These questions and answers are aimed at employers.
Payslips
How should tax credits be recorded on payslips?
Court Orders,Attachment of Earnings Orders etc.
Can employers recover net pay deductions from tax credits
if all their net pay has been used up?
Are tax credits included in the employee's income when completing
Court Order/Attachment forms?
When an employee applies for tax credit
Why do you need an estimate of earnings and how do I calculate
an estimate of earnings when I can't predict the future?
I provide all my employees with payslips. Why should I
provide you with information my employee should already have supplied
you with?
How quickly do you want the information back?
When you ask about a bonus you ask how much bonus has been
paid in the last 52 weeks. If you assess applications based on the circumstances
at the date of application, why do you need information going back over
52 weeks?
I don't understand why you ask for details about the hours
an employee actually works. Why is this information needed?
Are there any best practices that we can put in place to
help each other?
We operate a PRP scheme. Even when the employee supplies
you with payslips, you still contact us about a lump sum payment and what
the gross pay before any PRP adjustments is. Why?
Why do you ask questions relating to shares?
How could the new All-Employee Share Plan affect employees'
tax credits?
Employer's Role
How will I know if I am going to have to pay tax credits?
Where will I get the money to pay tax credits?
What if my liability for PAYE,NICs and student loan deductions
is less than the tax credit payable?
What will I need to do in each pay period?
How will I account to the Inland Revenue for tax credits
paid?
What information will I have to give to employees receiving
tax credits?
What if an employee is on sick leave and I am only paying
SSP?
I've been told to pay tax credit to an employee up to 9
October. Her October tax credit will go into her monthly pay packet on
31 October. What happens if she renews her tax credit award?
The employee you want me to pay tax credit to doesn't actually
earn enough to pay tax or NI. Is payment through the pay packet still
appropriate?
How do I pay my employee tax credit if I don't collect
enough tax or NI from my other employees?
How do I record that I have paid tax credits?
What happens if you have quoted the wrong PAYE number/name/
address on the form you have sent me? You told me to
pay my employee at a daily rate, but my payroll frequency is monthly.
What do I do?
Would it be easier for you if my PAYE reference number is
shown on all my employee's payslips? If yes, why? What would the benefits
be to me?
What happens if the employee goes on Maternity Leave/Sick
Leave?
Is there any circumstance when I don't have to action a
Start Notification (TC01)?
Can I request that the TCO send the TC01 Start Notification
to a different address?
If my employee only works part time, how much tax credit
do I pay?
If I'm told to stop paying tax credit before the end date
on the form TC01, do I still have to give the employee a Certificate of
Payments (TC02)?
How will my employees receive their tax credit payments
in the 14/42 days lead in period before my responsibility starts?
Funding
How do I apply for funding for tax credits?
What information will I have to provide in order to get advance
funding?
Further information and support for employers
Payslips
Q. How should tax credits be recorded on payslips - as net pay + tax credit = total pay - or can it be shown as an addition?
A. Employers are free to show the tax credit on the employee's payslip in the way that best fits in with their existing payslip design. The main point is that the tax credit amount must be shown as a clearly identifiable separate amount on the payslip.
Court Orders, Attachment of Earnings Orders etc.
Q. If various deductions from net pay such as Court Orders, Child Support Orders, Attachment of Earnings orders etc. reduce the net pay to less than nil, can tax credits be used to cover any shortfall? In other words, can employers recover net pay deductions from the tax credit if all their net pay has been used up?
A. No. The tax credit must be paid in full. It cannot be "attached", used by way of set-off or otherwise reduced.
Q. When employers are asked to complete forms in connection with Court Orders, Attachment of Earnings orders, do they include tax credits in the employee's income when completing these forms?
A. No. Tax credits are not included in income.
When an employee applies for tax credit
Q. Why do you need an estimate of earnings and how do I calculate an estimate of earnings when I can't predict the future?
A. An estimate of earnings is needed if your employee has:
- started a new job, or
- been off work for more than 4 weeks, or
- changed their contracted hours.
We are unable to use historical information as this doesn't accurately reflect your employee's average earnings. We therefore ask you to provide an estimate of earnings based on the number of hours the employee is contracted or likely to work and including any regular overtime, bonus or commission, where applicable.
It is not always simple to work out an estimate in circumstances where employees may not have a fixed number of contracted hours, for example when they work for an employment agency. One way to calculate an estimate in these circumstances would be for you to look at other employees' hours and earnings for the same or similar jobs and use the average as a basis for the estimate. We accept that it is no more than an estimate and use it only for the first 6 months. On any subsequent applications we use actual earnings gathered from payslips or an earnings enquiry to you.
Alternatively, employees can send their contract with the application form if they are new starters to indicate what their earnings are likely to be. If you need any help in providing us with an estimate, please ring the TCO Helpline for further assistance.
Q. I provide all my employees with payslips. Why should I provide you with information my employee should already have supplied you with?
A. Sometimes, one or more of the relevant payslips are missing. We need the earnings details for the weeks where payslips are not available, so that the employee's average net weekly earnings can be accurately determined.
Wherever possible we will ask the applicant to provide the missing payslip information. Occasionally, though, we may still have to approach you for it. Copy payslips are acceptable.
Even when your employees have provided us with payslips sometimes abbreviations or acronyms are used and it is not clear to us what the payments and deductions are. We need to know what the abbreviations or acronyms mean and what the payments and deductions are, so that an accurate net weekly earnings figure can be determined. If you could supply a list of standard abbreviations used on payslips, this would be helpful for us.
Q. How quickly do you want the information back?
A. We can not deal with an individual's application until we receive all the necessary information. You can help your employee by answering our questions promptly.
Q. When you ask about a bonus you ask how much bonus has been paid in the last 52 weeks. If you assess applications based on the circumstances at the date of application, why do you need information going back over 52 weeks?
A. Where bonus/commission has been paid, we need specific information dependent on how the bonus/commission was paid.
- Where it was paid or available in every pay period, we will include this as normal earnings, e.g. weekly paid employees might get a bonus every week paid with the regular weekly pay. Where it was included as normal earnings, no further information should be necessary. (Where it is unclear from the payslip whether it was available every pay period we will have to clarify this.)
- Where a bonus/commission was paid regularly we will include this as normal earnings, but if an additional bonus/commission was also paid irregularly, we will need that as a separate figure as above. For example, a weekly paid person regularly earns commission that was paid within their weekly pay but also receives a bonus quarterly or yearly. The commission was included with the normal earnings but the bonus received in the last 52 weeks is required and will be calculated to a net weekly figure.
- Where it was not paid regularly, we need to know how much was paid in the last 52 weeks immediately prior to the week in which the application is made. For example if a monthly paid person gets bonus/commission payments quarterly, we need the amount paid in the last 52 weeks. If this is a gross figure, we will deduct tax and NI and calculate this into a monthly net figure in order to arrive at a normal weekly average.
Q. I don't understand why you ask for details about the hours an employee actually works. Why is this information needed?
A. To qualify for tax credit, an applicant has to work, on average, 16 hours or more a week. Where an employee works variable hours, we have to establish an average. This is usually based on the hours worked by the employee for the 5 weeks prior to the week of application. This is the same for all employees, regardless of the pay frequency.
We will try to obtain this information from your employee wherever possible. People who work on average 30 hours or more weekly can qualify for an extra premium (currently £11.25 per week). If they work variable hours, we have to average out the hours over, at least, the 5 weeks prior to the week of application to see if they are eligible for this premium.
Q. Are there any best practices that we can put in place to help each other?
A. Encourage staff to keep payslips.
Wherever possible, ensure that the following are on payslips:
- The date of actual payment.
- The pay period covered.
- The hours worked in that period.
- The PAYE reference number.
- A clear explanation of payments, deductions and acronyms.
- Tax credit paid.
When completing the earnings enquiry forms (TC500 or TC200), answer all relevant questions. Where an estimate of earnings is required, the question most commonly missed is the one asking for an estimate of the employee's average gross earnings for a normal pay period.
In the first instance we try to get information from applicants rather than contacting you.
Q. We operate a PRP scheme. Even when the employee supplies you with payslips, you still contact us about a lump sum payment and what the gross pay before any PRP adjustments is. Why?
A. Where employees are paid any PRP scheme with their earnings, we are obliged to obtain the Gross Pay before any deductions are made for PRP. This is not normally shown on payslips and can lead to numerous enquiries, all dependent on the nature of the scheme and the amount of detail on the payslip. Any lump sum bonus from the scheme paid with the earnings must be deducted from the normal pay. Further deductions will be made for tax, NI and 50% pension where appropriate, the net is then treated as capital, not income.
Q. Why do you ask questions relating to shares?
A. Profit-sharing schemes Shares are sometimes allocated to employees, usually as part of a profit-sharing scheme. We cannot assume each scheme is the same and will need to establish how the scheme works. The employee is the beneficial owner of the shares even if the trustees of the scheme hold them. They are treated in 2 ways:
- Shares received in the 52 weeks prior to the application are treated as a bonus. You will be asked for the gross value of the shares when they were allocated. We will then calculate a net weekly figure.
- If shares have been allocated prior to the 52 weeks assessment period, they are treated as capital. We need to establish their value at the date of application, and for the purpose of tax credits deduct any tax, if appropriate, and 10% selling costs.
Shares sold through the employer -
Proceeds from the sale of shares are often received within an employee's
pay. This money is treated as capital, lifted from the gross pay and where
applicable, tax, NI and 50% Pension is deducted.
Share Save Schemes -
Company shares can be purchased by employees as part of share save schemes.
In these instances, we would need to know the amount and value of shares
held by the employee at the date of application.
Q. How could the new All-Employee Share Plan affect employees' tax credits?
A. The basic WFTC/DPTC capital rules -
There is a general rule that a family with capital of more than £8,000
(the upper limit in the case of WFTC) or £16,000 (the upper limit in the
case of DPTC) - as at the date of their application - will not be eligible
for tax credits. And families with capital over £3,000 lose £1 of tax
credit per week, for every £250 band between £3,000 and the upper limit.
The rule about the upper limit is a basic eligibility rule that has applied
since WFTC was first introduced last year and which also applied to Family
Credit from its inception in 1988. "Capital" excludes the family home
and possessions, but has always included shares, savings and other investments.
It does not matter whether the shares were originally acquired under a
company's new All-Employee Share Plan, an earlier tax-relieved approved
employee share scheme, an unapproved share scheme or by any other method.
The basic capital rule is explained in all the leaflets and literature
on tax credits, so all applicants should be fully aware of it.
New feature of the new All-Employee Share Plan -
The only new feature of this plan - that a very small proportion of tax
credit recipients may need to know - is that, for the first time, they
will be able to benefit from buying shares in the company they work for
out of their pre-tax and pre-NICs income, and that this possible increase
in their net pay could lead to a corresponding slight reduction in their
entitlement to tax credits. For example, if an employee (who was not on
maximum WFTC, i.e. who was subject to the 55% income taper) took part
in the Plan, so that his net pay went up by say £1 a week, his next WFTC
award could be tapered/reduced by 55% of that extra £1 =by 55p a week.
So that employee would still be better off (by 45p a week) overall, but
he might want to bear this possible side-effect in mind when deciding
whether or not to participate under the Plan.
It is only this new feature of the All-Employee Share Plan that tax credit recipients and benefit recipients need new information about from the Inland Revenue leaflet IR177. The old, basic capital rules are simply mentioned in the leaflet for the sake of completeness. The basic capital rules have always been covered comprehensively elsewhere and those rules have not been changed.
Employer's Role
Q. How will I know if I am going to have to pay tax credits?
A. The Tax Credit Office will send you a start notification by first class post. This will tell you
- The employee's name, National Insurance number and, if known, payroll number
- The start and end date of the period of your responsibility for paying tax credit to this employee
- The daily rate applicable to each calendar day for which you are responsible for paying tax credit, and
- The total amount which you will have to pay.
With the start notification you will also receive a table showing multiples from 1 to 31 of the daily rate (to help you work out the amount due in each pay period), and a Certificate of Payments for use in certain circumstances when you stop paying tax credit to an employee, for example, if the employee stops working for you.
(Employer's Guide to Tax Credits, page 5)
Q. Where will I get the money to pay tax credits?
A. You will have to ensure that you have the money to pay tax credits on pay day.
You will be able to offset tax credits paid to your employees against the aggregate PAYE tax, NICs and student loan deductions which you are due to pay to the Inland Revenue each month or quarter, as appropriate.
This means that the amount of PAYE tax, NICs and student loan deductions which you have to pay to the Inland Revenue will be reduced by the amount of tax credits you pay to your employees.
(Employer's Guide to Tax Credits, page 6)
Q. What happens if my liability to the Inland Revenue for PAYE tax, NICs and student loan deductions is less than the tax credits I will have to pay?
A. You will be able to apply to the Inland Revenue in advance for funding.
(Employer's Guide to Tax Credits, page 6)
Q. What will I need to do in each pay period?
A. For each pay day during your period of responsibility for paying tax credit you will have to
- Calculate the amount of tax credit due to the employee for each pay period. You will be able to work out the correct amount by using the daily rate and table supplied by the Tax Credit Office with the start notification
- Show it as a separate item on the employee's payslip. You do not need to show a net pay figure before the tax credit entry, although you may do so if you wish
- Record the amount of tax credit on form P11 or equivalent deductions working sheet.
You will continue to pay the tax credits until the end date on the start notification unless notified by the Inland Revenue to stop paying sooner or in certain other circumstances.
(Employer's Guide to Tax Credits, pages 6-7)
Q. How will I account to the Inland Revenue for tax credits paid?
A. At the end of the month or quarter you will
- Show on form P32 or P30BC the total PAYE tax, NICs and student loan deductions due in respect of all your employees (reduced by the amount of tax credits you have paid to employees)
- Remit to the Inland Revenue only the net PAYE tax, NICs and student loan deductions, reduced by the amount of tax credit paid.
At the end of the tax year you will show
- The total tax credits paid in the current employment on the P14 and P60 forms for each employee for the tax year
- The total tax credits paid to all employees in the tax year on the P35. You must include the amount of Inland Revenue funding received in the year and the unreduced PAYE tax, student loan deductions and NICs due for the year.
(Employer's Guide to Tax Credits, pages 7-8)
Q. What information will I have to give to employees receiving tax credits?
A. You will need to
- Tell the employee your PAYE reference number if he/she asks for it
- Show the tax credit paid on the employee's payslip
- Enter on the P60 the total amount of the tax credit you have paid to an employee in the tax year, and
- Give a Certificate of Payments to any tax credit recipient who leaves, or to whom you do not have to make any other payroll payment in an entire pay period. The employee will have to send this to the Tax Credit Office so that they can make direct tax credit payments.
(Employer's Guide to Tax Credits, page 8)
Q. What if an employee is on sick leave and I am only paying SSP?
A. You will have to pay tax credit as well as SSP.
(Employer's Guide to Tax Credits, page 11)
Q. I've been told to pay tax credit to an employee up to 9 October. Her October tax credit will go into her monthly pay packet on 31 October. What happens if she renews her tax credit award?
A. You should pay the current award as you have been instructed by the Tax Credit Office (TCO) on the form TC01. If your employee renews her award in October for a further 26 weeks, the TCO will pay the initial instalments of the new award to her direct. They will send you another TC01, giving you at least 42 days' notice before you start paying tax credit again.
Because you pay salary in arrears, your employee may find that she receives the first direct payments of her new award before you pay her the final instalment of her current award at the end of October. Where there is an overlap, it does not mean there is a problem: it's simply the way the system works.
As a matter of course the TCO will be drawing applicants' attention to this possible overlap of payments. If your employee asks you about it, please refer her to the relevant TCO Helpline: 0845 609 5000 (for WFTC) or 0845 605 5858 (for DPTC) in Great Britain or 0845 609 7000 (for both WFTC and DPTC) in Northern Ireland.
Q. The employee you want me to pay tax credit to doesn't actually earn enough to pay tax or NI. Is payment through the pay packet still appropriate?
A. Yes if you are collecting tax and/or NI from any other employees.
Q. How do I pay my employee tax credit if I don't collect enough tax or NI from my other employees?
A. You can apply to the Inland Revenue for advance funding using the form TC11, which will be sent to you automatically a few days after you receive your first start notification (TC01).
Q. How do I record that I have paid tax credits?
A. Tax credit paid must be recorded as a separate item on the employee's payslip. You should also record it on the form P11 or equivalent deductions working sheet. At the end of the month or quarter you will have to account to the Revenue for the tax credits paid by showing on form P32 or P30BC, the total PAYE tax, NICs and student loan deductions due in respect of all your employees reduced by the amount of tax credits you have paid. The amount of any funding received also needs to be recorded. At the end of the tax year you must show total tax credits paid in the current employment on the P14 and P60 for each employee, and total tax credits paid to all employees, and Inland Revenue funding received, in the tax year on the P35.
Q. What happens if you have quoted the wrong PAYE number/name/ address on the form you have sent me?
A. Call the Employer's Helpline immediately and ask for the record to be corrected.
Q. You told me to pay my employee at a daily rate, but my payroll frequency is monthly. What do I do?
A. Tax credit should be paid with pay and for the same period as pay. The daily rate is there to help you calculate how much tax credit is due for the calendar days in each pay period.
Q. Would it be easier for you if my PAYE reference number is shown on all my employee's payslips? If yes, why? What would the benefits be to me?
A. The TCO asks people for their payslips when they apply for tax credits. Although including your PAYE reference number on the payslip is not compulsory by law, it helps if you do include it because we can then find your address under the reference number in our records. It means we don't have to bother you with queries about where to send Start Notifications.
Q. What happens if the employee goes on Maternity Leave/Sick Leave?
A. If you have to make any payments to the employee (if Statutory Sick Pay or Statutory Maternity Pay are due, for example, even if there are no earnings), you will also be expected to pay the tax credit due for that pay period.
In a pay period in which no payroll payments are due, you may either create a pay packet for the employee in order to pay the tax credit or complete a Certificate of Payments and pass two copies to the employee. If you decide to give the employee a Certificate of Payments rather than pay the tax credit in a pay period in which no payroll payments are due, you must issue the Certificate of Payments within seven calendar days of the end of the first pay period in which you do not pay tax credit. If no payroll payment is due simply because you have paid the tax credit in advance (for example, with holiday pay paid in advance), you must continue to pay tax credit on subsequent pay days unless we tell you otherwise.
Q. Is there any circumstance when I don't have to action a Start Notification (TC01)?
A. The Start Notification must be returned if any of the following occurs:
- the employment ceases, or is expected to cease, prior to the start date for paying tax credit, or
- you do not expect to pay the employee for at least 3 consecutive pay periods commencing with the pay period which includes the start date for paying tax credit, or
- you are not currently deducting either PAYE tax or NI contributions from the pay of any of your employees.
The appropriate box on the Start Notification should be completed and the form returned to us.
Q. Can I request that the TCO send the TC01 Start Notification to a different address?
A. The TC01 Start Notification is sent to the correspondence address that you have requested all IR communications to be sent to. The Inland Revenue can only hold one payroll/correspondence address for each PAYE scheme. It is not possible for the TCO to send the TC01 to a different payroll address.
If you want to change or amend the correspondence address, you must contact your local tax office. The new address details will be updated on the IR computer system and all subsequent IR communications will be sent to the new correspondence address.
Q. If my employee only works part time, how much tax credit do I pay?
A. Tax credits are paid for every calendar day in the period of your responsibility, even though you may not pay your employee for every calendar day. Tax credits must be paid at the same frequency as your employee's pay.
For example, during your period of responsibility you must pay a weekly paid employee 7 days' worth of tax credit even if he/she has only done 2 days' part-time work in that week.
Q. If I'm told to stop paying tax credit before the end date on the form TC01, do I still have to give the employee a Certificate of Payments (TC02)?
A. No. If we send you a Stop Notice (form TC03), as long as you pay tax credits up to the date on the form, please don't fill in a form TC02. We only need a TC02 if you stop paying tax credit earlier than the end date you have been given, either on a TC01 or TC03.
Q. How will my employees receive their tax credit payments in the 14/42 days lead in period before my responsibility starts?
A. We will make direct payments of tax credit to your employee until you take over responsibility for paying.
These initial direct payments will be made into your employee's bank account, or by girocheque, every two weeks, covering a period of a week in arrears and a week in advance.
The lead-in period, besides giving you time to set up the payroll, eases the transition for employees who are paid monthly, 4 weekly etc., where they may have previously received tax credit via a weekly order book.
Funding
Q. How do I apply for funding for tax credits?
A. Shortly after you receive a start notification to pay tax credits for the first time the Inland Revenue Accounts Office will send you two copies of a Funding Application (Form TC11). Complete this form and return it to us. Keep the second copy in case you need it later. You can get further copies from the Employer's Orderline on 0845 7 646 646, or via the website.
(Employer's Guide, page 14)
Q. What information will I have to provide in order to get advance funding?
A. You will have to show the following information on the form TC11
- Your PAYE and Collection references, the name and address of your business and your bank or building society account details
- The first and last pay days on which you will require funding
- The amount of tax credit you expect to have to pay in the period covered by the application
- The amount of PAYE tax, NICs and student loan deductions you expect to collect in the same period, and
- The total funding needed.
(Employer's Guide to Tax Credits, page 14)
Further information and support for employers
Written guidance -
Detailed guidance on paying tax credits with pay can be found in the Employer's
Annual pack. Copies can be obtained by telephoning the Employer's Orderline
on 0845 7 646 646.
Helplines -
Employers can ring the Employer's Helpline 0845 7 143 143 with queries
about paying tax credits. The Helpline is open to answer questions about
tax credits from 8:00am to 8:00 pm Monday to Friday and from 8:00am to
5:00 pm on Saturdays, Sundays and bank holidays, except on Christmas Day,
Boxing Day and New Year's Day.
New employers can contact the New Enterprise Support Initiative (NESI) Helpline on 0845 60 70 143.
The tax credit Helpline can answer any questions about applications for tax credit and completion of forms you have been sent requesting information about an employee's wages. The number is 0845 609 5000 (GB) and 0845 609 7000 (NI).
Other help
A video is also available, and can be ordered free from the Employer's
Orderline. All employers can get face-to-face help through their local
Business Support Teams
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