Week 53 Provisional Tax CollectionThursday, April 5th, 2012
In March, we advised that we had been communicating with HMRC about underpayments of tax that may arise from the correct application of Week 53 procedures.
Tax is collected via PAYE on a provisional basis to ensure, amongst other things, that there are no fluctuations in net pay simply as a result of there being an extra payday in the year (Week 53, 54 or 56). This provisional collection allows for an additional pay adjustment to be allocated to the employee, when the tax basis is converted to a non-cumulative Week 1 basis. However, tax is still an annual liability on a statutory basis and when it is assessed by HMRC for people under Self-Assessment or subject to a P800 PAYE calculation, an underpayment situation will arise.
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.
In their informal weekly update to employers (Number 108 issued 30 March 2012), HMRC confirm this situation and give guidance on what advice an employer may give an employee querying a tax underpayment. Their text is reproduced in full below:
Employee queries where operation of ‘Week 53′ payment results in an underpayment of tax
In some tax years, the way dates fall mean that you will end up making one more payment than usual to your employees towards the end of the tax year. If you pay your employees weekly this would be a 53rd weekly payment, if you pay them fortnightly it would be a 27th fortnightly payment and if you pay them four-weekly it would be a 14th four-weekly payment. These extra payments are often referred to as ‘Week 53 Payments’
This may lead to an underpayment of PAYE as an individual’s personal allowance for the year is worked out on the basis of 52 weekly, 26 fortnightly and 13 four-weekly paydays, however the procedure ensures that the employer knows what tax code to operate for the extra pay day and gives the employee certainty of take home pay without tax being deducted punitively, e.g. at Basic rate or Higher rate, without allowances. Tax allowances are administered this way to allow the payroll to run and HMRC will then reconcile the tax records of any individuals falling into this category and recover any underpaid tax.
P800 PAYE tax calculations have now been sent out to individuals advising them that they have underpaid for the tax year 2010-11 and tax codes have recently been issued for 2012-13 which include this underpaid tax, and confirming collection of it during the 2012- 13 tax year.
If you are approached by an employee who has underpaid, you should confirm to them that you have not made an error in your payroll and explain to them that if they cannot pay the underpaid tax or think that the calculation is wrong they should contact HMRC using the contact details in the notes enclosed with the calculation.
If you receive any payment requests from HMRC which have been sent by mistake, then you should reply confirming that you operated the Week 53 procedure.
As we commented, it seems to have been forgotten that PAYE is only the method by which HMRC attempts to gather the correct tax over the course of the year. However, as in a Week 53 scenario, it does not always result in an accurate calculation. At the same time, as well as acknowledging this and giving it the prominence it deserves, the Update advises that employers who receive a payment request ‘by mistake’ need to reply to HMRC advising that they have operated the Week 53 procedure.
I am pleased to see HMRC have come out and acknowledged the situation of potential underpayments. However, they do not address the issue that an underpayment (or overpayment in the case of a K code) will only be spotted at HMRC if the employee’s earnings at the end of the year are subject to either Self-Assessment or a P800 calculation. This is unfair and unjust and an employee is unlikely to be placated if the payroll department follows HMRC’s advice and we simply tell them that we have not made a mistake and that they need to contact HMRC!