In many cases, you do not need to change your usual procedures to manage your PAYE responsibilities for employees who are taking holiday.
However, if you pay employees' holiday pay in advance or if you use certain holiday pay schemes there may be different steps to follow for PAYE tax and National Insurance contributions (NICs).
This guide tells you how to work out and record the correct amount of PAYE tax and NICs on payments of holiday pay to your employees.
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If you pay your employees on their normal payday(s) when they are on holiday, carry on deducting, recording and reporting PAYE tax and NICs in the normal way. You do not need to do anything differently.
If you pay an employee their holiday pay in advance, so that they receive two or more weeks' pay in one week, followed by one or more weeks with no payment from you, you should account for PAYE tax in the following way.
If your employee is on a cumulative tax code, calculate and record the PAYE tax due using the free pay for the last week in which no pay is received.
For example, if an employee is on holiday in weeks 16 and 17 and the wages for those weeks are paid in week 15, together with the pay for week 15, PAYE tax should be calculated on the holiday pay using week 17. You must report the payment on the Full Payment Submission (FPS) in the week you make the payment. For the 'Number of earnings period(s) covered by payment' on your FPS, you should enter '3'.
If your employee's code is non-cumulative or Week 1/Month 1, divide their holiday pay equally between each full week of their holiday and work out the PAYE tax separately for each week. You should report the payment on an FPS in the week that you make the payment.
If your employee will be leaving or retiring straight after their holiday, then work out the PAYE tax due on their holiday pay using the free pay for the week in which you pay it to them. You should report the payment on an FPS in the week that you make the payment.
There are special NICs procedures to follow if your employee receives their holiday pay in advance. You can calculate the NICs due on the holiday pay using either of the following two methods.
Method A: Split the payment and work out NICs due separately on each week's earnings.
Method B: Work out the NICs on the whole sum based on the number of weeks it represents. Round up parts of a week. You can't use this method for employees who are paid monthly, or for holiday pay that is paid through the types of special scheme outlined in the next section.
For examples of these methods, and what to do if further earnings are paid because the employee doesn't take their holiday, is required to attend their place of work during the holiday period or where additional earnings are due to be paid during the holiday period, see Chapter 2 of CWG2 at the link below.
If you operate any of the following holiday pay schemes, make sure you include the correct amounts in your employees' gross pay when calculating PAYE tax and NICs.
If an employee voluntarily sets aside some of their pay during the year and you return it to them later as holiday pay - for example, at Christmas or their annual leave - you should include the amount set aside in the employee's gross pay at the time it is set aside. This applies for your calculations of both PAYE tax and NICs.
Under a holiday credit scheme, you set aside money from your employees' pay each payday and then pay it in a lump sum when they take their holidays. If your employees:
In both cases, the figures must be included in their payroll record and sent to HM Revenue & Customs (HMRC) in your FPS when you report your payroll information.
These schemes involve employers contributing to an independently managed
central fund which then pays out employees' holiday pay. They were
typically used by companies that only employed people for a few weeks
at a time and where those employees had little hope of building up
a pot of 'holiday pay' for periods when absent on leave such as during
the 'summer fortnight' shutdown.
Employment laws now oblige an employer to give employees paid time off so the use of such schemes is now much restricted.
Money paid into and out of these funds was previously disregarded from the calculation of earnings from NICs for employers and employees personally involved in construction operations. This NICs disregard was withdrawn from 30 October 2012, so from 31 October 2012 all payments of holiday pay must be included in gross pay for the purposes of calculating NICs liability.
For PAYE tax purposes, include the cost of holiday pay stamps or credits in gross pay only if the fund you use hasn't been approved by HMRC.
If the fund has been approved, you can disregard these costs, as well as any holiday payments to your employees that the fund makes. This is because approved funds already deduct tax from their payments to employees.