Evening All, (oh dear, sounded like Dixon of Dock Green then)
Just had a thought. Last week one of my clients paid one of his employees an advance on his next week's salary. Normally I would record the salary as usual that week and the next, but obviously actually pay him less the advance in the second week. What happens in this scenario when RTI comes in, as you are actually supposed to report when the employee is actually paid. Or doesn't this advance make any difference?
I'd say that you need to process the advance for RTI reporting and deduct it next week. I think you could ignore tax and NI, as it isn't actually earnings yet.
I am guessing abit but after hearing all the questions and answers on HMRC webinar yesterday that I joined in on, I would say you can't do that now. The Webinars are FREE to join and are really useful, they last an hour. They were saying that when you actually pay someone whether its in Cash/Cheq/Bacs you have to report it to HMRC either before payday or actually on Payday. The question was asked what about if the bookkeeper went on holiday, and they said it was okay to process 2 weeks in advanced, the software, like 12Pay is automatically set up to do the RTI stuff direct with HMRC at the time of doing the pay on your chosen software. I don't know what software you are using, but 12Pay was on their list of software providers that have already altered their product to suit RTI.
Might be worth given their helpline a quick call to confirm, I found then very helpful when I phoned them. The webinar thing I found on twitter and went on the link and registered for it, they are well worth going on and listening to it all, if I find another one I will post it on here. Like I say it doesn't cost anything and is well worth it.
A loan from the employer to the employee is not subject to PAYE and not does need to be reported to HMRC. A loan is an amount of money given by an employer to an employee with the expectation that this amount is repaid to the employer.
Guidance on the difference between a loan and a payment on account of earnings can be found here:
EIM42280 - Employment income: basis of assessment for general earnings: the time when earnings are received: payments on account of earnings: general: director's drawings
Rule 1, Sections 18(1) and 686(1) ITEPA 2003
General
Earnings are treated as received when a payment is made on account of earnings (see EIM42270).
A payment on account of earnings is not the same thing as a loan.
A payment on account of earnings is a payment in respect of which the employer has no right of recovery. There is a payment on account of earnings when the employer agrees to pay the employee money the employee has earned but which is not yet due for payment. For example, where an employee is entitled to be paid a salary at the end of each month, he or she will have earned half a month's salary halfway through the month, but it will not be due for payment until the end of it. One month, the employer may agree to pay something on account halfway through the month that is not repayable. This is a payment on account of earnings.
If an employer and employee make an agreement under which the employer lends the employee money and the employee agrees to repay it at a future date or dates, the amount in question is a loan, not a payment on account of earnings. For example the Civil Service removal scheme may allow a transferred member of staff to draw an "advance of salary". Here the proper construction of the arrangement is that the employee is getting a loan that is repaid by instalments out of future salary payments. PAYE is applied when the salary is paid. It does not apply when the advance is made.
The terms used to describe a payment do not decide its treatment. You have to look at the substance of the matter. Something described as an advance may be a loan or a payment on account.
In Williams v Todd (60TC727) an Inspector of Taxes received an interest-free advance from his employer to help him purchase a new residence following a compulsory transfer. He claimed it was a payment on account of earnings that should have been taxed under PAYE. Walton J said:
"I do not consider that the advance can be truly called anything other than a loan. It is not a payment on account of [earnings] because it is not a part payment which cannot be recovered: on the contrary it is an express term of the advance that it is repayable on demand. I do not see that the advances fall within the scope of income to be assessed under the PAYE system" (page 736).
(There may be liability to tax on the benefit of an interest-free or cheap loan (see EIM26101onwards).
Directors drawings
Directors very often draw money from the company during the year, which is debited to their loan account and repaid at the end of the year by crediting fees, or a dividend, voted or declared after the end of the year. Until that time, and in the absence of specific evidence to the contrary, the amounts drawn do not actually belong to the director. The in-year drawings are not payments on account of earnings for the purpose of Sections 18(1) and 686(1).
The way in which directors become entitled to remuneration is explained at EIM42300.
Last time I used Sage there was a tick box utility to state whether additonal payments and deductions were subject to Tax, NI, pensionable earnings etc as there is in the software I use now.
Amanda.....you are correct....it was most definitely a payment on account of earnings, not a loan. As the employee was advanced say £50 of his £350 a week wage he will only receive £300 this week (net not gross), so if I was doing this in RTI, would I enter just £350 each week as normal, despite the fact that the employee has actually received £400 one week and £300 the following?
I'm going to try and persuade my client not to advance wages from April if he can help it...he's far too lenient with his employees as it is.
Amanda....if you find another of those links that would be great if you could post it on here ....thanks
I am with Diona on this. We often pay salaries in advance e.g. if they have just started and missed the cut off for monthly payroll so we have had to pay them by cheque/internet transfer etc. The HR team will manually calculated the amount of pay required. At this point we simply CR bank and DR salary control. When the next payrun occurs the following month, the HR team, having put the employee details in the payroll system will inform the system what payment was made by cheque, the system will calculate how much the gross should have been, allocate all the tax/NI to the correct nominals and any difference between the physical cash payment and the system calculated one will automatically go on to the BACS run as a payment (or show as DR to the salary control as an overpayment which needs clawing back).
The theory is the same for other advance payments due to missing the payroll cutoff be it an increase in car allowance etc.
Pauline- I didn't think it was a loan by the way you worded it, what it is is they are paying the employee and amount early as he is abit short.
Well according to the HMRC RTI web seminar yesterday, the RTI of payroll has to be sent to HMRC before payment is paid to the employee or at the very last on the day the employee is paid, so if its an early payment because they have missed the cut off point so if they joined on 1st May but the payday was 30th April but the payrol was prepared and submitted on say 23rd April, if you decided to pay them any money before the next Pay run ie May31st so you paid them an advance partway through the month, then that has to be reported to HMRC on RTI immediately on or before the payment leaves the company bank. The same applies if its a cash based business for example a pub or a small shop where wages are paid out of the till. It doesn't matter what software you are using to record it in your books, so you may record it in Sage for your books but you use say 12Pay for payroll, its the payroll software thats the important bit. 12 Pay and other softwares are geared up already for RTI, and it will be live on 6th April, so the minute you pay someone whether its an advanced or not it has to be recorded and reported to HMRC under RTI, if you pay amounts when you fancy and then do the payroll for it later you may well open yourself up for fines etc. Or worse still if you every had an inspection they would check your bank accounts and see that payments don't match the RTI.
On the Web seminar the other day they were stressing how important it is to report Pay (RTI) at the time. Infact someone did ask this exact question and they said a payslip would have to be issued at the time of payment so if the employee is paid twice in the month, ie an advanced then it will have to given 2 payslips from the payroll department on their chosen software, and when producing the payslips, will automatically report the payments etc to HMRC. The whole point of RTI is Pay has to be reported at the time of paying it or just before, not 2 weeks after its been paid.
Off course if a company loans you money say you needed £1000 urgently and you had agreed to pay it back say monthly then that is something totally different.
The directors are slightly different if they do their payroll once a year like some do, I haven't quite got my head round that one yet, but will be doing so in the next couple of weeks.
Pauline the next time I see anything to do with Payroll and HMRC I will post it on here as I felt alot more confident about it all yesterday and chatted with 12 Pay today about it and understood it well.
I may well be totally wrong on this but I don't think I am. Please if anyone has got anymore thoughts on this I would like to know, just in case I am wrong.
Shaun - Where are you when a good debate is going on!
Yes, many thanks for that Amanda, that was a great help.
I will definitely try and dissuade my client from making any advance wages payments I think. One of his employees isn't very good with money and can't seem to budget, but it's becoming a habit that I will have to try and break!
I am using Moneysoft payroll at this client so I'm sure it will cope with RTI.
If you change the interval at which you pay your employees - for example from weekly to monthly payments or vice versa, you must ensure that you continue to work out PAYE tax and National Insurance contributions (NICs) correctly.
Note that changes to payment interval cannot currently be processed using the P11 Calculator within HM Revenue & Customs (HMRC's) Basic PAYE Tools package. You will therefore need to record any changes using a paper form P11 or third-party payroll software with the appropriate functions.
The implications for NICs of shortening your payment interval - from monthly to weekly, for example - are straightforward. From the first payday after the change of interval, calculate NICs using the appropriate tables for the new earnings period.
PAYE changes
For PAYE tax deductions, you have to switch to using the appropriate tables for your new shorter earnings period. But the timing of this switch can vary as follows:
if you haven't already paid the employee during the month in which the change of interval takes place, start using the weekly PAYE tables from the first payment after the change of interval
if you have already paid the employee in the month of change, start using the weekly PAYE table from the beginning of the following tax month
Dealing with PAYE and NICs when lengthening your payment interval is quite straightforward.
PAYE changes
You work out PAYE on the basis of the new earnings period from the first payment after the change.
NICs changes
For NICs purposes you'll need to check whether your last payment to an employee under your old shorter interval falls in the first of your new, longer earnings periods.
If it does, then the NICs from the earlier payment need to be taken into account when working out the NICs for the later payment. The total NICs must not exceed the amount that would have been payable if the two payments were added together and monthly NICs worked out on the combined total. If no payments under your old shorter interval fall into your new, longer interval, then the NICs due in the first of the new intervals should be calculated as normal.
NICs if an employee joins your contracted-out scheme at the same time as their pay interval is lengthened
In this instance, if two payments overlap in the same earnings period, then NICs are payable at the applicable contracted-out rate on the combined total of the payments.
