employee, it is worthwhile considering, if you have not already done so, whether you might be entitled to any in-work benefits, such as tax credits or universal credit to help top up your income.

We suggest you seek a benefits review from a welfare rights organisation such as Citizens Advice or use one of the independent benefits calculators referred to on GOV.UK.

Useful links

LITRG article with links 

Links include:
Minimum wage for different types of work
National Living Wage
How do I work out my tax?
LITRG’s P800 factsheet
How do I check my coding notice?
What is Scottish income tax?
Tax allowances for spouses or civil partners
Pay and work rights helpline and complaints
Holiday entitlement
Tax credits and benefits
Benefits calculator

ACAS advice and guidance 

About The Author

The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation to give a voice to those who cannot afford to pay for tax advice. LITRG comprises tax specialists from professional practice and the voluntary sector, from publishing and from HM Revenue & Customs, together with people from a welfare benefits and social policy background. Visit www.litrg.org.uk for further information.
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