Guidance for Employers where a retrospective liability to Income Tax (PAYE) and Class1 National Insurance contributions (NICs) occurs.
A 'closed tax year' is any year preceding 6 April of the tax year in which the legislation giving rise to both the tax and NICs liabilities has effect (the current year). For example, if the legislation giving rise to the tax and NICs liabilities has effect in 2008-09, the tax year ending 5 April 2008 and all preceding years are closed tax years.
The dates that the legislation giving rise to the tax and NICs liabilities have effect will normally fall within different tax months (the tax by virtue of a Finance Act, and the NICs by subsequent Social Security regulations). Where this occurs, payment of the PAYE and NICs will be due on different dates.
Since Social Security regulations will normally follow the enactment of retrospective tax legislation, employers are recommended to amend employees' closed year pay records simultaneously to reflect both the amended tax and NICs.
For liabilities arising for 2006-07 and earlier years by virtue of legislation given effect by a common operative date of 6 April 2007, payments are due by 19 June 2007 and returns by 19 May 2008. Similarly, 6 April 2007 determines the start of the 90 day period an employee has to make good to the employer the additional tax due and paid by the employer.
Where a pay record (form P11 or equivalent) already exists for an employee who received a payment retrospectively charged to tax and NICs, the employer must amend that pay record in accordance with the guidance below.
Where no pay record exists for an employee who received a payment retrospectively charged to tax and NICs, the employer must complete a P11 or equivalent in accordance with the guidance below.
Each year's pay record in which employees received payments subsequently charged to tax and NICs, must be amended.
The format of the amended pay record is for an employer to determine having regard to their existing payroll process. However, employers should be aware that for closed years, paper forms P14 and P35(RL) are a mandatory requirement and this may influence their choice as to the format of the amended pay records.
PAYE should be calculated by reference to the code issued for the year in which the payment retrospectively charged to tax was actually paid. Where no code was issued, tax should be deducted at the higher rate of tax relating to the year in which the payment was actually paid.
NICs should be calculated by reference to the rates and thresholds of NICs applicable to the year in which the earnings subsequently charged to NICs were actually paid. Any such payment should be added to any other earnings paid to the earner in the earnings period in which the retrospective earnings were actually paid.
For tax purposes it is not necessary to calculate the PAYE separately where more than one payment retrospectively charged to tax was made to an employee in the same year. The total of such payments should be added to the gross pay at the final pay period of the year in question and the tax recalculated using the code issued / the higher rate for that year.
For the purposes of calculating the revised NICs due, it is necessary to record on the revised pay record in the earnings period, or periods, in which the payment or payments of earnings retrospectively treated as earnings were actually paid. This is important in order to correctly calculate the NICs due. If more than one payment of earnings retrospectively treated as earnings was made to an employee in a year, it will be necessary to calculate the revised NICs on each payment separately and amend the total NICs figure for the year accordingly.
Payment to HM Revenue & Customs (HMRC) of both PAYE and NICs are due within 14 days of the end of the tax month following the tax months in which the relevant tax and Social Security legislation giving rise to the liability has effect.
The Finance Act giving rise to a retrospective tax liability has effect on 20 July 2008. Payment of the PAYE will be due by 19 September 2008. The Social Security regulations have effect on 10 August 2008. Payment of the NICs will be due by 19 October 2008.
Irrespective of whether an employer pays their normal PAYE and NICs monthly or quarterly, payment of retrospective liabilities is due by reference to a month, as above.
Irrespective of whether an employer normally pays electronically or not, payment in respect of closed years can only be paid by cheque. A cheque should be sent, together with a letter clearly marked as relating to a retrospective PAYE/Class 1 NICs liability, giving the following information:
Cheques should be made payable to 'HM Revenue & Customs Only'
followed immediately by the Accounts Office reference and sent to:
HM Revenue & Customs
Section 10 (RPL)
Interest will be due on any payment received after the relevant 19th of the month. Interest will be calculated once a return has been received by HMRC.
As with closed years, the payment dates are determined by the dates on which the relevant tax and Social Security legislation has effect.
Payments to HMRC of both PAYE and NICs are due within 14 days (or 17 if paid electronically) of the end of the tax month following the tax months in which the relevant tax and Social Security legislation giving rise to the liability has effect.
Employers should include the additional PAYE and NICs as part of their normal monthly payments to HMRC. If an employer normally pays quarterly, PAYE/NICs due in respect of retrospective liabilities cannot be paid quarterly but must be made out of turn by the statutory monthly due dates. If payment is normally made electronically, payment should be made electronically.
The normal interest provisions relating to PAYE and NICs apply to PAYE and NICs due in respect of retrospectively charged liabilities. That is interest will be due on any outstanding balance of PAYE or NICs unpaid by 19/22 April following the current tax year.
Employers must complete a separate form P35(RL) Employer Annual Return (including a certificate and declaration) for each closed year along with the 'National Insurance' and 'Tax' copies of form P14 for each employee affected by a retrospective payment in the tax year concerned. All forms P14 should be prominently marked 'Revised'.
Returns cannot be sent online, even where an employer normally submits their Return online. Instead you should use form P35(RL). If you are sending more than eight forms P14 you will also need P35(RL)Continuation Sheets.
Paper forms P14 can be obtained from our Employer Orderline.
Amended forms P14 should be completed from the amended forms P11 (or equivalent) to show for each affected employee:
The employer should then show on the form P35(RL) the following details in respect of each affected employee:
The columns of the original and revised PAYE should then be totalled, with the original figure of PAYE subtracted from the revised figure of PAYE to arrive at the additional amount payable. The same process should then be undertaken to arrive at the additional NICs payable.
The form(s) P35(RL) must be signed and dated and sent, together with the forms P14, to the following address by 19 May following the year in which the relevant tax and Social Security legislation giving rise to the liability has effect:
Customer Operations Employer Office
Benton Park Vew
Newcastle Upon Tyne
Penalties for the late or incorrect submission of a form P35(RL) and associated forms P14 apply as they would for the late or incorrect submission of a form P35. The penalties for late returns build up each month. They are issued every four months in September, January and May.
The amended form P11 (or equivalent) figures for each affected employee should, in due course, be reflected on the form P14 completed at the end of the year and summarised on the form P35. There is no need to make separate returns in respect of payments made in a current year.
Where an employer incurs an additional PAYE liability in respect of a named employee, that amount must be paid to HMRC by the statutory due date, irrespective of whether the employer:
Once a retrospective tax liability has been created (relating to any year) by the relevant Finance Act receiving Royal Assent, an employer may seek to recover the PAYE underpaid relating to a named employee, from the employee's net earnings paid in that tax month only. There is no restriction on the sum that can be recovered (this also applies if the employee has actually left the employment but is still due a payment of earnings).
Where an employer cannot recover the tax in full from the employee's net earnings, the employee must make good to the employer the tax due within 90 days otherwise the outstanding amount will become additional employment income and charged to tax on the employee. Where the employee does not make good the tax, the employer should report the additional employment income/earnings (the tax not recovered from the employee) on the current year's form P11D. The entry on the form P35(RL) relating to the appropriate employee should also be noted that the tax has not been recovered.
See 'Class 1 NICs' below regarding the National Insurance implications of an employee not making good the tax.
Royal Assent of a Finance Act is 20 July. This results in an additional PAYE liability of £100,000 in respect of employee A. Employee A's net monthly pay is £7,000 (salary being paid at the end of the calendar month). The employer can recover from employee A, a sum equivalent to the employee's net pay (£7,000 less the additional NICs due on the earnings giving rise to the £100,000 PAYE - see below) from the salary due on 31 July. Employee A has until 19 October to pay to the employer the remaining tax, failing which this becomes additional income to be declared by the employee on their Self Assessment tax return and an additional payment of earnings on which Class 1 NICs must be paid.
The unmet tax sum should be aggregated with any other earnings the employee receives in the earnings period which includes the 19 October. The total amount is then liable to Class 1 NICs.
As with PAYE, where an employer incurs an additional NICs liability in respect of a named employee, that amount must be paid to HMRC by the statutory due date, irrespective of whether the employer recovers the primary contributions from the employee or not.
An employer has the remainder of the tax year in which the legislation giving rise to the retrospective NICs liability has effect, and all of the following year, to recover from the relevant employee's net earnings, that employee's primary contributions element of the additional NICs due. This is subject to the provision that the amount deducted cannot exceed the amount of NICs deducted from the employee's salary for the month.
These rules do not apply to any resulting increase in the employee's earnings arising from the employee's failure to make good to the employer any additional tax arising from payments retrospectively charged to tax. Under such circumstances the employer only has the earnings period in which the 90th day falls to recover any additional primary contributions.
Social Security legislation giving rise to retrospective earnings of £250,000 has effect on 10 August 2008. This results in an additional £34,500 NICs liability in respect of Employee A of which £2,500 represents primary contributions. Employee A's monthly salary - paid calendar monthly - is £3,000 on which £272.55 primary contributions are paid.
The employer can recover an additional £272.55 per month from August 2008 to March 2010 inclusive until the total £2,500 has been recovered. The employer will be able to recover the full amount of additional primary NICs in this example by May 2009.
The payment of tax by an employer on an employee's behalf is a payment of earnings for NICs purposes and should be aggregated with any other earnings an employee receives in an earnings period. This applies equally to cases where an employee fails to make good tax within 90 days. In these cases the sum of tax is treated as a payment of earnings on the 90th day and should be aggregated with any other earnings paid in the earnings period in which the 90th day falls.
Employers are able to recover the NICs due on these additional earnings as normal but there is no extended recovery period for these NICs if the total amount of primary NICs due cannot be recovered from the pay in the relevant earnings period.
Where an employer amends an employee's pay records for any closed tax year, for each year for which records are amended, the employer must provide the employee with details of the revised pay, tax and NICs as soon as possible after the amendments are made and no later than 31 December in the year in which the legislation giving rise to the retrospective liability has effect.
Where the employer:
Where an employer amends an employee's current year pay records, those amendments should be reflected in the revised figures on the form P60 provided at the end of the year, or form P45 if the employee leaves during the year. As such there is no requirement to provide employees with separate certificates relating to retrospectively charged liabilities and the tax and NICs due on those liabilities.
Where an employee has left before the date on which legislation giving rise to a retrospective tax liability has effect, an employer should still attempt to seek repayment from the employee within 90 days by applying to the employee's last known address. If the ex-employee does not make good the tax, the same situation applies as if the employee were currently employed. That is the sum becomes additional income of the employee.
Where an employee has left before the date on which legislation giving rise to a retrospective NICs liability has effect, the employer cannot recover the primary contributions due on the retrospective earnings or on any amount of additional tax unpaid after the 90 days have expired unless he pays the employee any earnings after the date of leaving.
Where a code was issued to an employer in respect of a named employee for the year in which the payment to that employee giving rise to the retrospective liability was actually paid, that code should be applied.
Where a code was not issued to an employer in respect of a named employee for the year in which the payment to that employee giving rise to the retrospective liability was actually paid, the Higher Rate tax should be applied to the payment.
Employee A leaves the employment on 31 December 2006. On 6 April 2007 the employer makes a payment to employee A, which on 20 July is retrospectively charged to tax. The employer has not been issued with a 2007-08 code in respect of the employee. The employer deducts tax at the higher rate applicable for 2007-08 on the payment made to employee A.
The requirement to provide employees with details of revised earnings, tax and NICs, either by way of a revised form P60 or copy form P14, apply as equally to leavers as they do to current employees.