Paying gross salary - The Book-keepers Forum (UK)

Hopeful · Veteran Member

Paying gross salary

BackOfficeGroup · Guru

Hi

A person should not be paid gross salary if they are under a PAYE scheme. This is wrong and the payment should not be made. Not sure why this would be done in this way?

P

Hopeful · Veteran Member

Hi P

I was a bit worried about it, it's part of a settlement deal. should the company pay over the paye due then?

Hopeful · Veteran Member

I've been told it is a redundancy settlement which is tax free. so I would process it through the payroll and show it as redundancy payment.

BackOfficeGroup · Guru

Ah yes a redundancy settlement is tax free. See below:

How are the different parts of a redundancy package dealt with for tax and National Insurance contributions purposes?
Unpaid salary and holiday pay are earnings for tax and National Insurance contributions.
Redundancy payments are tax-free up to £30,000 (see EIM13750) and not liable for National Insurance contributions (see NIM02580). Note that in some situations the £30,000 is reduced (see EIM13530).
For payments in lieu of notice the position can be complex (see EIM12975-9). The National Insurance contributions position follows that for tax.
Payments for restrictive covenants are earnings for tax and National Insurance contributions purposes (see EIM03600. & NIM02320).
Damages payments are dealt with in the same way as redundancy payments (see EIM13070).
Is £30,000 of a redundancy payment always tax exempt?
Not always because certain payments must be added together before applying the exemption (see EIM13530).

P

Hopeful · Veteran Member

Hi P

Thank's for that very helpful, my only query is I didin't think they were eligable for redundancy since they haven't been an employee for two years.

BackOfficeGroup · Guru

Thats right, to get Statutory Redundancy payment, they must have been employed for 2 years continuously and the job is no longer needed.

P

BackOfficeGroup · Guru

This might also help

How does an employee qualify for a statutory redundancy payment and how is it calculated?

To claim a statutory redundancy payment, an employee must have been employed for a continuous period of two years and have been dismissed by reason of redundancy.

Currently the amount of a statutory redundancy payment depends on the employee's age, length of service and gross week's pay. Only a maximum of 20 years' service may be taken into consideration. The maximum gross week's pay that an employer has to take into consideration when making the calculation is currently £380. The current maximum statutory redundancy payment is therefore based on multiples of this sum - see our Unfair dismissal FAQ for futher details). These amounts are increased annually, usually in February, although there will be no such increase in February 2010 - see our Employment law at work data.

The formula for calculating redundancy pay is:

half a weeks' pay for each complete year in which the employee was under 22 years old,
one weeks' pay for each complete year in which the employee was less than 41 but not less than 22 years old,
one and a half weeks' pay for each complete year of employment in which the employee was 41 years old or more.
The employer must give the employee a written statement showing how the redundancy payment was calculated. An employer who does not do this may be fined for committing a criminal offence (see Employment Rights Act 1996 Section 165).

Hopeful · Veteran Member

Thanks P that is useful, How do I get round this - do I tell my boss I can't process through payroll as redundancy or process it as normal salary if they want to pay him gross??

should I just let them do a payment not through payroll and let them enter the payment through the accounts and code it to where they ask me to??

BackOfficeGroup · Guru

I would tell your boss that you have found the information and that redundancy pay is not applicable in this case and any monies paid will have to go through PAYE.

Obviously they need to do their homework, if they say no, I would make a call to the accountants to see what they would do with your boss.....

P

adi2402 · Senior Member

Not a payroll guy but can even if you dont qualify for a statuatory redun payment you can still be paid redunancy? If the statuatory calculation not just there to show the minimun that you must pay?

Whats the rule for Golden handshakes instead of stat redun pay or has that practice totally died out

BackOfficeGroup · Guru

I believe you can pay whatever you like to someone but it will be taxed.

The statutory redundancy payment is free of tax up to £30k.

P

Hopeful · Veteran Member

Good question Adi - can you still be paid redundancy even if you've not been an employee for 2 years??? if so then I just process as redundancy

otherwise as normal salay with dedunctions?

BackOfficeGroup · Guru

Its not classed as Statutory Redundancy but as said, you can pay what you like and call it what you like but it will be taxed and NI'd through PAYE as normal.

P

Hopeful · Veteran Member

Hi P

sorry the penny has just dropped!!! so because it's not statutory redundancy I still have to deduct tax & NI

Ok what would be implications be if I'm asked to do it anyway & pay gross named under redundancy??

BackOfficeGroup · Guru

if you had a PAYE inspection, they would want the tax and NI paid to them together with a hefty fine no doubt!! oh, and interest!

P

Hopeful · Veteran Member

Hi P thanks for all your comments - This is what I've recenty been told

It can be paid gross if it isn't wages. It isn't wages if it is statutory redundancy and/or payment in lieu of notice and/or another payment negotiated as part of an agreement by the employer/employee to terminate the contract. However there is an overall limit of £30k before the employer is obliged to deduct tax (but not NI) on the excess over £30k.

so as this is more of a payoff then redundancy I think I may be ok???

BackOfficeGroup · Guru

Its only tax free if statutory redundancy, everything else is taxable! The £30k limit is on statutory redundancy only. The payment in lieu etc etc is still taxable under PAYE.

P

Hopeful · Veteran Member

Ok thanks I didn't realise....back to square one!! I think it would be in my best interest not to put it through unless I'm deducting tax & NI

Thank you so much for all your help.

Hopeful · Veteran Member

Hi All

Apparently I have recently been told this payment isn't tax deductible because in the agreement the employee agrees to indemnify the company fully against any demands for income tax & NI??

anybody any thoughts??

Quentin Pain · Senior Member

WOW, that is certainly hopeful by your company bosses! I bet HMRC have a different view.

Here's how it would sound to HMRC:
"We are not paying PAYE because our employees have agreed we are not going to pay it"

I guess under an inspection this is what would happen:
1. The employer would be fined and have to cough up the full PAYE and interest
2. They would then sue the employee
3. The judge would throw out the case (it's only a guess though ;)

Hopeful · Veteran Member

Hi Quentin I agree don't quite know what planet this guy is on!!!

I grossed up net to gross and told him the company is liable for the tax. the company had now stopped me doing payroll and out sourced it. my guess is they are re-doing my figures.

my concern lies with the employee who will be clobbered for the underpayment if it's re-done!!

RobH · Expert

For the payment to be free of tax it does have to qualify, but that doesn't mean it is subject to statutory minimum payment. It is mportant though to know what is in the contract of employment, as if there is a clause that says the employee will be entitled to £x then that amount will be liable to tax and ni. The payment has to 'ex-gratia', ie the employee has no contractual right to receiving the payment and it should be to compensate for loss of office. Other payments like holiday pay and unpaid wages would need to be taxed normally. Payment in lieu of notice is only tax free if it is not written into the contract that they will be paid it.

I'm noexpert but the above is what I have always believed.

Rob

Hopeful · Veteran Member

The original contract stated 6 months, but when the company pushed him out the door they drew up a contractual agreement and changed it to 3 months, two months would be paid gross, one month net. would the contract only stand if it were signed by both parties?

Quentin Pain · Senior Member

Well, the important thing is that it is not you who will be fined. As for signed contracts etc. These days a verbal contract is enough. The thing is, UK law is case law. And that means each case is reviewed on its merits. Judges decide. They can throw out anything if they believe it contains 'legalease' or is plain unfair. It is a good system in my view.

If someone is on PAYE, they are on PAYE. As Rob says, there are few circumstances where you can pay someone and not collect and pay their tax.

Hopeful · Veteran Member

Well it's out of my hands now I can only sit back and see what happens next???

RobH · Expert

For a contract to exist there has to be certain elements in place, ie an offer, an acceptance, etc. Clearly if the amended contract was not accepted then it should not be enforceable, however like Quentin says proving it may be trickier.

Rob