Payroll Week 53 payment. When it’s right, it’s wrong!
In some tax years, the way pay dates fall for weekly based payrolls means that an employer ends up making one more payment than usual to employees at the end of the tax year. For weekly payroll this is known as a Week 53, for a 27th fortnightly payroll a Week 54, and for a 14th Lunar a Week 56 payment.
Just to confuse the situation further, all of these payments are officially referred to by HMRC as ‘Week 53 Payment’ and are calculated and recorded differently with regards to PAYE Income Tax.
Payroll software is built to deal with the required calculations automatically – but the operation comes with issues.
Employers will have done everything correctly by calculating PAYE in accordance with HMRC rules and applied tax correctly to the pay period, however, the employee will have paid the incorrect amount of tax!
Where an employee is on a non-cumulative tax code, they will receive an extra 1, 2 or 4 weeks of free-pay to which they are not really entitled. For employees on cumulative codes (but not K codes), where pay exceeds 52 weeks of free-pay, then again the tax this time is based on the employee receiving an extra 1, 2 or 4 weeks of free-pay.
Where a K code is in operation, then an additional non-cumulative amount of tax liability is levied, again based on 1, 2 or 4 weeks. However, the employee is likely to not owe the additional 1, 2 or 4 period amount – they have overpaid tax.
Is the amount of additional free-pay or tax right?
The answer, simply, is no. For those on standard suffix tax codes, the employee will have received between 1 and 4 weeks of free pay that they are not entitled too. Equally those with K codes will have had deducted an extra period of additional taxable gross that would not normally have been applied leading to an overpayment.
Weekly payrolls have been familiar with the issue for many years as the regularity is reasonably close together – but the amounts are not very large. However, the occurrence of Week 56 for lunar payrolls is much rarer and the impacts of the resulting P800 and tax bill are more significant – raising employee unhappiness and complaints.
The reality is that the employer has followed the HMRC PAYE requirements to the letter. The employees in many cases are left with a bill, and some attempt to pursue the employer to pay it.
How can employers avoid this?
Without a change in HMRC rule, it is unavoidable without changing pay date or frequency. The fact is PAYE does not collect the right amount of tax even when an employer follows the tax calculation.
Any underpaid tax is normally added to the employee tax code for the new tax year to enable the employee to pay it back in equal installments. For example, an underpayment from the 2013-2014 tax year is paid back in the 2015-2016 tax year! However, if the P800 issued to the employee does not state that the underpayment will be including in the tax code, then the employee has a bill to pay.
HMRC advise employees to check the P60 for the Week 53 indicator box before making contact with them.