Underpaid Tax in 2012/13 PAYE Confusion
We’ve noticed a few of our Payroll users contacting us recently, with employees having received letters from HMRC regarding underpayment of Tax in the 2012/13 PAYE Year. This is not because of any fault in the software but instead it is due to the fact that April 5th was a Friday this year and as a result, for any wage-runs done on Fridays, there were more than 52 weeks in that Tax Year; from 53 weeks for weekly-paid staff, up to 54 and even 56 weeks for fortnightly and four-weekly paid staff. Note that monthly-paid staff are not affected.
Normally everyone’s Tax Code (indicating how much free pay before tax, eg 944L = £9445 free pay) is automatically shared out over a maximum of 52 weeks in any year and therefore, although HMRC requires Payroll Software providers to treat extra weeks beyond week 52 as having the same proportion of free pay as week 52, the employee isn’t in fact entitled to it.
It would appear that, unlike in the past when HMRC might have ignored it or made an adjustment to the following year’s tax code, this year HMRC seem rather keen to get the employee to pay the difference from what they had deducted from their pay-packet at the end of the year compared to the actual Tax amount calculated.
For example, if someone earned £1000 in the fortnight up-to week 54 and had a tax code of 810L, he would have been given tax free pay of £311.73 (8105/26). The tax deducted would have therefore been (1000-311.73) x 20% = £137.65. However as he was not really entitled to any tax free pay for those 2 weeks he should really have been charged £200 tax (1000 x 20%). HMRC will therefore send him a bill for the £ 62.35 underpayment of tax (200 - 137.65).
So in summary, if you feel your staff may potentially be affected by this then it is worth bringing these facts to their attention.