PAYE72030 - PAYE operation: payments for PAYE purposes: holiday pay
Holiday pay paid by employers
For PAYE purposes employers must include in gross pay all holiday pay that they pay to their employees. The Employer Further Guide to PAYE and NICs (CWG2) tells employers how to operate PAYE. If an employee receives two or more weeks pay at once before a holiday and no pay in the holiday weeks, PAYE will normally be worked out at the last week in which no pay is received.
Holiday pay after employee has left
Employers paying holiday pay to an employee who has left should not issue an amended or additional P45. They should
- Deduct tax at the basic rate
- Enter details of the payment and tax deducted on the employee's Deductions Working Sheet and write BR as the amended code
Holiday Pay Stamp Fund schemes
In some industries, such as construction, employers contribute to Holiday Pay Stamp Fund schemes by buying stamps. The employer pays the employee's holiday pay to the value of the stamps, operating PAYE in the usual way. The employer is then reimbursed by the fund.
If the employee leaves the employment or for any other reason the holiday pay is paid under an approved scheme by the fund itself, then the fund is responsible for deducting tax. This modified form of PAYE is allowed under the PAYE Regulations. The fund deducts tax at basic rate on any payment and gives the employee a Certificate of Tax Deducted.
The fund is treated as an employer for end of year filing purposes and should submit an electronic Employer Annual Return (P35 and forms P14). You should ask the fund to insert the date of leaving on the form P14. This is so that the form will pass through all validation checks without creating a new employment in NPS.
Deduction of tax from Holiday Pay Stamp Fund schemes is explained in the Employer Further Guide to PAYE and NICs (booklet CWG2).
