Summer is on the way and for many businesses that means taking on temporary workers. Some may stay for the season while others just a week or two. What tax tips and traps should you be alert to?
When HMRC introduced real time information (RTI) reporting for payroll data the rules for temporary and casual workers changed. Until then HMRC had given employers leeway to not apply the full PAYE rules for very short term and casual workers . This concession was withdrawn except for farmworkers, (see The next step ). Of course, this doesn’t prevent you from using casual labour but it can lead to tax and NI problems where you choose to pay them cash-in-hand, that is, you agree to pay a an after tax and NI amount.
Tip. If a worker is not supplied through an agency or other third party and carries out the work on a self-employed basis, PAYE tax and NI doesn’t apply to their pay. If you’re going down this route, make sure you agree terms of work that do not create an employer-employee relationship otherwise HMRC can hold you liable for the PAYE tax and NI that ought to have been deducted from the worker’s pay.
Additional tax cost
Paying a worker, temporary or permanent, cash-in-hand means you must work out the corresponding amount of pre-tax and NI pay. As you’ve agreed a net pay figure with the worker (which is a contractual obligation) you have to pick up the tab for the tax and NI (employees’ and employers’). This can be surprisingly costly.
Example. Over the summer holidays Acom Ltd takes on two students for three weeks, at £260 each per week, to carry out some tidying of the grounds around its premises. This doesn’t give Acom sufficient time to tackle the usual tax paperwork before it pays the students. In fact, it never receives the new starter checklist from either student. Naturally, the students don’t think it very important. However, for Acom the consequence of not obtaining the checklists is more significant as shown by the calculations below.
| Per employee per week | £ |
|---|---|
| Gross weekly pay | 342.00 |
| PAYE tax at 20% | 68.40 |
| NI at 13.25% on pay above £242 | 13.25 |
| Worker’s net pay | 260.35 |
| Employers’ NI at 15.05% on pay over £175 | 25.13 |
| Total tax and NI cost to Acom | 106.78 |
Avoiding the extra tax and NI
The total cost of tax and NI for the two temporary workers over three weeks is £640.70. This has hiked the cost of temporary summer labour by 41%, from £1,560 to £2,204. If Acom had obtained completed starter checklists from the students the tax and NI bill could be reduced to as little as £139, thus lowering the overall cost of the labour to £1,753.
Tip. Tell temporary workers they won’t get paid until they complete and return the starter checklist. Better still, stand over them while they complete the form. It only takes a few minutes.
Tip. A simpler solution is not to pay temporary or casual workers on a net pay basis. Instead, agree a figure for gross pay so that the tax and NI comes out of their pockets instead of yours.
If you pay a worker cash-in-hand amount you’ll be liable for all the tax and NI (employees’ and employers’) on their pay. This could increase the cost of labour by up to 41%. To reduce or avoid the extra cost tell the worker they won’t get paid until they’ve completed HMRC’s starter checklist or agree a pre-tax and NI wage.
The next step
HMRC’s guidance on temporary farm workers
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.