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Payroll - Processing overtime

Does payroll need to be processed in the same period that it is earned?

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Are there any rules determining when overtime should be paid to an employee, based on the dates that the overtime was worked? Generally speaking, employment income is taxed when it is paid, however, I am unsure if there are any rules that determine when it needs to be paid by. 

I have a client who pays his employee monthly and would like the pay that is processed on the 20th of each month to include the overtime that was earned in the previous month. 

As an extreme, assuming that the employee's contract allows it, is there any reason why an employer couldn't only pay out overtime once a year? This may have NI benefits for the employee. 

Any links to any guidance/HMRC manual pages would be really appreciated. 

With kind regards

Chris

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By Nicola Edd
23rd Oct 2020 14:17

Hi - I don't think you will find any HMRC guidance as to when an employee is entitled to payment - as you say this is a legal issue. Paying overtime a month in arrears is fairly common. Be mindful of the NMW rules, any later than a month and the pay for these hours will not be counted so this could cause a problem. Lots of other potential issues but as this seems a theoretical question I won't list them.

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By chrisacc1985
23rd Oct 2020 14:48

Thank you Nicola. Hadn't consider NMW. Good to know that paying OT a month in arrears is quite common.

Chris

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By paul.benny
23rd Oct 2020 14:25

You mention a client wanting to pay overtime a month in arrears. If this is a change to existing practice, it's a variation to contracts of employment, which will need to be agreed with employees.

If overtime is small and/or infrequent, it may be no big deal, but if significant, employees will not be too happy about having some of their pay deferred. And certainly not about having an entire year's overtime delayed to save NI.

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By chrisacc1985
23rd Oct 2020 14:49

Thank you for the response.

This isn't a variation in a contract. It is a new employee and the contract is silent on when the OT should be paid.

I only mentioned deferring the OT for a year hypothetically

Chris.

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By tom123
23rd Oct 2020 14:41

Out of interest how are you calculating your core hours?

We recently moved from a basic hours calculation that ran in weeks, with a cut off, to a flat level of basic hours each month.

You will always have some kind of delay in overtime, assuming it takes you some time to gather timesheets and actually process the pay.

In our case we pay on 28th for the calendar month, with overtime running until the 15th.

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By chrisacc1985
23rd Oct 2020 14:51

The core hours are paid as a salary and are 148 hours for a 4 week period.

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Chris

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By tom123
23rd Oct 2020 14:58

So, if you are paying every four weeks (rather than monthly) I would be expecting overtime to be paid one week in arrears.

Anything different would probably give you employee unrest :)

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By Paul Crowley
23rd Oct 2020 20:29

Agree
Switching months just to smooth NI is not really affordable for employee

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By Paul Crowley
23rd Oct 2020 20:28

Straight answer is no
Tax needs to be deducted in period of payment
How people are paid is down to agreement between employer and employee
Annual bonuses are annually paid but earned every month.
I have come across agreements that are lumpy the other way, as in to exceed the NI limit just once a year, despite being below in all other months.
Either way smoothing or lumping both are NI efficient.

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