HMRC have published guidance for employers where a retrospective liability to income tax and national insurance contributions (NICs) arises under PAYE.
Under new legislation, which came into force on 6 April 2007, outstanding PAYE liabilities arising for 2006/07 and earlier years are due for payment by 19 June 2007. Returns for 2006/07 are of course, due by 19 May 2008. 6 April 2007 also determines the start of the 90 day period an employee has to make good to the employer the additional tax due and paid by the employer.
Broadly, PAYE on retrospective payments should be calculated by reference to the PAYE code number in operation for the year in which the payment was actually paid. Where no code was issued, tax should be deducted at the higher rate of tax (currently 40%) relating to the year in which the payment was actually paid.
NICs should be calculated by reference to the rates and thresholds of NICs applicable to the year in which the earnings subsequently charged to NICs were actually paid. Any such payment should be added to any other earnings paid to the earner in the earnings period in which the retrospective earnings were actually paid.
For tax purposes, it is not necessary to calculate the PAYE separately where more than one retrospective payment was made to an employee in the same year. The total of such payments should be added to the gross pay at the final pay period of the year in question and the tax recalculated using the code issued/the higher rate for that year.
The position is slightly different for NICs. It is necessary to record on the revised pay record in the earnings period, or periods, in which the payment or payments of earnings retrospectively treated as earnings were actually paid. This is important in order to correctly calculate the NICs due. If more than one payment of earnings retrospectively treated as earnings was made to an employee in a year, it will be necessary to calculate the revised NICs on each payment separately and amend the total NICs figure for the year accordingly.
Employers must complete a separate form (P35(RL) Employer Annual Return, including a certificate and declaration) for each closed year along with the ‘National Insurance’ and ‘Tax’ copies of form P14 for each employee affected by a retrospective payment in the tax year concerned. All forms P14 should be prominently marked “Revised”. Returns cannot be sent online, even where an employer normally submits their Return online.
Where an employer amends an employee’s pay records for any closed tax year, for each year for which records are amended, he must give the employee details of the revised pay, tax and NICs as soon as possible after the amendments are made, and no later than 31 December in the year in which the legislation giving rise to the retrospective liability has effect (i.e 31 December 2007 for 2006/07 payments).
Where an employee has left before the date on which legislation giving rise to a retrospective tax liability has effect (see above), the employer should still attempt to seek repayment from the employee within 90 days by applying to the employee’s last known address. If the ex-employee does not make good the tax, the same situation applies as if the employee were currently employed. That is the sum becomes additional income of the employee.
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