Let me talk about something other than COVID-19 for a minute and focus on payroll operation – particularly the way that payroll is operated in the first month of the 2020/21 tax year.
CWG2 Update 06 April 2020
Firstly, let me say that the CWG2 (Employer further guide to PAYE and National Insurance contributions) was updated on 06 April 2020. This came with the statement:
Section 3.1.5 of the 2020 to 2021 version of CWG2 has been updated.
Section 3.1.5 is all to do with ‘working out National Insurance Contributions when you first pay an employee’. This is really important and to do with making a ‘mistimed payment’. For example, someone that starts in one pay period but is not paid until the next, say, an employee that starts on 10 March 2020 but is not paid until April 2020. This is a common occurrence, i.e. paying backpay in the following month because, for one reason or another, it was too late to get them on the payroll in the month that they started.
This above example is important for April 2020 payroll processing.
I always go to the legislation in the first instance. This is the Social Security (Contributions) Regulations 2001, Regulation 7 (3) in Great Britain. Reading the whole of Regulation 7 means that where the April payment consists of March backpay, the two payments are treated separately for National Insurance Contributions and then the two are added together.
The Contributions are calculated on the rates and thresholds that apply when the payment is made.
The employee is paid monthly on the last working day (30 April 2020). The payment to be made is £1,950 made up as follows:
- £450 backpay for the period 10 March to 31 March 2020
- £1,500 salary for the period 1 April to 30 April 2020
National Insurance should be calculated on the £450 independently from the £1,500 and the values added together in the payroll. This should all be done at the rates and thresholds that apply in the tax year when the payment is made, i.e. 2020/21.
CWG2 Confirmation of the Legislation
The legislation corresponds with HMRC’s guidance at the start of 3.1.5 which says:
When you first pay an employee, you must work out National Insurance contributions based on what will be the normal earnings period for the employment using the contribution rates and limits current at the actual time of payment.
CWG2 2020 Example 3
As we process April payrolls, there will be lots of people that are being processed for the first time in April 2020, even though they started in March 2020. These are two different tax years. Example 3 at 3.1.5 indicates that this is the action to take:
A new employee starts work on 10 March and is due to be paid monthly on the last day of each month.
The earnings period is monthly and the first payday is 30 April. The employee receives £1,950 gross pay which is made up of:
- £450 for the period 10 March to 31 March
- £1,500 for the period 1 April to 30 April
Work out National Insurance contributions separately on the payment for:
- March of £450 using 2019 to 2020 contribution rates and limits and record National Insurance contributions on the employee’s payroll record in tax month 1 of 2020 to 2021
- April of £1,500 and record National Insurance contributions on the employee’s payroll record in tax month 1
This is incorrect!
The two payments should have National Insurance Contributions calculated separately, however, at the rates and limits that applied at the time of payment. If we are paying on 30 April 2020, these will be the rates and limits that applies for tax year 2020/21. We are not interested in the rates and limits for 2019/20.
It happened in 2019/20!
This is one to watch out for as the same error occurred last year too: At the start of the 2019/20 tax year the CWG2 told employers to use the March value at 2018/19 rates and limits and April at 2019/20 rates and limits. This was later updated, although the update wasn’t highlighted.
Action for Employers: err on the side of caution
As with my recent advice in relation to some of the COVID 19 guidance, it is important to be able to justify calculations and figures, when published guidance may change at a later date. Employers can protect themselves against any future compliance activity by taking a copy of the CWG2 as it stands at the moment. Then, if you or your payroll system have calculated National Insurance on the March backpay at the 2019/20 rate and limits, you can always point to the guidance that was in place at the time.