Week 53 and Provisional Tax CollectionTuesday, March 13th, 2012
The Learn Centre (TLC) has received quite a few queries about the possibility of underpayments of tax due to increased instances of Week 53 situations in the 2011/12 tax year. Therefore, this warranted an in-depth discussion on the topic.
The tax year is divided into 52 weeks, 26 fortnights or 13 four-weekly pay periods. However, there are one or two days in the calendar that fall outside of this norm. Where the payday falls on 05 April (or 04 and 05 April in a Leap Year), this means that, in a tax year, there are:
- 53 weekly paydays,
- 27 fortnightly paydays, and
- 14 four-weekly paydays
We know these as Week 53, 54 and 56 respectively, and the situation where there is an extra payday in the year occurs:
- every 5 or 6 years for weekly-paid employees
- every 11 or 12 years for fortnightly-paid employees, and
- every 22 or 23 years for lunar-paid employees
Since tax started to be collected via PAYE, the system has had to make adjustments for the fact that there are these additional paydays in a tax year. The fact remains, however, that tax is due on the taxable pay paid in this extra pay period and, likewise, this is assessable to tax. To ensure that the employee’s net pay remains consistent with their ‘normal’ pay, the PAYE system copes with this by giving the employee additional personal allowances. For the additional ‘Week’ in the tax year, i.e. 1 for weekly, 2 for fortnightly and 4 for lunar payrolls, an extra pay adjustment is given to the employee and the tax code is operated non-cumulatively for that payment. The effect is that, in that tax year:
- Week 53 – weekly-paid employees receive one extra Week’s pay adjustment,
- Week 54 – fortnightly-paid employees receive two extra Week’s pay adjustment, and
- Week 56 – four-weekly-paid employees receive four extra Week’s pay adjustment
As we have said, the above method ensures that an employee’s net (take home) pay remains consistent, which is important for the purposes of personal budgeting and planning. However, in a tax year which contains a Week 53, 54 or 56, the employee is given a greater pay adjustment than they are actually entitled to. For example, for a weekly-paid employee on a tax code of 747L, the personal allowance is £7,475 spread over 52 weeks giving a free pay of about £143.80 per week. In a Week 53 situation, the employee is given this free pay adjustment again, meaning they receive more than the annual personal allowance.
TLC queried this with HMRC, asking if and how they dealt with such situations where an employee was given more personal allowances than they were entitled. After all, this only happens as a result of the net pay equalising operation of the Week 53 procedure that has been in use for years.
HMRC responded saying that tax is collected via PAYE only on a ‘provisional’ basis. PAYE is the method by which tax is collected on a periodic basis rather than settling it once a year. PAYE, therefore, reduces fluctuations in net income. However, income tax is still an annual liability and is calculated on a statutory basis rather than a provisional one for people under Self-Assessment or subject to a P800 PAYE calculation. These are described in more detail below:
This is where an employee is issued a SA Tax Return by HMRC for completion. Their Website advises that these are for taxpayers where there are ‘more complicated tax affairs’ – typically, directors, self-employed, trustees and individuals receiving multiple and foreign income.
The Tax Return will only allow the annual 52 week statutory allowances to be applied against taxable income and, therefore, will identify where an employee has received more than this via PAYE.
There are published guidelines on who is issued a SA Tax Return, see below, and the communication TLC received advised that:
‘HMRC applies consistent criteria when deciding who is issued with a Self-Assessment (SA) Tax Return, but we do not issue them on a one-off basis simply to claw back the benefit of the extra allowances given through a week 53 adjustment.’
P800 PAYE Calculation
Certain taxpayers need to have their tax situation assessed, for example, if they have more than one taxable income, either via multiple employments or multiple sources of that income. Some taxpayers will want HMRC to do this on their behalf. Others requiring a calculation may be those who have queried their tax affairs with HMRC, have had the wrong tax code used or have clearly underpaid or overpaid tax during the previous tax year.
Where the P800 calculation process is used by HMRC, using the centralised PAYE record-keeping system, this will also apply personal allowances on a statutory basis, which will recognise that too many allowances have been given via PAYE and will identify the underpayment.
In short, employees may suffer tax underpayments as a result of applying Week 53 PAYE procedures (and 54 and 56). However, these will only be identified where the employee’s income is subject to a P800 Tax Calculation or a Self-Assessment Tax Return, both of which will identify that too many allowances have been allocated under PAYE. Likewise, however, employees on K codes may suffer tax overpayments as a result of applying more than the annual 52 Weeks’ worth of additional pay. This situation is confirmed on HMRC’s Website in their Employment Income Manual, see the link below.
The ‘problem’ of an extra payday within a tax year and, therefore, the Week 53 issue will never apply to monthly-paid employees who will only ever be paid 12 times a year.
Yes, it has always been recognised that PAYE was only the mechanism by which HMRC collect the annual tax liability. Only with the advent of SA and a mixture of earnings arrangements (employed / self-employed etc) has an awareness arisen of the underpayments of tax caused by the Week 53 scenario that has been described.
However, knowing it now does bring PAYE itself into perspective. It seems to have been forgotten that PAYE is only the method by which Government tries to ensure that our tax liability is collected as we earn money, rather than waiting until the end of the year as it used to be. It also gives us as employers more information to be able to deal with employee queries if they experience tax underpayments / overpayments as a result of the operation of the PAYE procedures.
This method of adding another Week / two Weeks’ / four Weeks’ pay adjustment in Week 53, 54 and 56 situations is consistent with HMRC’s own PAYE Manual 70015, which deals with the operation of PAYE on ‘non-standard pay days’, and gives exactly this advice. However, it appears slightly inconsistent with the advice they give on ‘Dealing with Week 53 Payments’ which says that, for employees on a cumulative suffix code, it is the free pay at week 52 that has to be taken into account:
- If the free pay at Week 52 is more than the year-to-date earnings, including the Week 53 (54 or 56)payment, no tax is due
- If the free pay at Week 52 is less than the year-to-date earnings, including the Week 53 (54 or 56) payment, tax is due
The PAYE manual gives the impression that the extra Weeks’ pay adjustment is due to the employee. However, it is only on comparison with the other guidance (that concerns paper recording of PAYE) that mention is made of 52 Weeks being the actual annual entitlement.
Many people seem to be posting queries about Week 53, 54 and 56 situations this year. This could imply that there is more concern about underpayments of tax this year than in previous years. Not surprisingly, people expect PAYE to calculate their tax liability accurately and fully over the course of the year. This is especially true where the employee only has one source of income. Therefore, a recalculation under Self-Assessment or a PAYE calculation would give rise to an understandable shock if it resulted in an underpayment. It must be highlighted again that it is only in the instances of a SA or PAYE recalculation that the underpayment (or overpayment) will be picked up by HMRC. The indication is that it will not be picked up for taxpayers who are outside of these routes.
The Learn Centre has approached HMRC with the following comments and questions:
- Whilst the situation of potential underpayments may always have existed under tax collected via PAYE, have the methods for ‘spotting’ this improved at HMRC over the last few years with the increase in SA and new software?
- Taxpayers will regard any underpayments of tax as an unfair and unreasonable consequence of SA or PAYE calculation. How do HMRC deal with complaints from taxpayers and industry from what is perceived to be an unjust situation?
- Initial communication from HMRC to The Learn Centre mentioned that ‘tolerances’ would be shown and ‘small amounts’ of underpayments would be disregarded. In this regard, what is HMRC’s definition of ‘small’?
Armed with the knowledge of the potential situation of underpayments (or overpayments) of tax, do we make our employees aware, or wait until the queries start coming in? This is a tricky one.