Sage Payroll problem

Sage Payroll problem

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A director (NIC table letter A, PAYE tax code 384L cumulative) left in November 2006 and form P45 was issued.

In December 2006 the remaining directors decide to pay a bonus to the leaving director, in recognition of services performed prior to leaving.

As far as I can tell, Sage payroll software simply cannot cope with this, although it cannot be that rare a situation.

Strictly, i would suggest that the same individual should appear twice in the P35 listings. One entry should comply with the P45 as issued. The other should just include the bonus.

Getting the tax right is not a problem: BR Wk1/Mth1 applies to the bonus. Getting the NIC right is a bit of a headache. The NIC on the bonus should be calculated by taking into account the YTD figures prior to leaving. I can do this so as to get the NIC correctly computed on the bonus in the second employee record, but then if I generate a P35 return it doubles up on the NIC for period up to cessation.

The closest solution that I can find is to "undo" the cessation of employment and process the bonus through the existing payroll record. This gets the P35 figures correct, but means that the P14 will disagree with the P45 already submitted, as the P14 will include the salary up to leaving (per P45) plust the subsequent bonus.

Anyone else attempted this and have a better solution, I would be intrested to know.

Clint Westwood

Replies (5)

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By neileg
02nd Jan 2007 16:19

Some thoughts
And remember I'm not a tax expert!

The recipient is no longer a director at the time of paying the bonus, he is a returning employee. This would suggest that the earnings are not aggregated. But the earnings accrued before the leaving date.....Aaargh!

The earnings are not contractual, otherwise they would have been due at the date of leaving. Does this make the payment ex gratia and thus non-taxable?

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Euan's picture
By Euan MacLennan
02nd Jan 2007 18:25

PAYE rules
This is not really a problem with Sage or any other payroll program; it is a case of what you are supposed to do under the PAYE regulations.

The Employer Further Guide to PAYE & NICs, CWG2, says - as you already know - that you deduct tax on a BR Month1 basis. For NIC purposes, as the unexpected bonus is an irregular sum, the manual says that you work out NICs using a weekly (yes! weekly) earnings period on the usual contribution letter.

So, I think you should put the individual onto the payroll a second time as a weekly employee (employee is not specified in CWG2, but he is no longer a director) with PAYE code BR Month 1 and NIC Table A. You must not issue a second P45, but you must give the (former) director a letter specifying the date, gross payment and tax deducted. At the end of the year, he should have two P14s and appear twice on the P35.

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Euan's picture
By Euan MacLennan
04th Jan 2007 09:36

I now agree with Clint
para 33 of CA44, NI for Company Directors, does indeed give the specific answer for directors, rather than the general case I quoted for employees.

The bonus has to be added to the previous earnings for NI purposes and NI calculated on the same annual earnings period.

So, it is a payroll program problem. On the program we use (PAYE-Master), you can set up brought forward NI contributions, bands and earnings when you set up a new employee (director in your case), as you will have to do because you have already issued a P45. I assume it will be the same for every other payroll program because they have to cater for computerising an existing payroll part way through the year.

As I said before, you must send a letter rather than issue a second P45 and there will be two P14s and two entries on the P35.

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By neiltonks
05th Jan 2007 09:06

Payment after leaving
I don't believe you actually need two entries on the P14/P35 in this case.

This payment is being treated as a payment after leaving for tax and NI purposes. HMRC's guidance (in CWG2) says that these should be entered on the employee's P11 against the month in which they are made. There is no instruction to start a new P11 other then in cases when the payment is made in a later tax year.

At year-end, therefore, the values would be included in the totals on the P11 along with the pay and deductions from the period of employment, and transferred to a single P14.

The only time two P14s are required for one person is in re-employment cases, where the person leaves and is then re-engaged later in the same tax year.

The fact that the P14 and P45 will differ doesn't matter, as this is a normal ocurrance with payments after leaving.

Neil.

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By AnonymousUser
03rd Jan 2007 19:31

I believe that I currently disagree ...
... with the previous responders.

Euan - I refer you to paras 25 and 33 of leaflet CA44, here:
http://www.hmrc.gov.uk/nitables/ca44.pdf

Neil - I did think about the possibility of a S.148 tax exemption but I don't think it would wash. A bonus was paid to all current and past directors in recognition of services performed. The payment is definitely not ex gratia.

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