What is the difference between a “pay period” and an “earnings period”?Tuesday, October 5th, 2010
The term “pay period” does not appear, as might be expected, in the income tax legislation. The term appears frequently in employment and social security legislation in the context of maternity, paternity and adoption pay periods, e.g. “maternity pay period”. It is used once in the Social Security (Contributions) Regulations 2001 in connection with the pay of mariners. It is also used in the stakeholder pension and student loan legislation, but is not defined. The term “normal pay period” is used in the employment and trade union legislation in the context of tribunal awards for the continuation of an employment contract, and it is also not defined.
The only definition of “pay period” appears in the social security legislation for jobseeker’s allowance, disability working allowance and family credit. It is defined as “the period in respect of which a claimant is, or expects to be, normally paid by his employer, being a week, a fortnight, four weeks, a month or other longer or shorter period as the case may be”.
The common term “pay frequency” is not used anywhere in legislation. Instead, the Income Tax (Pay As You Earn) Regulations 2003 refer to employees having a “payment interval”, for example, “weekly”, “monthly”, in “regular intervals which are multiples of a week”, in “regular intervals which are fractions or multiples of a month”, or some other regular or irregular pay interval.
For the purposes of this discussion, we will use the term “pay period” to denote the period indicated by the employee’s “payment interval”, e.g. a week, a fortnight, four weeks, a month, etc.
The length of an employee’s pay period is used to determine the amount of the employee’s pay on each payday that is “free pay”, i.e. not liable for income tax, as indicated by the employee’s tax code.
(For completeness, it must be added that the PAYE Regulations use the term “payment period” in the context of a number of different but specific situations, e.g. where a payment is made to an employee on a day other than the employee’s normal payday, where it refers to the tax week or tax month in which a payment is made.)
The term “earnings period” is used only in social security legislation, in the context of the calculation of earnings-related (Class 1) National Insurance contributions. For employees who are paid at regular intervals, the first earnings period in a tax year starts on the first day of the tax year and each subsequent earnings period starts on the day immediately following the previous period. Class 1 NICs are calculated on all of the earnings paid to an employee in the employee’s earnings period.
This means that an employee’s “earnings period” is not necessarily the same as the employee’s “pay period”. However, the distinction between the two is usually only relevant where more than one payment is made to an employee in the same earnings period. As that situation does not apply to most employees, the dates on which an employee’s earnings period start and end are not important – the NICs on the earnings for the pay period are calculated at the same time as the tax.
However, the actual period covered by the earnings period is critical when
- an employer makes two or more payments to an employee at different pay intervals, or
- an employee’s payment interval changes to a longer period, e.g. weekly to monthly.
In the first of these situations, the Regulations provide rather complex rules to decide which of the pay intervals is used to determine the employee’s earnings period.
Example – two jobs with the same employer
An employee is paid on the 20th of each month for work performed in that calendar month. The employee has another job with the same employer and is paid weekly each Friday for work done up to the previous Saturday. Because the earnings from the monthly job are contracted-out in a COSR pension scheme, the earnings period for NICs, as specified in regulations, is one month. The earnings during July and August 2010 are as follows:
2 July – £150 23 July – £150 20 August – £1500
9 July – £150 30 July – £150 20 August – £150
16 July – £150 6 August – £150 27 August – £150
20 July – £1500 13 August - £150 3 September - £150
(a) The employee’s pay period in the weekly-paid job is the period from Sunday to Saturday preceding the payday.
(b) The employee’s pay period in the monthly-paid job is the period from the first day to the last day of the calendar month.
(c) The employee’s weekly payday is Friday of each week. This date determines the tax week that must be used for PAYE purposes. Tax is deducted from the weekly earnings but, because the earnings period is a month, no NICs are calculated.
(d) The employee’s monthly payday is the 20th. This date determines the tax month that must be used for PAYE purposes.
(e) According to the rules for aggregation of earnings for NICs, the employee’s earnings period is a period of one month, starting on the 6th of each month. In the earnings period
- from 6 July to 5 August, the employee received earnings of £600 in the weekly employment, and £1500 in the monthly employment. NICs are due on £2100.
- from 6 August to 5 September, the employee received earnings of £750 in the weekly employment, and £1500 in the monthly employment. NICs are due on £2250.
(f) The tax month is the period from the 6th of one month to the 5th of the following month. All of the PAYE tax and NICs calculated and deducted on the paydays that fell between 6 July and 5 August must be paid to the Accounts Office by 22 August (if paid electronically).
Example – change from weekly to monthly pay
An employee starts a new monthly-paid job with the same employer on 13 September 2010 and is paid for the period between 13 September and the end of the month on 30 September. The last two payments for the previous weekly-paid job are paid on 3 September and 10 September.
The earnings period in which the monthly payment on 30 September is paid runs from 6 September to 5 October. The weekly payment on 10 September is also paid in that earnings period. The total NICs due for the earnings period is based on the total pay for the two payments.