Are you aware of the main employment tax risk areas within payroll?

Are you aware of the main employment tax risk areas within payroll?

The world of payroll is not as straightforward as it used to be.

Not only do employers pay employees with numerous different elements in addition to the usual wages and salary, but ever-evolving tax legislation has increased the complexities of remunerating employees, requiring more specialist knowledge and advice more often.

Unlike many payroll bureau providers who simply process the amounts provided to them each week or month for employers, the Azets Payroll team has the support of our internal specialist Employment Tax team.

There are many aspects of employee remuneration that require careful consideration from an income tax and National Insurance Contribution (NIC) perspective that we believe make this collaboration of added value to our clients.

The Payroll and Employment Tax teams are further strengthened by our HR Consultancy team. The overlap in all three areas is evident and this ‘triangular’ support helps to ensure comprehensive employer solutions.

We summarise below the main topics where Employment Tax supports Payroll and the key risk areas that we tend to assist on.

Termination payments

There is a common misconception that any amounts paid up to £30,000 can simply be paid free of tax and NIC. However, a termination package is made up of various elements that may require different treatment and each component part should therefore be considered separately.

To further complicate matters, the legislation for termination payments was updated in April 2018. There is now a requirement to carry out a Post-Employment Notice Pay (PENP) calculation to determine the notice pay element that is required to be subject to PAYE. In addition, from April 2020, amounts in excess of the £30,000 exemption are now liable to Class 1A NIC as well as PAYE tax.

Benefits and expenses

Being on the frontline of employees’ pay, our Payroll colleagues are frequently asked about expenses and benefits. This is a large and complex topic with various reporting and tax and NIC nuances, depending on the expense or benefit and the wider situation of each spend. 

We firstly need to consider whether there are any exemptions that can be applied. If reportable, we advise on whether it should be a payroll or P11D item, or whether it can be included on a PAYE Settlement Agreement. 

Where taxable benefits have been traditionally reported on P11D forms each year, employers have been gradually opting to switch over to payrolling benefits following its introduction in April 2016. As such, benefits are now becoming more the responsibility of Payroll rather than the Tax and Finance personnel who previously dealt with the P11D forms.

Not only do employers need to make sure they register to payroll their benefits adequately, but the amounts to be payrolled need to be carefully calculated and updated throughout the year.

National minimum wage (NMW)

The subject of NMW is not simply one of ensuring employees are paid at or above NMW rates for the work they do.

What is quite commonly overlooked are the additional elements of the NMW legislation; namely, with regards to deductions and accommodation, and this is where employers can get caught out for inadvertently breaching these elements of the rules.

Internationally mobile employees

Employees who work in an overseas location for their employer can create complex tax and social security issues that must be carefully considered, whether these be formal international assignments or simply more ad-hoc remote working arrangements.

From a payroll perspective, it is not easy to understand what needs to be processed and in what jurisdiction. In many cases, tax aspects must be dealt with separately to social security.

IR35

With the changes to the IR35 rules for public sector organisations in April 2017 and for the private sector in April 2021, there is now a requirement to payroll payments made to contractors operating via a Personal Service Company (PSC) who are determined to be inside IR35.

For such ‘deemed’ employees, there are various nuances that have to be taken into account in order to correctly process through the payroll.

Share structures

Shares issued or promised to employees by their employer will have some intricate tax and NIC implications depending on the plan and its criteria, and each arrangement must be considered in detail.

Arrangements, be they unapproved share plans or other structures providing shares in a business, may trigger a PAYE withholding obligation, and care needs to be taken to understand how to process these transactions through the payroll correctly.

Get in touch

These are just some of the areas in which our Employment Tax team support and assist our colleagues in Payroll to ensure a seamless service to clients. For further information or to discuss your particular circumstances, please get in touch with one of our employment tax specialists or a member of our payroll team.