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Rounding reminder for payroll calculations

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19th Jan 2017
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Julie Hodgskin, technical material author at the CIPP, outlines why accuracy is important for payroll calculations and examines some of the new calculations about to come in.

Introduction

There are many rounding rules associated with payroll calculations, and which rule to follow varies according to the purpose. But why does using the correct rounding method matter? The results may differ by less than a penny after all. Here are some of the reasons why accuracy is important, with examples of the most common payroll calculations used.

Reasons

Budgets

One very important duty of a payroll department is to produce an accurate and realistic payroll budget, and then to keep within it. Failure to do this can have repercussions for the current financial year, if not future financial years.

Accuracy in calculating and projecting staff numbers, staff pay and deductions, and possible levy and reporting requirements is paramount as small errors can quickly add up to sizeable amounts.

The accuracy of these projections is particularly important as we approach 2017‑18 because of the new demands placed on businesses in the form of the apprenticeship levy and gender pay gap reporting.

Verifying payroll software

It is prudent to run random checks to confirm that the payroll software is up to date and conforms to the latest legislation. The only way to do this is by manually calculating the pay and comparing it to the software calculation.

Accurate statutory pay

Ensuring that the employee is receiving the correct amount of statutory child-related or sick pay is very important as failure to do so, or mistakes made and not rectified, could lead to possible claims against the business. Pay that is a just a penny out could prompt the employee not only to question the calculation, but may alert other bodies to scrutinise not only that pay, but all other pay calculations made by the business.

Ad-hoc manual calculations

There may be situations where, for a number of reasons, calculations have to be made manually. Again, accuracy must be to the nearest penny, as failure to do so could lead to consequences that are unwanted and time-consuming.

Lastly, and possibly most importantly, HMRC requires payroll calculations to be accurate to the penny and this means knowing and implementing the current rules on rounding. When and how to round is therefore not a matter of individual choice but is subject to specific rules.

Current calculations

National Insurance contributions (NICs)

NICs are rounded at the end of the calculation, when the figure is used or reported, and is rounded to the nearest penny with half a penny rounded down. For this reason, only the first three numbers after the decimal place are considered, with any number up to and including five rounded down, and any number six or above rounded up to the next penny.

For example, an NIC calculation that resulted in £52.655 would be reported as £52.65 and a calculation that resulted in £52.656 will be rounded up to £52.66.

Income tax

By contrast, the income tax calculation is much simpler. Pay is rounded to the whole pound before looking up the tax amount in the tax tables or applying the relevant percentage. As pay is rounded to the nearest pound, the resulting ‘tax due’ amount is never more than to two decimal places, that is, to the penny.

Statutory payments

With all child-related statutory payments, the average weekly earnings (AWE) is the amount on which the eligibility of the employee is based. It can also affect the level of payment for maternity and adoption (the earnings-related rate).

Here, the rules dictate that the AWE is calculated to five decimal places. This unrounded figure is used to determine whether the earnings are above or below the Lower Earning Limit (LEL), and therefore eligible for any child related statutory payments. When AWE is used to calculate an earnings-related rate, the result is rounded up to a whole penny.

Statutory sick pay (SSP) rules state that for the qualifying days the daily rate is rounded up to the whole penny, so do be aware of the differences between the different types of statutory pay.

Student loan deductions

Here again the rules on when and how to round are different. There are two occasions when rounding occurs: once when pro-rating the annual threshold, and again when the deduction has been calculated.

The annual threshold figure is calculated to four decimal places and then rounded, if necessary, down to a whole penny below. When this figure is used to calculate the deduction amount, the result is rounded down to a whole pound. The example below illustrates the rounding rules for an annual salary of £27,500 or £2,291.67 per month.

The annual threshold for Plan 1 is £17,495. To calculate the monthly threshold, divide this figure by 12, which is £1,457.9167. This is rounded to £1,457.91.

This amount is then taken away from the monthly salary amount and multiplied by the deduction rate: £2,291.67 – £1,457.91 = £ 833.76; x 9% = £75.0384. Rounded to the nearest pound, the amount deducted for the month is £75.00.

New calculations

The government regularly brings in new requirements that impact on payroll. Included in this coming April’s changes are the apprenticeship levy and gender pay gap reporting. While guidance on how to calculate hourly pay and bonus pay for gender pay gap reporting is still to come, the apprenticeship levy calculations are now known.

Apprenticeship levy

The apprenticeship levy payment due is a percentage of the pay bill minus the pro-rated amount of the levy allowance. The percentage of the pay bill is rounded down to the pound, the pro-rated levy allowance is rounded down to the penny, and the levy due is rounded down to the pound. An example illustrates this more clearly.

Total pay bill for April is £348,693.40. This is multiplied by 0.5% to give £1,743.467, which is rounded down to the whole pound.

The employer has a reduced annual levy allowance of £11,000 so the monthly levy allowance is £916.6667, which is rounded down to the penny: £916.67. £1,743 less £916.67 gives a levy charge for the month of £826.33, which is rounded down to the pound: £826.

Gender pay gap reporting

Gender pay gap reporting becomes mandatory in April 2017. However, further details on how to calculate the figures are yet to come. The guidance is expected when the legislation receives parliamentary approval. Hopefully it will include details about the level of accuracy and rounding rules that will be required.

Conclusion

The calculations we encounter in payroll have different rounding rules, often because they originate from different government departments. It can therefore be confusing as to which rounding rule applies. However, it is imperative that the correct rounding rule is identified and used because an incorrect rounding may indicate a systematic error, and one that HMRC may wish to investigate.

Full details about HMRC's rounding requirements are given in the software developer specifications that are on GOV.UK.

*This article was amended 19 January to correct a rounding figure

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Replies (3)

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By EASy
19th Jan 2017 16:57

"a calculation that resulted in £52.666 will be rounded up to £52.66"

...errrrr, I make that rounding down.

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Replying to EASy:
Tom Herbert
By Tom Herbert
19th Jan 2017 19:45

Thanks EASy, that's been amended.

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By swarbs59
26th Jan 2017 12:10

Would Class 1a follow the same principals as National Insurance? Round Up/Down individual figures if possible and do same with Total Liability subject to C1a?

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