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Christmas appears to have arrived early this year.  Retailers, keen to make up for lost time, began promoting their goods and services for Christmas as early as September.  But when it comes to delivering the payroll in time for the holiday season, it certainly “pays” to start early.

Christmas & HMRC

So, let’s begin with HMRC’s official guide the CWG2 on how to deal with seasonal payments. The CWG2 2022 is “the Employer’s Further Guide to PAYE and National Insurance contributions” which can be viewed on the Gov.uk website.  

The index at the end of the guide is often the fastest way to find items.

Christmas Box

In section 5 (which deals with pay, expenses, and benefits) of the CWG2 guide, HMRC lists the tax and NI treatment of “Christmas boxes”, which is an old-fashioned term for a Christmas bonus.  As you would expect, because the bonus is paid in cash, then it must be included on the payroll for tax and NI purposes.

Cash sums such as bonuses cannot be included in a PAYE Settlement Agreement (PSA). But an employer could meet the cost of the tax and national insurance by grossing up the amount of the bonus via the payroll.

Gift Vouchers

If an employer is giving his staff gift vouchers as a Christmas gift, then there is a national insurance (Class 1) liability on the cost to the employer at the point that the voucher is given. Unless a PSA is already in place, prior to the voucher being presented to the employee.  

Where there is no PSA in place, the NI is accounted for via the payroll and the value of gift voucher should be reported on the employee’s P11D for tax purposes.  If you are registered for payrolling benefits then the cost of voucher to the employer (rather than face value) can be taxed via the payroll at the same time as the national insurance is deducted. 

However, if the cost to the employer to provide the voucher is £50 (per employee) or less, it may qualify as a trivial benefit, and would therefore be tax and NI free.  

Please note that trivial benefits given to directors (of a close company with 5 or less shareholders) carries a limit of £300 per tax year.

Paying early at Christmas

Traditionally many companies pay their staff early at Christmas, particularly if the payday for a monthly payroll falls on or after 25 December.  But there is no legal obligation to pay staff early.

For those operating a weekly payroll, it often makes sense to pay staff two weeks’ pay at Christmas, to remove the necessity of running another payroll between Christmas and New Year.  

However, paying staff early does have an impact on a business’s cash flow and needs to be carefully considered.

Cintra Customers

Cintra customers are reminded that the payroll schedule for December can be found here: https://cintra.co.uk/oss-resources/ Please note that that payroll information must be submitted to Cintra by 10 a.m. on the specified date according to the pay day.

Customers also need to be aware that if they want to make a late change the pay date for Christmas, there is an admin fee of £50 plus VAT.

BACS Approvers

For customers paying their employees via BACS, please ensure that the BACS approvers are contactable and available for the payroll sign offs dates.  Approval must be made by 10 a.m. on the date specified on the schedule.

Now may be a good time to review if you have a second BACS approver, in case of holidays or sickness and to ensure that Cintra also have their contact details. 

Universal Credit 

Paying employees early has an impact on HMRC, following the introduction of Real Time Information (RTI).  It also affects the calculation of Universal Credit for claimants because assessments are carried out on a monthly basis. 

So HMRC introduced a temporary easement to resolve this issue, which worked well and became a permanent easement in 2019.  This easement states that where an employer pays his staff earlier than normal, the employer should report the normal (or contractual payday) on their Full Payment Submission (FPS) rather than the day it is actually paid.

It is vitally important that the correct pay date is entered onto the FPS i.e. the normal or contractual payday (payment run due date) as this will affect any employees receiving Universal Credits.  It is estimated that if employers pay early and enter the wrong date on the FPS this could potentially affect up to 85,000 Universal Credit claimants.

It is also worth noting that there are ongoing issues for employees paid every four weeks (lunar month) because UC assessments are carried out monthly, but employees paid every four weeks have 13 paydays in a year.

Disadvantages to paying early

If this year is the first year that you are considering paying employees early for Christmas, there is a particular disadvantage for employees that you should be aware of.  Inevitably, to pay employees early, the cut off dates for the payroll need to be brought forward and HR, your employees, and their managers will need to be made aware of this. Due to the early payroll cut off dates, any extra payments, items such as overtime and extra shift payments may miss the payroll and will therefore not be paid until after Christmas.  

It is good practice to warn employees that this will happen, as they may not have budgeted for this.  It is helpful if you can set out clearly when the Christmas cut off dates are and what payments will be included on the payroll.  

For example, you could state that: “The December monthly salaries will be paid a week early this year, on 17 December.  Therefore, the cut off dates for the Christmas payroll will be 8 December, and all overtime and extra payment claims submitted up to 8 December will be paid on 17 December.  Any overtime etc submitted after 8 December will be included on 24th January payroll”.

Monthly Payroll Example

An employer pays his staff monthly and the normal pay day is 24th of the month which covers the whole of the month.  In December, the employer would usually pay employees on Friday 24 December for 1 to 31 December.  However, he has decided to pay staff a week early, on Friday 17 December.  The date he enters onto the RTI Full Payment Submission (FPS item 43) is shown on the system as the “payment run due date”, 24 December.  Although employees have been paid on 17th December, because 24 December is the payment run due date, the FPS can be sent to HMRC up to 24 December.

Weekly Payroll Example

For employers operating a weekly payroll, if you normally pay employees each Friday, but you want to pay the salaries due on 24 December on 22 December, then you enter the payment run due date as 24 December (normal payday) as normal (FPS item 43).

However, if you decide to pay two weeks’ pay at Christmas, so the regular week’s pay plus a week in advance.  For example: you want to pay 24th and 31 December’s pay on 24th December. You should enter the normal pay day on the FPS for the first week’s pay on the FPS as the payment run due date i.e. 24th December. 

You will need to advance the tax week number to include the second week’s pay i.e 31 December, in a similar way to when you pay holiday pay in advance.  This will ensure that the payroll system will allocate two weeks’ personal allowances for tax according to the employee’s tax code, to cover the two weeks’ pay.  

The payroll system will also make the correct deductions for the two weeks’ pay for national insurance, workplace pension, student loans, court orders and any other deductions made via the payroll.

For RTI purposes, providing the FPS indicates that the earnings paid on 24th December are for two pay periods instead of one, Universal Credit, where applicable, should be calculated correctly.  

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