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Compliance & HMRC

HMRC recognition, RTI submissions, auto-enrolment obligations, and UK payroll compliance rules.
Nicolas Croix
By Nicolas Croix
• 24 articles

HMRC-Recognised Software: What It Means

HMRC maintains a list of payroll software products that have been tested and approved to send Real Time Information (RTI) to HMRC's systems. Products on this list are described as HMRC-recognised software. Moonworkers appears on this list. You can verify this on the GOV.UK page at gov.uk/payroll-software/paid-for-software. What HMRC recognition covers Being HMRC-recognised means the software has been technically assessed by HMRC and is authorised to submit the following RTI document types directly to HMRC: Full Payment Submission (FPS): sent on or before each pay day, containing details of all payments made and deductions applied in the pay period. Employer Payment Summary (EPS): sent after the end of each tax month when there are statutory payment recoveries, no payments were made in the period, or the employer is claiming Employment Allowance. Moonworkers sends both document types automatically on each payroll run and at the end of each tax month where required. No manual submission is needed. What HMRC recognition does not cover HMRC recognition is a technical approval for RTI submissions. It does not constitute financial advice, legal advice, or a guarantee that the software will produce correct results for every edge case in your specific circumstances. You remain responsible for verifying that payroll calculations are correct for your employees. Auto-enrolment Moonworkers assesses each employee for auto-enrolment on every pay run in accordance with The Pensions Regulator requirements. Pension contributions are calculated and included in pay run outputs. You are responsible for enrolling employees with your chosen pension provider and ensuring contributions are paid over on time.

Last updated on May 26, 2026

Configuring your HMRC and RTI settings

The HMRC / RTI tab is where you set up how Moonworkers reports to HMRC in real time, and where you claim the allowances and reliefs you are entitled to. Your Employer PAYE reference and Accounts Office reference are set during onboarding. Employment Allowance Employment Allowance reduces your employer, or secondary, Class 1 National Insurance bill by up to £10,500 in the 2026 to 2027 tax year. Enable it if you are eligible. If you do not enter a value, Moonworkers claims the maximum available for the tax year. The claim is made through the Employer Payment Summary (EPS). You cannot claim Employment Allowance if you are a public body, or if you do more than half of your work in the public sector, unless you are a charity. You also cannot claim if your company has a single director who is the only employee paid above the secondary National Insurance threshold. If you are part of a group of connected companies or charities, only one of them can claim. Some workers cannot be included in the claim, such as anyone covered by the off-payroll working (IR35) rules, or someone you employ for personal or domestic work unless they are a care or support worker. Small Employers' Relief If your total Class 1 National Insurance for the previous tax year was £45,000 or less, you qualify as a small employer. Small employers can reclaim 109% of statutory parental payments, which is the full payment plus 9% compensation. Larger employers reclaim 92%. The payments you can reclaim are Statutory Maternity, Paternity, Adoption, Shared Parental, Parental Bereavement and Neonatal Care Pay. Statutory Sick Pay cannot be reclaimed. Recovery is reported through the EPS. Apprenticeship Levy The Apprenticeship Levy is charged at 0.5% of your pay bill and is only paid by employers whose annual pay bill is more than £3 million. There is a £15,000 annual allowance to offset against it. Enter the allowance available to you. The levy is reported through the EPS. How your RTI is submitted You choose how Moonworkers submits your Real Time Information. Test mode checks your setup and credentials but does not make official submissions to HMRC. For live submissions you provide your sender details, either your HMRC Government Gateway user ID and password or your GOV.UK One Login. You can also add the contact details that are sent on your FPS and EPS. FPS and EPS explained The FPS, or Full Payment Submission, reports pay and deductions on or before each payday. The EPS, or Employer Payment Summary, is your monthly reconciliation with HMRC, and carries items such as Employment Allowance, recovered statutory payments and the Apprenticeship Levy. Get started In Moonworkers, go to Settings > HMRC / RTI to configure these options. Not signed in yet? Log in at https://payroll.moonworkers.co.uk/auth/login

Last updated on Jun 20, 2026

Adding company cars and vans (benefits in kind)

The Company assets tab is where you record vehicles owned by your business, such as cars or vans used by your team. These are treated as benefits in kind for the employees who use them. Adding a vehicle Add a company car or van and enter its details, including the tax information for the vehicle. Once saved, you can assign it to one or more employees as a benefit in kind from the employee profile. How benefits in kind are reported A benefit in kind is something of value you give an employee on top of their salary, such as a company car. You report it to HMRC in one of two ways: by payrolling it, which means taxing its cash equivalent through payroll during the year, or on a P11D after the tax year ends. Either way you also submit a P11D(b), which declares the total employer Class 1A National Insurance due. In Moonworkers these are carried by the EXB, or Expenses and Benefits, online submission. Class 1A National Insurance Company cars, vans and fuel are Class 1A benefits. Class 1A is employer-only National Insurance on benefits in kind, charged at 15% for the 2026 to 2027 tax year. You report P11D and P11D(b) by 6 July after the end of the tax year, and pay the Class 1A due by 22 July, or 19 July if you pay by cheque. A change to prepare for From April 2027, payrolling of most benefits in kind becomes mandatory and will be reported in real time through the FPS. It is being introduced in phases, so it is worth preparing now. Get started In Moonworkers, go to Settings > Company assets to add a vehicle. Not signed in yet? Log in at https://payroll.moonworkers.co.uk/auth/login

Last updated on Jun 20, 2026

Employee types explained

When you add an employee, you choose their type. This is not just a label: it changes how National Insurance and pay are handled, so it is worth choosing the right one. Permanent employee A regular employee with a fixed working pattern, paid each pay period. Most permanent employees use National Insurance category A. Company director Directors have National Insurance worked out over an annual earnings period rather than period by period, because their pay is often irregular. You can use the standard, or alternative, method during the year, with a recalculation on the annual basis at year end. HMRC booklet CA44 covers the detail. Apprentice An apprentice under the age of 25 uses National Insurance category H. The employer pays no secondary National Insurance on their earnings up to the Apprentice Upper Secondary Threshold, which for the 2026 to 2027 tax year is £967 a week, or £50,270 a year. Above that the employer pays the standard 15%. Off-payroll worker An off-payroll worker provides services through an intermediary, such as their own limited company, but is treated as an employee for tax under the off-payroll working, or IR35, rules. The deemed employer operates PAYE on their pay, deducting Income Tax and employee National Insurance. The thresholds that decide who is responsible changed from 6 April 2026. CIS subcontractor A subcontractor under the Construction Industry Scheme has a deduction taken from the labour part of their payments and passed to HMRC. The standard rate is 20% for a registered and verified subcontractor, 30% if they are not registered or cannot be verified, and 0% if they hold gross payment status. Materials are excluded from the deduction. Casual or zero-hours worker A casual or zero-hours worker has irregular hours and no fixed working pattern, and is paid by the shifts they work. They are still an employee on PAYE, and are flagged as an irregular payment so that HMRC does not treat a gap between payments as the employee having left. Get started You choose the type when you add an employee, in People > Employee list > Add employee. Not signed in yet? Log in at https://payroll.moonworkers.co.uk/auth/login

Last updated on Jun 22, 2026

PAYE and Real Time Information (RTI)

Pay As You Earn (PAYE) is the system HMRC uses to collect Income Tax and National Insurance from employees' pay, and Real Time Information (RTI) is the way you report that pay to HMRC every time you run payroll. This guide explains how PAYE and RTI work for the 2026-27 tax year (6 April 2026 to 5 April 2027), what each submission carries, the deadlines you must meet, and how to fix things when they go wrong. What is PAYE? PAYE, which stands for Pay As You Earn, is HMRC's system for collecting Income Tax and National Insurance contributions (NICs) directly from employees' wages as they are paid. As an employer you deduct the right amount of tax and NICs from each payment, add your own employer's National Insurance and any other liabilities, and pay the total over to HMRC. The amount of tax you deduct depends on each employee's tax code, while National Insurance depends on their NI category letter and how much they earn relative to the thresholds for the year. PAYE also handles other deductions made through payroll, such as student and postgraduate loan repayments. Operating PAYE is a legal obligation for almost every employer, and RTI is the method by which you tell HMRC what you have deducted. What is Real Time Information (RTI)? Real Time Information means you submit information about your PAYE payments to HMRC throughout the tax year as part of running your payroll, rather than only once at the end of the year. In practice, every time you pay your employees you send HMRC an electronic return that reports their pay, the tax and National Insurance deducted, student loan deductions, and various year to date totals. RTI submissions are sent as XML messages filed over the internet. The two returns you will use most are the Full Payment Submission (FPS) and the Employer Payment Summary (EPS). What is a Full Payment Submission (FPS)? A Full Payment Submission is the main RTI return and the one you send every time you pay your employees. It tells HMRC who you paid, how much, and what you deducted, and it must be sent on or before each payday. The FPS reports each employee's taxable pay, the Income Tax deducted, National Insurance contributions, student and postgraduate loan deductions, statutory payments such as maternity or paternity pay, and a set of year to date figures that build up across the tax year. It also carries your employer references and details of any starters and leavers. Because it is filed in real time, the FPS is what HMRC uses to keep each employee's tax record up to date and to calculate what you owe for the month. What information does an FPS report? The FPS is built around three things: who you are, who you paid, and what you deducted. At employer level it carries your HMRC Office Number, your Employer PAYE Reference and your Accounts Office Reference, plus the tax year. At employee level it carries identity details such as National Insurance number, name, address, date of birth and gender, along with starter information (start date, starter declaration and student loan plan type) and leaver information where relevant. For the payment itself it reports the payment date, pay frequency, tax week or month number, the tax code used, taxable pay, tax deducted, National Insurance by category letter, student and postgraduate loan deductions, and statutory payments. Many of these figures are reported both for the pay period and as a cumulative year to date total, so HMRC always holds the running position for each employee. When must I send the FPS? You must send the FPS on or before the day you pay your employees. This on or before rule is the cornerstone of RTI: the submission should reach HMRC on payday at the latest, and ideally before the money lands in the employee's account. The payment date you put on the FPS is the date the employee is contractually due to be paid, or the date you actually pay them, depending on the circumstances. Sending late without a valid reason can lead to a late filing penalty, so building the FPS into your normal payday routine is essential. What is an Employer Payment Summary (EPS)? An Employer Payment Summary is the RTI return you send to report things that do not belong on an FPS, mainly amounts that reduce what you owe and adjustments to your monthly liability. You do not send an EPS every time you pay people; you send it monthly only when you have something to tell HMRC that the FPS cannot carry. Typical reasons include claiming the Employment Allowance, recovering statutory payments, reporting Apprenticeship Levy due, telling HMRC you have made no payments in a period, or reporting Construction Industry Scheme (CIS) deductions suffered. What does an EPS carry? The EPS carries the items that adjust your overall PAYE liability rather than individual employee pay. The main things it reports are: the Employment Allowance indicator used to claim the annual allowance against your employer secondary National Insurance; recovered statutory payments and the associated National Insurance compensation (covering maternity, paternity, adoption, shared parental, parental bereavement and neonatal care pay); the Apprenticeship Levy due year to date with the tax month and your annual levy allowance; a no payment for period indicator and dates; a period of inactivity for future months with no paid employees; CIS deductions suffered where you are a limited company subcontractor; bank account details so HMRC can refund you if your recoverable amounts exceed what you owe; and the final submission indicators used at year end or when your scheme ceases. What is the deadline for sending an EPS? You should send your EPS so that it reaches HMRC by the 19th of the month following the tax month it relates to. Tax months run from the 6th of one calendar month to the 5th of the next, so an EPS for the tax month ending 5 May should be sent by 19 May. Sending the EPS on time matters because it is what reduces your liability for the month; if you claim a recovery or the Employment Allowance after HMRC has already worked out what you owe, your account may show a balance you did not expect. How do I claim the Employment Allowance through RTI? The Employment Allowance is an annual allowance that eligible employers offset against their employer (secondary) Class 1 National Insurance bill. You claim it by setting the Employment Allowance indicator on an EPS to Yes. You must check that you are eligible before claiming, and HMRC does not send confirmation that your claim has been accepted. Once made, the claim is retained for the full tax year, so you do not need to claim again each month, but you do need to make a fresh claim at the start of each new tax year. For 2026-27 the allowance is up to 10,500 pounds; see the dedicated article on employer allowances for the eligibility rules. What is the Apprenticeship Levy and when do I report it? The Apprenticeship Levy is a charge on employers with a large enough pay bill, reported through the EPS rather than the FPS. If it applies to you, you report the Apprenticeship Levy due year to date along with the tax month and your annual levy allowance on an EPS. Once you start reporting the levy you must continue making EPS submissions for the rest of the year. The levy is 0.5% of the pay bill, only paid by employers with an annual pay bill over 3 million pounds, with a 15,000 pound annual allowance to offset. What are recovered statutory payments and CIS deductions suffered? When you pay employees statutory payments such as maternity, paternity, adoption, shared parental, parental bereavement or neonatal care pay, you can usually recover a percentage of those payments, and smaller employers may also receive National Insurance compensation on top. You report these recovered amounts on the EPS as year to date figures by tax month, and they reduce the PAYE you owe. Separately, if you are a limited company working as a subcontractor under CIS, contractors will have deducted CIS amounts from your payments; you report these as CIS deductions suffered on the EPS so they can be set against your PAYE liabilities. If your recoveries and CIS deductions together exceed what you owe, you can supply bank details on the EPS for a refund. What is a nil payment or no payment EPS? A no payment for period EPS tells HMRC that you have paid no employees in a tax month and therefore have no FPS to file. You must send it within 14 days of the end of the tax month, so for the month running 6 April to 5 May you would send it by 19 May. Without this EPS, HMRC will expect an FPS and may estimate that you owe PAYE for the month, which can lead to incorrect charges. If you know in advance that you will have no paid employees for one or more whole future tax months, you can instead report a period of inactivity on the EPS. What happens if I pay employees early, before a weekend or bank holiday? If you pay employees earlier than usual, for example because payday falls on a weekend or bank holiday, you should normally report the employees' contractual or usual payday on the FPS rather than the earlier date you actually paid them, and you must still send the FPS on or before the date you make the payment. Reporting the regular payday helps protect employees who receive benefits such as Universal Credit, because it avoids two months' pay appearing in a single assessment period. The key point is that the FPS still needs to be filed on or before the day the money leaves your account. What happens if I report or pay late? If you report a payment after the date it was actually paid, your FPS lets you attach a late reporting reason explaining why. HMRC provides a fixed list of reason codes, including a reasonable excuse code and a code for a correction to an earlier submission. You should only use a late reporting reason where one genuinely applies, and supply it against each late reported payment. Reporting late without a valid reason can trigger a late filing penalty, and paying HMRC late can trigger a separate late payment penalty plus interest, so the two should not be confused: one relates to the submission, the other to the cash. How do late filing penalties work? Late filing penalties apply when you do not send your FPS on or before payday without a valid reason, or fail to send an expected EPS. HMRC generally allows one unpenalised late submission per tax year and bases the penalty on the number of employees in the scheme, with monthly penalties rising as the workforce grows. There is usually a short grace period of a few days after payday, but you should not rely on it. To avoid penalties, send the FPS on or before each payday, send a no payment EPS by the 19th when you have paid no one, and check the current penalty bands on GOV.UK. How do late payment penalties work? Late payment penalties are separate from late filing penalties and apply when you do not pay the PAYE you owe by the due date. They are charged as a percentage of the amount paid late, and the percentage can increase the more often you pay late within a tax year, with additional penalties for amounts unpaid after a longer period. Interest is also charged on late paid PAYE from the due date until you pay. Make sure HMRC has cleared funds by the deadline each month or quarter, and confirm the current figures on GOV.UK. When do I have to pay HMRC the PAYE I owe? You must pay HMRC the PAYE and National Insurance you owe for each tax month by the 22nd of the following tax month if you pay electronically, or by the 19th if you pay by post or cheque. Tax months run from the 6th to the 5th, so for the month ending 5 May the electronic deadline is 22 May and the postal deadline is 19 May. If the 22nd falls on a weekend or bank holiday, your electronic payment must clear by the last working day before it. Paying electronically is strongly recommended and is the default for most employers. Can small employers pay HMRC quarterly? Yes. Employers whose average monthly PAYE liability is less than 1,500 pounds can choose to pay HMRC quarterly rather than monthly, which can ease cash flow. The quarterly periods end on 5 July, 5 October, 5 January and 5 April, and the same timing rules apply, so the electronic deadline is the 22nd after the end of the quarter and the postal deadline is the 19th. You still send your FPS and any EPS on the normal monthly schedule even if you pay quarterly; the quarterly option only affects when you hand over the money, not when you report. What are the Employer PAYE reference and the Accounts Office reference? These are the two identifiers HMRC issues when you register as an employer, and both appear on your RTI submissions. Your Employer PAYE Reference is made up of your three digit HMRC Office Number, then a forward slash, then your employer reference, for example 123/A246. Your Accounts Office Reference is a separate 13 character reference in the format 123PA00045678, found on the letter Paying PAYE electronically or on the Employer Payment Booklet. The HMRC Office Number, Employer PAYE Reference and Accounts Office Reference are all required on every FPS and EPS, so record them accurately in your payroll software. What is the Government Gateway, the sender ID and GOV.UK One Login? To file RTI you authenticate with HMRC's online services, and your payroll software signs each submission using your credentials. Historically this is a Government Gateway user ID (sometimes called the sender ID) and password, obtained when you enrol for PAYE Online for employers. HMRC is moving users towards GOV.UK One Login as the single sign on for government services, so depending on when you set up access you may sign in through One Login rather than the older Government Gateway screens. Keep these credentials secure and up to date, because without valid authentication HMRC will reject your FPS and EPS. What is the difference between a test and a live submission? RTI supports both test and live submissions so software and processes can be checked without affecting your real PAYE record. The message that wraps every RTI submission contains a test flag that marks it as a test rather than a live filing. Test submissions are validated by HMRC in the same way as live ones, so they are useful for confirming that your data passes validation, but they do not update employees' tax records or create a liability. You should never rely on a test submission to meet a filing deadline, because only a live submission counts as having reported your payroll. What is the first FPS I send for a brand new PAYE scheme? When you set up a new PAYE scheme and run payroll for the first time, your first FPS establishes your employees' records with HMRC. On it you report each employee with their starter information, including start date and starter declaration (statement A, B or C), and their student loan plan type where relevant, along with their identity details. If an employee has no National Insurance number, include at least two lines of their address and you can send a National Insurance number Verification Request. As with every FPS, it must be sent on or before the first payday and must carry your employer references. How do I correct a mistake on an FPS? Because the FPS reports cumulative year to date figures, the most common fix for an error found within the same tax year is to put it right on your next regular FPS, since the corrected year to date totals carry the right position. If you need to correct a period you have already reported and cannot wait, you send an additional FPS for that period with the corrected year to date values, and where the corrected payment is reported after the event you can use the late reporting reason for a correction to an earlier submission. The guiding principle is that the FPS always reflects the true year to date position. How do I correct a mistake after the tax year has ended? If you discover an error after the tax year has closed, you generally correct it by sending an amended FPS for the relevant year, reporting the corrected year to date figures. The submission must relate to the correct tax year, because the related tax year on the submission has to align with the period covered. Corrections to a prior year are time sensitive and the available method can change, so check the current GOV.UK guidance on correcting payroll for an earlier tax year before you file. What is the final submission of the tax year? Your final submission of the year is the last RTI return for the tax year, telling HMRC you have finished reporting. You make it by setting the final submission indicator, either on your last FPS of the year or on an EPS if your last FPS has already gone. Make sure all your figures for the year are complete and correct before sending it, because it signals to HMRC that the year is done. After year end you also provide each employee with their P60 summarising their pay and deductions. What do I submit if my PAYE scheme is closing? If you are stopping as an employer and paying your employees for the last time, you tell HMRC by marking your final submission as being because the scheme has ceased. You set the scheme ceased indicator, enter the date the scheme ceased, and enter a leaving date for all employees on the final FPS. The date the scheme ceased must be in the tax year to which the final submission relates. This lets HMRC close your PAYE scheme cleanly and stop expecting further returns, so make sure all outstanding pay and deductions are reported correctly first. How do the FPS and EPS work together each month? In a normal month, the FPS reports what you paid your employees and the EPS reports the adjustments that reduce or change what you owe, and HMRC combines them to work out your liability. You send an FPS on or before every payday during the month, building up the year to date figures, and then, if you have anything to declare such as Employment Allowance, recovered statutory payments, CIS deductions suffered or Apprenticeship Levy, you send an EPS by the 19th of the following month. If you paid no one at all, you send a no payment EPS instead. HMRC takes your FPS totals, subtracts the recoveries and allowances on your EPS, and arrives at the amount you must pay by the 22nd electronically or the 19th by post.

Last updated on Jun 26, 2026

National Insurance: rates, thresholds and how it is calculated

National Insurance contributions are payments made by employees and employers that build entitlement to certain state benefits, including the State Pension. This article explains how Class 1 National Insurance works through your payroll for the 2026 to 2027 tax year (6 April 2026 to 5 April 2027): the rates, the thresholds, and how the contributions are calculated. For the category letters that decide which rates apply to a given employee, see the companion article National Insurance category letters explained. What is National Insurance and why do employers deal with it? National Insurance contributions (NICs) are payments made by workers and employers that build entitlement to certain state benefits, including the State Pension. For employees and employers the relevant contributions are Class 1 NICs, calculated and collected through your payroll every time you pay someone. As an employer you are legally responsible for working out both the employee's contribution and your own employer contribution, deducting the employee's share from their pay, and paying the combined amount to HMRC through PAYE. Because NI is reported in real time through RTI, the figures must be calculated correctly each pay period and submitted on your Full Payment Submission. Getting NI wrong affects both the employee's benefit record and the amount your business owes. What is the difference between employee (primary) and employer (secondary) National Insurance? Class 1 National Insurance has two parts calculated on the same earnings but charged to different people. Primary Class 1 NICs are the employee's contributions, which you deduct from gross pay so they reduce take-home pay. Secondary Class 1 NICs are the employer's contributions, a cost to your business on top of the wage and not deducted from the employee. Both are worked out from the same NIable pay in the period, but they use different thresholds and rates, which is why the two figures on a payslip rarely match. You report both amounts and remit the total of employee plus employer NICs together. How much is employer National Insurance in 2026 to 2027? For 2026 to 2027 the main rate of secondary (employer) Class 1 National Insurance is 15.0%. Employers pay this on an employee's earnings above the Secondary Threshold, which is £5,000 a year (£96 a week, £417 a month). There is no upper cap for employer contributions on standard category letters, so 15.0% continues on all earnings above the Secondary Threshold however high the pay. The only situations where employer NICs are 0% rather than 15.0% are the relief categories (apprentices under 25, employees under 21, qualifying veterans, and freeport or investment zone workers), and even those stop at a defined upper threshold above which 15.0% resumes. How much is employee National Insurance in 2026 to 2027? For a standard category A employee, primary (employee) Class 1 National Insurance is charged at 8% on earnings between the Primary Threshold and the Upper Earnings Limit, and at 2% on earnings above the Upper Earnings Limit. The Primary Threshold is £12,570 a year (£242 a week) and the Upper Earnings Limit is £50,270 a year (£967 a week). So an employee pays nothing on pay up to £242 a week, 8% on the slice between £242 and £967 a week, and 2% on anything above £967 a week. The 2% rate above the Upper Earnings Limit applies to every category letter. What are the National Insurance thresholds for 2026 to 2027? National Insurance is banded, so different slices of pay are treated differently. The thresholds for 2026 to 2027, shown as annual figures with the weekly figure in brackets, are: the Lower Earnings Limit £6,708 (£129); the Primary Threshold £12,570 (£242); the Secondary Threshold £5,000 (£96); the Upper Earnings Limit £50,270 (£967); the Upper Secondary Threshold for under-21s and the Apprentice and Veterans Upper Secondary Thresholds, all £50,270 (£967); and the Freeport and Investment Zone Upper Secondary Thresholds £25,000 (£481). Always apply the threshold that matches the employee's earnings period, not the annual figure, when running a normal weekly or monthly payroll. What is the Lower Earnings Limit and why does it matter if no contributions are due? The Lower Earnings Limit (LEL) is £6,708 a year, or £129 a week, for 2026 to 2027. Earnings at or above the LEL do not by themselves trigger any contribution, because employee NICs only start at the Primary Threshold and employer NICs at the Secondary Threshold. The LEL matters because earning at or above it protects an employee's entitlement to contributory benefits such as the State Pension, even in weeks where they pay no actual National Insurance. For this reason you must record earnings up to the LEL on the payroll record once pay reaches or exceeds the Secondary Threshold. How is National Insurance calculated in each pay period? In each pay period you take the employee's gross NIable pay and apply the bands that fall within that period's thresholds. For employee NICs you charge the primary percentage on earnings above the Primary Threshold up to the Upper Earnings Limit, then add 2% on earnings above the Upper Earnings Limit. For employer NICs you charge the secondary percentage on all earnings above the Secondary Threshold. HMRC prefers the exact percentage method, which works to pounds and pence, rather than the older tables method that uses whole-pound rounded bands. You should never mix the two methods for the same employee within one tax year, because the rounding differences would not reconcile. What counts as pay for National Insurance (NIable pay)? For National Insurance you calculate on gross pay for NICs purposes. This generally includes wages and salary, overtime, most bonuses and commission, and certain other cash payments in the period. National Insurance is worked out separately from PAYE income tax, and the NIable figure is not always identical to the taxable figure, so payroll software keeps the two running totals apart. Some items have their own rules: termination awards above £30,000 and certain sporting testimonial payments above £100,000 attract employer-only Class 1A at 15.0% reported in real time, while benefits in kind are dealt with through Class 1A after the year end. If you are unsure whether a payment is NIable, the CWG2 Employer Further Guide is the definitive reference. How is National Insurance calculated for company directors? Company directors have an annual, or pro-rata annual, earnings period for National Insurance regardless of how often they are actually paid. Under this method you calculate the director's National Insurance cumulatively across the tax year against annual thresholds, so contributions only start once cumulative earnings pass the annual Primary or Secondary Threshold, rather than week by week. The annual earnings period means a director paid irregularly, for example through occasional bonuses, has their contributions averaged over the whole year. This applies whatever the interval between payments and prevents directors timing pay to reduce National Insurance. HMRC's Booklet CA44 gives the full detail and worked examples. What is the alternative method for directors, and when can I use it? As well as the standard annual earnings-period method, the regulations allow an alternative arrangement. Under the alternative method, National Insurance can be deducted on a normal weekly or monthly basis during the year, with a final annual calculation when the last payment of earnings in the tax year (or in the directorship if it ends earlier) is made. At that final point you confirm the correct annual amount has been paid and make any adjustment on the payroll record. This is useful for directors who take a regular salary, because it smooths their take-home pay. Whichever method you use, the total for the year must come out the same, and Booklet CA44 explains both. Why does HMRC prefer the exact percentage method over the tables method? HMRC offers two ways to calculate National Insurance. The exact percentage method works in pounds and pence and applies the rates directly to the banded earnings, which is the most accurate approach and the one HMRC prefers. The tables method uses whole-pound earnings bands with built-in roundings, which can produce small differences compared with a computerised calculation. For modern payroll software the exact percentage method is the standard, and you should not use both methods for the same employee within a single tax year, because the rounding differences would not reconcile at year end. What do the National Insurance bands look like in practice? It helps to picture National Insurance as a series of slices. On a standard category A employee in 2026 to 2027, the slice of annual pay up to the Secondary Threshold of £5,000 carries no contributions. The slice from £5,000 up to the Primary Threshold of £12,570 carries employer contributions at 15.0% but no employee contributions, because the employer threshold is lower. The slice from £12,570 up to the Upper Earnings Limit of £50,270 carries both employee contributions at 8% and employer contributions at 15.0%. The slice above £50,270 carries employee contributions at the reduced 2% and employer contributions still at 15.0%. The relief categories change only the employer percentage on the middle slices, dropping it to 0% up to the relevant upper threshold. Where can I find the official National Insurance rules? The figures and calculation rules come from HMRC's National Insurance contributions guidance for software developers for 2026 to 2027, which sets out the exact percentage method, the directors' rules and the earnings bands and rates. For employer-facing operational guidance, the CWG2 Employer Further Guide to PAYE and NICs is the main handbook, and for company directors, Booklet CA44 gives detailed worked examples. For the category letters that decide which rates apply, see the companion article National Insurance category letters explained. Because thresholds and rates are set each tax year, always confirm the figures for the year you are running before finalising your payroll.

Last updated on Jun 26, 2026

National Insurance category letters explained

Your employee's National Insurance category letter tells the payroll which rates and thresholds to use, and choosing the right one can change the employer cost from 15% to 0% on a large slice of pay. This article explains each category letter for the 2026 to 2027 tax year, the employer-only National Insurance on benefits and PAYE Settlement Agreements, and how National Insurance numbers work. For the rates and thresholds themselves, see the companion article National Insurance: rates, thresholds and how it is calculated. What are the National Insurance category letters? The category letter you put against an employee tells the payroll which rates and thresholds to use, based on the employee's circumstances. The most common letters are: A, the standard category for most employees; B, married women and widows with a historic reduced-rate election; C, employees over State Pension age, who pay no employee NICs while the employer still pays secondary NICs; J, employees deferring NI because they already pay it in another job; H, apprentices under 25; M, employees under 21; V, qualifying veterans in their first year of civilian employment; Z, under-21s deferring NI because of another job; and F, I, S, L, D, E, K and N, the freeport and investment zone equivalents used in designated special tax sites. Choosing the correct letter is essential because it can change the employer cost from 15% to 0% on a large slice of earnings. What is category A and when should I use it? Category A is the default and applies to most employees aged between 21 and State Pension age who do not qualify for any special relief. On category A in 2026 to 2027, the employee pays 8% between the Primary Threshold (£12,570 a year) and the Upper Earnings Limit (£50,270 a year), and 2% above the Upper Earnings Limit, while the employer pays 15% on all earnings above the Secondary Threshold (£5,000 a year). If an employee does not clearly fall into another category, category A is almost always correct. Only move someone off category A when their age, veteran status, apprenticeship, special tax site location, deferment or reduced-rate election genuinely meets the conditions for another letter. What is category B for married women and widows? Category B applies to a small and declining group of married women and widows who hold a valid certificate allowing them to pay National Insurance at the reduced rate. This is a legacy arrangement: no new reduced-rate elections can be made, so category B only applies to women who made the election before it was withdrawn and have kept it in force. On category B the employee pays a lower primary rate between the Primary Threshold and Upper Earnings Limit than category A, plus the standard 2% above the Upper Earnings Limit, while the employer pays the full 15% secondary rate. Only use category B if the employee can produce a valid certificate, because applying it without one would under-deduct their contributions. What is category C for employees over State Pension age? Category C is used for employees over State Pension age. Once someone reaches State Pension age they stop paying employee (primary) National Insurance entirely, so their primary contribution is nil on category C. The employer, however, still pays secondary Class 1 NICs at 15% on earnings above the Secondary Threshold. To use category C correctly you should hold proof of the employee's date of birth or a certificate of age exception, and move them onto category C from the first pay period after they reach State Pension age. This is a common area for errors, because the employee's deductions change but the employer cost does not. What is category H for apprentices under 25? Category H is for apprentices under 25 following an approved UK apprenticeship. Its purpose is to reduce the employer cost: on category H the employer pays 0% secondary National Insurance on the apprentice's earnings up to and including the Apprentice Upper Secondary Threshold, which is £50,270 a year (£967 a week) for 2026 to 2027. Above that threshold the employer reverts to 15%. The apprentice still pays primary National Insurance in the ordinary way, at 8% between the Primary Threshold and Upper Earnings Limit and 2% above it, so the relief benefits the employer only. Keep evidence that the apprenticeship is genuine and the apprentice is under 25, and move them off category H when they turn 25 or the apprenticeship ends. What is category M for employees under 21? Category M applies to employees under 21. As with apprentices, the relief is on the employer side: the employer pays 0% secondary National Insurance on the under-21 employee's earnings up to and including the Upper Secondary Threshold, £50,270 a year (£967 a week) for 2026 to 2027, and only 15% above that. The under-21 employee still pays the standard 8% between the Primary Threshold and Upper Earnings Limit and 2% above it. You apply category M based on the employee's age, and you must switch them to category A from the first pay period in which they turn 21, unless another category applies. What is category V for veterans? Category V is the National Insurance relief for employers who hire qualifying veterans. From the first day of a veteran's first civilian employment after leaving the regular armed forces, the employer can claim a 0% rate of secondary Class 1 National Insurance for 12 consecutive months, on the veteran's earnings up to and including the Veterans Upper Secondary Threshold of £50,270 for 2026 to 2027, with 15% above that. The 12-month period runs from the start of the first civilian role and continues even if the veteran changes employer within that window, so a later employer can claim for the remainder. The veteran pays standard employee National Insurance throughout, and you should keep evidence of their status and start date. What are the freeport and investment zone National Insurance categories? Freeports and investment zones are designated special tax sites where the government offers a 0% rate of secondary Class 1 National Insurance to encourage employment. Eligible employers with a business premises in such a site can apply 0% secondary NICs on eligible employees' earnings above the Secondary Threshold up to and including the Freeport or Investment Zone Upper Secondary Threshold, both £25,000 a year (£481 a week) for 2026 to 2027, for up to 36 months. A new employee is expected to spend 60% or more of their working time within the site. The category letters used are F, I, S, L, D, E, K and N, mirroring the standard letters but flagging the special tax site, and above the threshold the employer pays the normal 15%. How does the 0% employer relief actually save my business money? These reliefs reduce only the employer (secondary) contribution and leave the employee contribution untouched, so the saving is a reduction in your business cost rather than the worker's deductions. For an under-21, apprentice or veteran employee, you pay 0% rather than 15% on the slice of pay between the Secondary Threshold and £50,270 a year, which is a substantial saving on a full-time worker. For a freeport or investment zone employee, the 0% applies up to £25,000 a year before 15% resumes. Even where the relief applies, you must still record the earnings and report the correct category letter through RTI, because the figures feed the employee's benefit entitlement and HMRC's records. What is Class 1A National Insurance on benefits in kind? Class 1A National Insurance is the employer-only contribution on most taxable benefits in kind, such as company cars, private medical insurance and other non-cash benefits. There is no employee Class 1A contribution, and it is not deducted from the worker's pay. For 2026 to 2027 the Class 1A rate is 15%, the same as the main secondary Class 1 rate. Most Class 1A on benefits is reported and paid annually after the tax year through the P11D and P11D(b) process. Some Class 1A charges must be reported in real time, including employer Class 1A at 15% on termination awards above £30,000 and on certain sporting testimonial payments above £100,000. What is Class 1B National Insurance on a PAYE Settlement Agreement? Class 1B National Insurance is an employer-only contribution linked to a PAYE Settlement Agreement (PSA), an arrangement where the employer agrees with HMRC to settle the tax and National Insurance on certain minor, irregular or impracticable-to-allocate benefits on behalf of employees, rather than reporting them per employee. Class 1B is charged on the value of the items in the PSA plus the tax the employer is paying on the employee's behalf, and replaces any Class 1 or Class 1A that would otherwise have been due on those items. It is paid annually after the tax year. Because the rate aligns with the employer secondary rate, confirm the figure against current GOV.UK guidance when you settle the PSA. How does the National Insurance number work? A National Insurance number is the unique reference that links an individual to their National Insurance and tax record throughout their working life. It is made up of two letters, six digits and a final letter, for example AB123456C, and it never changes for that person. As an employer you should record the employee's number on your payroll and include it on RTI submissions, because it lets HMRC match the contributions you report to the correct individual's account. The number is personal to the employee and is not allocated by the employer; new arrivals to the UK apply for one through the government's process. A wrong or transposed number can cause contributions to be credited to the wrong record. How do I verify an employee's National Insurance number? Employers can confirm an employee's number using HMRC's National Insurance Number Verification Request (NVR) service, submitted electronically alongside your RTI. You send an NVR when you take on a new employee, or when you are unsure whether the number you hold is correct, and HMRC responds by confirming the number or providing the correct one. You should not send an NVR until you have submitted your first Full Payment Submission for the employee, and the NVR is the proper route rather than guessing or reusing a number from another worker. What if a new employee has no National Insurance number? If a new employee genuinely does not have a number yet, you should still take them on and run them through payroll, because the lack of a number does not exempt anyone from National Insurance. You calculate and deduct their employee contributions and pay your employer contributions in the normal way based on their earnings and category letter, and report them through RTI leaving the National Insurance number field blank if you do not yet hold one. Ask the employee to apply for a number as soon as possible, and once it is confirmed, update your records. Never invent a number or copy one from another employee.

Last updated on Jun 26, 2026

Income Tax through PAYE

Pay As You Earn (PAYE) is the system you use to deduct Income Tax from your employees' pay and send it to HMRC. This article explains how PAYE Income Tax works in the 2026 to 2027 tax year: how it is collected, the difference between gross and taxable pay, the rates and bands, and how refunds happen through payroll. For how to read and apply tax codes, see the companion article Tax codes explained. How does Income Tax get collected through payroll? PAYE is HMRC's system for collecting Income Tax and National Insurance directly from employees' wages, salaries and occupational pensions as they are paid. As the employer, you calculate the tax due on each payment using the employee's tax code, deduct it, and report it to HMRC on or before payday through a Full Payment Submission. The aim is to spread an employee's tax bill evenly across the year so that by the final pay period they have paid roughly the right amount and do not face a large balance. Income Tax is only one of the deductions PAYE handles; National Insurance, student loan repayments and pension contributions are calculated separately under their own rules. What is the difference between gross pay and taxable pay? Gross pay is the total you pay an employee before any deductions, including basic salary, overtime, bonuses, commission and most allowances. Taxable pay is the figure Income Tax is actually calculated on, and it is usually lower than gross pay because some amounts are removed before tax is worked out. The most common reduction is an employee pension contribution made under a net pay arrangement or salary sacrifice, which comes off before tax. Other items, such as payrolled benefits in kind, may instead increase the taxable figure. The tax calculation always works from taxable pay to date, not gross pay, so when you reconcile a payslip it is the taxable pay figure that should match the tax due. What are the Income Tax rates and bands for 2026 to 2027? For employees taxed under the rest-of-UK rules (England and Northern Ireland), the 2026 to 2027 rates apply to taxable income after the Personal Allowance. The Personal Allowance of £12,570 is taxed at 0%; the basic rate of 20% applies to taxable income from £1 to £37,700 above the allowance; the higher rate of 40% applies from £37,701 to £125,140; and the additional rate of 45% applies above £125,140. In practice an employee with the standard Personal Allowance starts paying higher-rate tax once total income exceeds £50,270 (the £12,570 allowance plus the £37,700 basic-rate band). Welsh taxpayers use the same rates and bands for 2026 to 2027; Scotland has its own bands, covered in the tax codes article. How does the Personal Allowance taper work above £100,000? Employees with adjusted net income above £100,000 lose part or all of their Personal Allowance. For every £2 of income above £100,000, the allowance is reduced by £1, so it tapers away gradually and is completely gone once income reaches £125,140 (£100,000 plus twice £12,570). Within the £100,000 to £125,140 band the effective marginal rate is around 60%, because each extra pound both attracts higher-rate tax and removes 50p of allowance that then also becomes taxable. HMRC normally manages the taper by issuing an adjusted tax code rather than expecting you to calculate the reduction; your job is to apply the code HMRC sends. What is the difference between a cumulative and a non-cumulative (Week 1 / Month 1) basis? A cumulative tax code looks at the employee's total taxable pay and total tax-free allowance for the year to date, recalculating the correct position at every pay period. So if too much or too little tax was deducted earlier in the year, a cumulative code automatically corrects it in the next payment, which can produce a refund through payroll. A non-cumulative code, shown as Week 1 or Month 1, ignores everything before and treats each pay period in isolation, giving only that period's slice of the allowance. Non-cumulative operation is used where HMRC does not want previous pay and tax to affect the current calculation, for example for many new starters or where a code has just changed. Can an employee get a tax refund through payroll? Yes. Where an employee is on a cumulative tax code, your payroll software recalculates their tax position for the whole year to date at each pay period, and if they have paid too much tax it produces a refund in that pay period. This commonly happens when someone has a gap in earnings, a drop in pay, or starts work part way through the year with unused Personal Allowance building up. A refund only happens automatically on a cumulative basis; an employee on a Week 1 or Month 1 code will not receive a back-dated refund through payroll, because each period is taxed in isolation, and any over-payment is instead reviewed by HMRC. If a code changes from non-cumulative to cumulative during the year, the first cumulative calculation can trigger a sizeable refund. How do student loans and pension contributions interact with Income Tax? Student loan repayments and pension contributions are deducted through payroll alongside Income Tax, but they are calculated under their own rules rather than as part of the tax code. Student loan deductions are based on earnings above a threshold for the plan type and are worked out separately, so a tax code never changes a student loan deduction directly. Pension contributions can affect the taxable pay figure: contributions under a net pay arrangement or salary sacrifice reduce the pay on which Income Tax is calculated, while relief-at-source contributions do not change taxable pay. The key point is to establish the correct taxable pay figure first, after any pension reduction, before applying the tax code. See the separate articles on student loan deductions and on workplace pensions. Where can I find the official 2026 to 2027 tax figures? The figures in this article are grounded in HMRC's official 2026 to 2027 tax calculation specifications, which set out the expected tax due for each scenario, and the RTI Data Item Guide, which covers reporting. The Personal Allowance is frozen at £12,570 and the rest-of-UK bands are basic 20%, higher 40% and additional 45%. If you are ever unsure which code or basis to apply, follow the coding notice HMRC has issued, and direct employees with personal tax queries to HMRC, since only HMRC can change an individual's tax code. For reading and applying tax codes, see the companion article Tax codes explained.

Last updated on Jun 26, 2026

Tax codes explained

A tax code tells your payroll software how much tax-free pay an employee is entitled to and how to tax the rest. This article explains how to read a tax code, what the letters mean, and how to handle emergency codes, K codes, Scottish and Welsh codes, new starters and second jobs for the 2026 to 2027 tax year. For the rates, bands and how Income Tax is calculated, see the companion article Income Tax through PAYE. What does a tax code mean? A tax code is a short combination of numbers and letters. The number represents the employee's tax-free allowance for the year: multiply it by ten to get the annual tax-free amount. The letters describe the employee's situation, for example whether they get the standard Personal Allowance, whether a special rate applies, or whether the code operates in an unusual way. For 2026 to 2027 the most common code is 1257L, which gives a tax-free allowance of £12,570 (1257 times 10) and uses the standard Personal Allowance. Your software spreads that allowance evenly across the pay periods, so a monthly-paid employee on 1257L gets roughly £1,047.50 of tax-free pay each month before any tax is due. How do I read the number in a tax code? The number is the annual tax-free allowance divided by ten, with the final digit dropped, so to convert it back you multiply by ten: a code of 1257 means £12,570 of tax-free pay across the year, and a code of 500 would mean £5,000. Payroll software divides that annual allowance across the pay periods, so a weekly-paid employee on 1257L receives roughly one fifty-second of £12,570 each week and a monthly-paid employee one twelfth each month. The allowance accumulates as the year goes on, which is why someone who starts work partway through the year, or who has a low-paid period, can receive a build-up of unused allowance. If the number is preceded by the letter K, the meaning is reversed, as explained below. What do the letters in a tax code mean? The letters describe the employee's circumstances. L means the employee gets the standard tax-free Personal Allowance (for example 1257L). M means they have received a transfer of 10% of their partner's allowance under Marriage Allowance, and N means they have transferred 10% of their own allowance to their partner. T means the code includes other calculations, often where HMRC needs to review it or the allowance is being tapered. K means deductions are greater than the allowance, so an amount is added to taxable pay. BR taxes all income from the job at the basic rate (20%) with no allowance; D0 taxes it all at the higher rate (40%) and D1 at the additional rate (45%). NT means no tax is deducted, and 0T gives no allowance but taxes across the normal bands as income rises. Scottish and Welsh codes add an S or C prefix. What is the standard tax code for 2026 to 2027? The standard code for 2026 to 2027 is 1257L. The number reflects the standard Personal Allowance of £12,570 (1257 times 10), and the letter L confirms the employee is entitled to that standard allowance. Most employees with one job, no taxable benefits and no untaxed income will be on 1257L. The Personal Allowance has been frozen at £12,570 for several years, which is why the same code carries forward. HMRC issues the code, and unless you receive a coding notice telling you otherwise, you carry an employee's existing code forward into the new tax year following HMRC's annual instructions. What are emergency tax codes? An emergency tax code is used when you do not yet have full information about a new employee's tax position. For 2026 to 2027 the emergency code is 1257L operated on a Week 1 or Month 1 basis, which gives the standard Personal Allowance but only one period's worth at a time and ignores any earlier pay in the year. Emergency codes most often arise when a new starter cannot give you a recent P45 and completes a starter declaration. Because it is non-cumulative, an emergency code can result in slightly too much or too little tax in the short term, but HMRC corrects this once it issues a proper cumulative code. If a starter indicates they have another job or pension, you use BR or 0T instead. What is a K code and how does it work? A K code is used when an employee's deductions are greater than their tax-free allowance, which turns the allowance negative. Instead of giving tax-free pay, a K code adds an amount to taxable pay, so the employee is taxed on more than they actually earn in order to collect tax on benefits or arrears. To find the added amount, multiply the number after the K by ten: code K585 adds £5,850 to annual taxable pay, spread across the periods. K codes commonly arise where an employee has substantial taxable benefits in kind such as a company car, is repaying tax owed from an earlier year, or has the state pension taxed through their employment. There is an important protection: the extra tax collected through a K code in any pay period cannot exceed 50% of that period's taxable pay, so your software caps the deduction and carries forward any uncollected amount. What is the 0T code and how does it differ from BR? The 0T code gives no tax-free allowance at all, but unlike BR it taxes income across the normal rate bands as pay rises, so a high earner on 0T can move through the basic, higher and additional rates. BR taxes every pound at the single basic rate of 20% regardless of earnings. You will most often use 0T where an employee has given you no starter information and you have nothing to go on, or where HMRC instructs it, for example where the Personal Allowance has been fully tapered away above £125,140. Where a new starter has provided no details, you should use 0T (or S0T for Scottish taxpayers) on a Week 1 or Month 1 basis. Because 0T applies the full rate structure, it usually collects more tax than BR for higher earners. When should I operate a code on a Week 1 or Month 1 basis? You should operate a code on a Week 1 or Month 1 (non-cumulative) basis only when HMRC tells you to, or when the new-starter rules require it. The main reasons are that HMRC has issued a coding notice marked Week 1 or Month 1, a new employee's starter declaration requires it, or a P45 indicates the previous employer applied the code on that basis. In your payroll software and your FPS you flag this by setting the non-cumulative basis indicator to Yes; you do not change the code itself. The effect is that the employee gets a fresh slice of allowance each period and no back-correction happens, which prevents an unexpectedly large refund or deduction while HMRC reviews the position. How do Scottish tax codes work and what are the Scottish bands for 2026 to 2027? Scottish taxpayers have an S prefix on their tax code, for example S1257L, which tells your software to apply the Scottish rates and bands. The S is shown at the front of the code on printed documents such as the P45, P60 and payslips, and is reported in the tax regime field on the FPS. Scotland has more bands than the rest of the UK, so it has extra flat-rate codes: SBR taxes at 20%, SD0 at 21%, SD1 at 42%, SD2 at 45% and SD3 at 48%. For an employee with the standard £12,570 Personal Allowance, the 2026 to 2027 Scottish bands are: starter rate 19% from £12,571 to £16,537; basic rate 20% from £16,538 to £29,526; intermediate rate 21% from £29,527 to £43,662; higher rate 42% from £43,663 to £75,000; advanced rate 45% from £75,001 to £125,140; and top rate 48% above £125,140. The Personal Allowance and the £100,000 taper are set UK-wide. How do Welsh tax codes work for 2026 to 2027? Welsh taxpayers have a C prefix on their tax code, for example C1257L, which signals that the Welsh rates apply. For 2026 to 2027 the Welsh rates and bands are the same as the rest of the UK: basic rate 20%, higher rate 40% and additional rate 45%, with the standard £12,570 Personal Allowance. As with the Scottish prefix, the C is shown at the front of the code on printed documents and reported in the tax regime field on the FPS. You must still apply the correct prefix, because it determines which government receives the Income Tax and can matter if Welsh rates diverge from the rest of the UK in future. How does an employee's tax code change during the year? HMRC, not the employer, decides an employee's tax code, and tells you about changes by issuing a coding notice. A P6 notice tells you to change an existing employee's code, often part way through the year, for example because of a new benefit, a change in allowances, or tax to collect from a previous year. A P9 notice is issued before the start of a new tax year and tells you the code to use from 6 April. When you receive a P6 or P9, apply the new code from the effective date shown and on the basis the notice specifies. Never change an employee's code simply because they ask you to; if they think it is wrong, they must contact HMRC, who will issue a revised notice. What do I do with a new starter's tax code? When someone joins, your first step is to find the right code, which depends on whether they give you a recent P45. If they hand you a P45 from the current tax year, you normally use the code and year-to-date figures shown on it. If they have no P45, ask them to complete a starter declaration, which has three statements: that this is their first job since 6 April, that it is now their only job, or that they have another job or pension. The statement determines the code: broadly the first or only-job statements lead to 1257L (often on a Week 1 or Month 1 basis), while the other-job statement leads to BR. Report the new employee and the code on your first FPS, and HMRC will review and issue a corrected code if needed. See the article Starter declarations explained. How should I tax a second job, and when do I use BR or D0? When an employee has more than one job, their Personal Allowance is normally given against their main job only, so the second job is usually taxed without any allowance. The most common code for a second job is BR, taxing all of that income at 20%, on the assumption the main job has used up the allowance. If the employee is a higher-rate taxpayer overall, HMRC may instead issue D0, taxing the second job at 40%, or D1 at 45% for an additional-rate taxpayer. You apply whichever code HMRC issues, and you should not assume BR yourself unless a starter declaration indicates another job and no P45 is provided. The same logic applies in Scotland and Wales using the S and C prefixed equivalents. If the split of allowance between jobs is wrong, the employee should contact HMRC.

Last updated on Jun 26, 2026

Statutory parental pay and leave

This article explains the six statutory parental payments you may need to administer as a UK employer in the 2026 to 2027 tax year: Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), Statutory Adoption Pay (SAP), Statutory Shared Parental Pay (ShPP), Statutory Parental Bereavement Pay (SPBP) and the new Statutory Neonatal Care Pay (SNCP). It covers who qualifies, how long each is paid, the rates, and how you recover the money from HMRC. Statutory Sick Pay is separate and has its own article. How much is the standard weekly rate for 2026 to 2027? The standard weekly rate that applies across SPP, ShPP, SPBP, SNCP and the later weeks of SMP and SAP is £194.32 a week for 2026 to 2027. In every case the employee receives the lower of £194.32 or 90% of their average weekly earnings, so a lower earner may be paid less but never more. If you run a company maternity, paternity or adoption scheme, your enhanced rates sit on top of this statutory floor and do not change the amount you can recover. What is the 90% of average weekly earnings rule? Average weekly earnings (AWE) is the average of the gross earnings on which you paid Class 1 National Insurance over a set period, normally the eight weeks ending with the qualifying week. For the first six weeks of SMP and SAP the employee is paid 90% of their AWE with no cap, so a higher earner can receive more than the standard rate during this opening period. For all other payments and the remaining weeks of SMP and SAP, the employee receives the lower of £194.32 or 90% of AWE. AWE also determines eligibility, because it must reach the Lower Earnings Limit for the employee to qualify at all. The HMRC maternity, adoption and paternity calculator for employers can work it out for you. How does Statutory Maternity Pay work? To qualify for SMP an employee must have been continuously employed by you for at least 26 weeks up to and into the qualifying week (the 15th week before the expected week of childbirth), have average weekly earnings at or above the Lower Earnings Limit, and give you the correct notice and proof of pregnancy. SMP is paid for up to 39 weeks: the first six weeks at 90% of AWE, then 33 weeks at the lower of £194.32 or 90% of AWE. Maternity leave itself can run for up to 52 weeks, so leave and pay are not the same length. If an employee does not qualify, give them form SMP1, because they may be able to claim Maternity Allowance from the DWP instead. What proof of pregnancy do I need for SMP? The standard evidence is the MATB1 maternity certificate, which a midwife or doctor usually issues no earlier than 20 weeks before the expected week of childbirth. You should not start paying SMP until you have acceptable medical evidence, and the employee must normally give it to you within 21 days of their SMP start date. The MATB1 confirms the expected week of childbirth, which anchors the qualifying week, the earliest payment date and the AWE period. Keep the certificate, or a copy, as part of your statutory pay records. How does Statutory Paternity Pay work? An employee qualifies for SPP if they have been continuously employed for at least 26 weeks up to and into the qualifying week, have average weekly earnings at or above the Lower Earnings Limit, and give the correct notice. SPP is paid at the lower of £194.32 or 90% of AWE. The employee can take one or two weeks of leave and pay, and where they take two weeks these can be taken consecutively or as two separate single weeks. Paternity Pay and Leave also apply to adoption and surrogacy, and the leave must finish within 52 weeks of the birth. If the employee does not qualify, give them form SPP1. How does Statutory Adoption Pay work? SAP mirrors SMP closely. The employee must have been continuously employed for at least 26 weeks up to and into the relevant qualifying week, have average weekly earnings at or above the Lower Earnings Limit, give the correct notice, and provide proof such as the matching certificate from the adoption agency. SAP is paid for up to 39 weeks: the first six weeks at 90% of AWE, then 33 weeks at the lower of £194.32 or 90% of AWE. Only one person in a couple can take Statutory Adoption Pay and Leave, while the other may qualify for Paternity or Shared Parental Pay. SAP also covers certain surrogacy and overseas adoption situations. How does Shared Parental Pay work? Shared Parental Leave and Pay lets eligible parents share the balance of the mother's or main adopter's leave and pay after the initial maternity or adoption period ends. The parent curtailing their entitlement, and their partner, must meet continuous employment, earnings and notice tests. Between them they can share up to 50 weeks of leave and up to 37 weeks of pay, which is the balance of the original 52 weeks of leave and 39 weeks of pay. ShPP is paid at the lower of £194.32 or 90% of AWE. Leave can be taken in up to three separate blocks by each parent and at the same time or different times, which makes the booking and notice rules more involved. How does Statutory Parental Bereavement Pay work? SPBP supports an employee who loses a child under 18 or suffers a stillbirth. To receive the pay the employee must have been continuously employed for at least 26 weeks, have average weekly earnings at or above the Lower Earnings Limit, and give the correct notice. The two-week leave entitlement applies from the first day of employment, so an employee can take the leave even if they do not qualify for the pay. SPBP is paid for up to two weeks at the lower of £194.32 or 90% of AWE, taken together or as two separate weeks, within 56 weeks of the death or stillbirth. A separate entitlement applies for each child. How does the new Statutory Neonatal Care Pay work? Statutory Neonatal Care Pay is the newest statutory parental payment and supports parents whose baby is admitted to neonatal care. To qualify, the employee must have at least 26 weeks of continuous employment, average weekly earnings at or above the Lower Earnings Limit, and give the correct notice. The baby must have spent seven or more continuous days in neonatal care, starting before the baby was 28 days old. The employee gets one week of leave and pay for every seven full continuous days the baby is in neonatal care, up to a maximum of 12 weeks, paid at the lower of £194.32 or 90% of AWE. Where both parents qualify the combined entitlement is still capped at 12 weeks. What are the continuous employment and Lower Earnings Limit tests? Almost every statutory parental payment shares two conditions: a continuous employment test and an earnings test. The continuous employment test requires the employee to have worked for you for at least 26 weeks ending in, and usually including, the relevant qualifying week. The earnings test requires their average weekly earnings, over the set reference period, to be at or above the Lower Earnings Limit, the same threshold used for National Insurance. An employee who is continuously employed but earns below the Lower Earnings Limit will not qualify for statutory pay, although they may still be entitled to the leave and to alternative support such as Maternity Allowance. How long is each statutory parental payment paid for? The duration differs by payment, which is a common source of error. Statutory Maternity Pay is up to 39 weeks; Statutory Paternity Pay is one or two weeks; Statutory Adoption Pay is up to 39 weeks; Statutory Shared Parental Pay is up to 37 weeks shared between the parents; Statutory Parental Bereavement Pay is up to two weeks per child; and Statutory Neonatal Care Pay is up to 12 weeks. Remember that the paid period and the leave period are not always the same, most obviously with maternity leave, which can run to 52 weeks even though pay stops at 39 weeks. How do employers recover statutory parental payments? You can recover a proportion of SMP, SPP, SAP, ShPP, SPBP and SNCP from HMRC, but you cannot recover Statutory Sick Pay. You calculate the recoverable amount in your payroll software and claim it on an Employer Payment Summary (EPS) each tax month, which reduces the PAYE and National Insurance you pay over rather than being refunded separately. The standard recovery rate is 92% of the statutory parental pay you have paid out. If your business qualifies for Small Employers' Relief, you recover more. Recovery is claimed through the EPS, not the Full Payment Submission. What is Small Employers' Relief and the £45,000 threshold? Small Employers' Relief is the higher recovery rate for smaller businesses. You qualify if your total Class 1 National Insurance, counting both employee and employer contributions, was £45,000 or less in the previous tax year, ignoring any reductions such as the Employment Allowance. If you qualify, you recover 109% of the statutory parental pay you have paid: 100% of the payment plus 9% compensation for the employer National Insurance on it. If your total Class 1 National Insurance was above £45,000, you recover at the standard 92%. The £45,000 test is applied each year, so a business can move in or out of Small Employers' Relief as its payroll changes. What if I cannot afford to make the statutory payments? If you do not have enough in your PAYE account to cover the statutory parental payments you owe, you can apply to HMRC to be paid in advance. You apply online up to four weeks before you need the first payment. Once an advance is in place, if the statutory payments you reclaim in a month exceed your PAYE deductions, HMRC automatically uses the surplus to reduce what you owe on the advance. To apply for advance funding relating to a previous tax year, write to HMRC with your Accounts Office reference, PAYE reference and the amount claimed. What are Keeping in Touch days? Keeping in Touch (KIT) days let an employee on maternity, adoption or shared parental leave do some work without ending their leave or statutory pay. An employee on maternity or adoption leave can work up to 10 KIT days, and a Shared Parental Leave employee has a separate allowance of SPLIT days. KIT days are optional and must be agreed between you and the employee. Any day worked, even for an hour, counts as a whole KIT day, and you pay for that work at an agreed rate alongside statutory pay. Going over the allowance can end the statutory pay period, so keep an accurate count. Where can I find HMRC calculators and the correct forms? HMRC provides an online maternity, adoption and paternity calculator for employers that works out leave dates, pay dates, the qualifying week, average weekly earnings and the amounts for SMP, SAP and SPP. There is no dedicated calculator for ShPP, SPBP or SNCP, so HMRC publishes manual calculation guidance instead. To reclaim payments and apply for advance funding, use the GOV.UK service for recovering statutory payments and report the figures on your EPS. Where an employee does not qualify, use the right non-payment form (SMP1, SPP1, the adoption equivalent, and the NEO1 for neonatal care). Keep all statutory pay records for at least three years after the end of the tax year they relate to.

Last updated on Jun 26, 2026

Statutory Sick Pay (SSP): the complete employer guide

Statutory Sick Pay changed substantially on 6 April 2026, when the Employment Rights Act 2025 removed the three waiting days, removed the Lower Earnings Limit test and introduced a new "lower of" calculation. This article explains how SSP works in the 2026 to 2027 tax year, the reform and its transitional protections, and the practical steps to run it correctly in payroll. What is Statutory Sick Pay? Statutory Sick Pay is the minimum amount you must pay an eligible employee when they are off work because they are unwell. It is a legal entitlement, paid by you through payroll, and it is treated as earnings, so it is subject to PAYE tax and National Insurance in the normal way. It is separate from any contractual or occupational sick pay scheme you may run, although the two interact. SSP is a safety net rather than full income replacement, so the amounts are modest compared with normal pay. What is the SSP weekly rate for 2026 to 2027? For 2026 to 2027 the weekly rate of SSP is the lower of £123.25 or 80% of the employee's average weekly earnings. The flat rate rose from £118.75 in 2025 to 2026 to £123.25 from 6 April 2026. For an employee earning above roughly £154.05 a week, 80% of earnings exceeds the flat rate, so they simply receive the flat £123.25. For an employee earning below that level, they receive 80% of their average weekly earnings instead. What changed in the 2026 SSP reform? From 6 April 2026 the Employment Rights Act 2025 made three connected changes. First, it removed the three waiting days, so eligible employees are entitled to SSP from the first full qualifying day of sickness rather than the fourth. Second, it removed the Lower Earnings Limit as an entitlement criterion, so SSP is now available to all employees regardless of earnings. Third, it introduced the new rate rule under which SSP is the lower of 80% of average weekly earnings or £123.25, so lower earners now receive a percentage of pay rather than nothing. These changes apply across Great Britain and are being replicated in Northern Ireland. Who is eligible for SSP now? To qualify, an employee must be classed as an employee and have done some work for you, must be off sick for the relevant period, and must tell you they are sick within your time limit (or within seven days if you have none). From 6 April 2026 there is no earnings test, so workers who earned too little to qualify before are now eligible, including zero-hours and agency workers. Some employees still cannot get SSP for specific reasons, such as already receiving Statutory Maternity Pay or Maternity Allowance, being in legal custody, or having already had the maximum 28 weeks of SSP. How does the new "lower of" calculation work? The weekly rate is the lower of two figures: 80% of the employee's average weekly earnings, and the flat rate of £123.25. For an employee earning at or above about £154.05 a week, 80% exceeds the flat rate, so they receive £123.25. For an employee earning below that, 80% of their average weekly earnings is lower, so they receive that percentage. For example, an employee earning £140 a week receives 80% of £140, which is £112, because that is lower than £123.25. When a payment includes a fraction of a penny, round it up to the next whole penny. How are average weekly earnings calculated for SSP? Average weekly earnings (AWE) are based on the employee's average earnings in the relevant period, broadly the eight weeks leading up to the last normal payday before the sickness began. Once you have the AWE, you take 80% of it and compare that with £123.25 to find the weekly rate, rounding up any fraction of a penny. The order of operations is: find AWE, apply 80%, compare with the flat rate, divide by the number of qualifying days to get the daily rate, multiply by the number of sickness days, then round up the total. What are qualifying days and the daily rate? Qualifying days are the days an employee normally works, and SSP is only paid for qualifying days. The daily amount is the weekly rate divided by the number of qualifying days in that week. Based on the £123.25 flat rate, the daily rate is £17.6071 with seven qualifying days, £24.6500 with five days, £41.0833 with three days, and the whole £123.25 with one qualifying day. Where an employee's rate is based on 80% of their earnings rather than the flat rate, you divide that personal weekly rate by their qualifying days instead. What is the maximum amount of SSP? The maximum entitlement is 28 weeks of SSP within a single period of incapacity, including any linked periods. Once an employee has had 28 weeks of SSP their entitlement ends and they cannot receive more for that continuous or linked spell. At that point you must issue form SSP1 so they can claim other support such as Employment and Support Allowance. The 28-week cap is one reason accurate record keeping of SSP paid is essential, particularly where periods of sickness link together. What is a Period of Incapacity for Work and how do linked periods work? A Period of Incapacity for Work (PIW) is a period of four or more consecutive days of sickness, counting all days including those the employee would not normally work. Two or more PIWs are "linked" and treated as one continuous period if the gap between them is less than eight weeks (56 days). Linking affects both the 28-week maximum and the rate, because where a PIW is linked to an earlier one, the average weekly earnings from the first PIW are used to set the rate for the linked periods rather than recalculating. This keeps the rate consistent even if pay changes between spells; only when the link is broken by a gap of eight weeks or more is a fresh calculation done. What transitional protection applies across 6 April 2026? Some employees who were already receiving SSP before 6 April 2026 and remained off sick on that date would have seen their rate fall, because they would move from the flat rate to the lower 80% figure. To prevent this, employees who earn between £125 and £154.05 a week, were off sick and receiving SSP before 6 April 2026, and continued to be off sick on 6 April 2026, keep the flat rate at the uprated £123.25 for the duration of that continuous absence. This protection applies only to that single continuous spell. If a protected employee returns to work and then goes off sick again in a later linked PIW, the new rate rules apply to the second period and the protection does not carry across. What about employees who were below the old Lower Earnings Limit? An employee who was off sick before 6 April 2026 but did not qualify because they earned below the Lower Earnings Limit becomes entitled to SSP from 6 April for that absence, at 80% of their average weekly earnings at the start of the absence. For example, an employee earning £90 a week and off sick from 20 March 2026 receives no SSP before 6 April but becomes entitled to £72 a week (80% of £90) from 6 April. There are two exemptions: an absence that started on or before 21 September 2025 and continued unbroken to 5 April 2026 does not create a new period of entitlement, and an employee who was not eligible for another reason (such as legal custody or recent Employment and Support Allowance) does not become entitled. What evidence can you ask for, and what is self-certification? For the first seven days of sickness an employee can self-certify, telling you in writing that they have been unwell without medical proof. For absences lasting more than seven days you can ask for a fit note from a doctor or other authorised healthcare professional. Set out your notice requirements clearly; if you have no time limit, the statutory default is that the employee must tell you within seven days. You cannot insist on a fit note for the first seven days, and you should keep records of sickness, payments and evidence, as HMRC may ask to see them. How does SSP show on the payslip and in the FPS? SSP is paid through payroll and appears on the payslip as part of gross pay, subject to PAYE tax and National Insurance like other earnings. You report SSP to HMRC through your Full Payment Submission (FPS) each time you pay the employee, including the year-to-date SSP figure. Because SSP is no longer recoverable, there is no separate reclaim entry on the Employer Payment Summary for it. Make sure your payroll software is configured for the 2026 to 2027 rules, including the removal of waiting days and the "lower of" calculation, so the right amount is reported. Is SSP recoverable from HMRC? No. You cannot recover Statutory Sick Pay. This is unlike SMP, SPP, ShPP, SAP, SPBP and SNCP, where you can recover 92% or 109% of payments depending on your Class 1 National Insurance liability. The old Percentage Threshold Scheme that once allowed some employers to reclaim high SSP costs was abolished years ago and has not been reinstated by the 2026 reform. The full cost of SSP falls on you as the employer, so you should budget for SSP as a non-recoverable cost in your payroll planning. How does SSP interact with occupational or contractual sick pay? Many employers run an occupational or contractual sick pay scheme that pays more than SSP, often full or part pay for a set period. Where you pay occupational or contractual sick pay, any amount you pay for a day is set against that day's SSP entitlement, so you are not paying both on top of each other for the same day. This offset does not reduce the employee's maximum 28-week entitlement. In short, ongoing occupational sick pay offsets the SSP due day by day, but you cannot subtract earlier occupational sick pay from SSP. What happens when SSP ends, and what is form SSP1? When an employee's SSP is ending or they do not qualify, you must give them form SSP1 so they can claim other support such as Employment and Support Allowance. If SSP ends unexpectedly while the employee is still sick, send SSP1 within seven days of the SSP ending; if you know in advance that SSP will end, you can send it earlier. Where an employee does not qualify at all, send SSP1 within seven days of their first day off sick. For a long-term illness you can complete SSP1 before SSP runs out, which lets the employee apply for Employment and Support Allowance before their SSP ends. Where can you find the official tools and rates? HMRC provides a Statutory Sick Pay calculator at https://www.gov.uk/calculate-statutory-sick-pay to help you work out SSP, including qualifying days and the daily rate, with detailed manual calculation guidance on GOV.UK for cases the calculator does not cover. Keep clear records of each employee's periods of sickness, qualifying days, the average weekly earnings used, the rate applied, amounts paid and any evidence, especially for linked periods and transitional cases spanning 6 April 2026. Check that your payroll software has been updated for the 6 April 2026 rules before processing sickness absence in the 2026 to 2027 year.

Last updated on Jun 26, 2026

Holiday entitlement and accrual: a guide for employers

This article explains how UK statutory holiday entitlement works and how it accrues for full-time, part-time, irregular-hours and part-year workers, under the Working Time Regulations and the reforms applying to leave years beginning on or after 1 April 2024. A companion article, "Holiday pay: how to calculate it," covers how to work out the amounts to pay. What is the statutory minimum holiday entitlement? Almost all workers are entitled to 5.6 weeks of paid holiday a year (statutory annual leave), a right under the Working Time Regulations 1998 that covers agency, irregular-hours and part-year workers as well as conventional employees. For someone on a five-day week, 5.6 weeks equals 28 days. The entitlement is the same regardless of how someone is paid, though the calculation and accrual differ by working pattern. Many workers have a contract giving more than the statutory minimum, which is governed first by the contract. Is entitlement capped at 28 days? Yes. Statutory paid holiday is capped at 28 days even where the 5.6-week multiplier would give more. A six-day-week worker would arithmetically get 33.6 days but is capped at 28. The cap only affects workers who work more than five days a week. Employers may offer more as a contractual benefit but are not obliged to. How is entitlement calculated for part-time workers? Part-time workers on regular hours get the same 5.6 weeks, which is fewer than 28 days because their week is shorter. The calculation is 5.6 multiplied by the days worked each week, so three days a week gives 16.8 days and four days gives 22.4 days. The GOV.UK holiday entitlement calculator confirms these figures. The principle is proportionality, so part-time staff are never worse off pro rata than full-time colleagues. How do I calculate entitlement for fixed weekly hours spread unevenly across days? Work it out in days first, then convert to hours using the average working day. Entitlement in days is the lower of 28 or 5.6 multiplied by the days worked per week; the average working day is total weekly hours divided by days worked per week. For example, 30 hours over four days gives 22.4 days, an average working day of 7.5 hours, and a full-year entitlement of 168 hours. When the worker takes a day off, the hours deducted depend on which day it is. What is a leave year and how is it set? A leave year is the 12-month period over which statutory leave is measured and must be taken. Tell staff their leave year dates when they start, for example 1 January to 31 December, usually in the contract. If the contract is silent, the law fills the gap: for anyone starting after 1 October 1998 it begins on their first day; for earlier starters it begins on 1 October. A clear contractual leave year removes ambiguity. The leave year is not affected by maternity, paternity or adoption leave, during which holiday continues to accrue. What are irregular-hours and part-year workers? These two categories determine who the accrual method and rolled-up holiday pay apply to. An irregular-hours worker has paid hours that are, under their contract, wholly or mostly variable, typically casual and zero-hours arrangements; a worker on a rotating but fixed shift pattern is not an irregular-hours worker. A part-year worker only works part of the year and has periods of at least a week when they are not required to work and not paid, such as a seasonal worker. Part-year status can apply even where hours are fixed during the weeks worked. How does holiday accrue in the first year for regular-hours workers? For workers who are not irregular-hours or part-year, leave builds up from the start, and an employer can use an accrual system in the first year under which the worker receives one-twelfth of their annual entitlement on the first day of each month. Someone entitled to 28 days who has completed three months would have accrued 7 days. After the first year, entitlement is based on the proportion of a week worked, known as pro-rating. The 2024 reforms did not change this for regular-hours staff. What if a regular-hours worker starts part way through the leave year? They are entitled to a proportion of the full leave depending on how much of the year remains, accruing one-twelfth from their first day, rounded up to the nearest half day. For example, a five-day worker entitled to 28 days whose leave year starts 1 January but who starts on 13 January is entitled to 2.5 days for January, because 28 divided by 12 is 2.33, rounded up. Alternatively the employer can calculate the first month strictly pro rata to days actually worked. The GOV.UK calculator can work this out. What is the 12.07% accrual method and who does it apply to? It calculates entitlement as a percentage of hours actually worked each pay period rather than awarding fixed days up front, and it applies to irregular-hours and part-year workers for leave years beginning on or after 1 April 2024, in the first year and beyond. The figure comes from 5.6 weeks of leave leaving 46.4 working weeks (52 minus 5.6), and 12.07% of 46.4 is 5.6. Entitlement accrues as 12.07% of hours worked in the period, rounded to the nearest hour, with 30 minutes or more rounded up. For example, 68 hours in a month accrues 8 hours of holiday (68 multiplied by 12.07% is 8.21, rounded to 8). Does the 12.07% figure change if a worker has more than the statutory minimum? Yes. The 12.07% rate is built on 5.6 weeks; a worker contractually entitled to more uses a different percentage, calculated as total holiday weeks divided by the remaining working weeks, multiplied by 100. For a worker entitled to 6 weeks, 6 divided by 46.4 working weeks gives about 12.93%, so their holiday accrues at that rate of hours worked. Apply your chosen divisor consistently across calculations. How does the 12.07% method handle very low weekly hours? Where a weekly-paid irregular-hours or part-year worker works four hours a week or less, standard rounding could leave them accruing nothing in some weeks. To prevent this, it may be appropriate to round up to the next half hour or hour so the worker still accrues some entitlement. This is a fairness safeguard reflecting that workers should not lose statutory leave because their hours are small. Build this into payroll for very short shifts. How was holiday calculated before the reforms? For leave years beginning on or before 31 March 2024, the new accrual method did not have to be used, and entitlement for irregular-hours and part-year workers did not need to be accrued on hours already worked. Employers could use a leave-year or accrual approach and estimate entitlement from average days or hours using the GOV.UK calculator. The specific accrual method only becomes compulsory once the worker's leave year renews on or after 1 April 2024, so employers transitioned at different points during 2024. How does holiday accrue during maternity, family leave or sickness? A worker continues to accrue statutory holiday during sick leave, maternity, paternity, shared parental, adoption and other statutory leave, and the leave year is unaffected. Annual leave cannot be taken during maternity leave itself, though some family-related leave can be taken in blocks with annual leave in between. For irregular-hours and part-year workers (leave years from 1 April 2024), a specific method works out accrual during such absences: take a 52-week relevant period ending the day before the absence, exclude weeks of family leave or sickness, find average weekly hours and apply 12.07%. How do I work out accrual during absence using the 52-week relevant period? Use the 12.07% principle on average hours. For a worker employed over 52 weeks who took full leave the previous year, average weekly hours is total hours divided by 46.4 (52 minus 5.6). The divisor is higher if they took less than 5.6 weeks, and lower if employed under a year. Divide average weekly hours by 100, multiply by 12.07 for holiday accrued per week, then multiply by weeks of absence and round. For example, a worker who worked 1,032 hours then took 40 weeks of maternity leave accrues about 107 hours. With multiple absences, the relevant period excludes earlier leave weeks and can stretch back up to 104 weeks. Do bank holidays count towards the 5.6 weeks? Bank or public holidays do not have to be given as paid leave, and there is no separate statutory right to take them off. An employer can choose to include bank holidays within the 5.6 weeks, so for a worker entitled to 28 days the eight England and Wales bank holidays could be counted within that 28 rather than on top. Whether they are included or additional is a matter for the contract, so state your position clearly. Bank holidays offered on top of 5.6 weeks are contractual and can have separate rules. When can unused holiday be carried over? Carry-over is generally limited. Ordinary carry-over of up to 8 of the 28 days is allowed only where the employer agrees, governed by the contract. Where a worker could not take leave because of maternity or other family-related leave, the employer must allow all untaken statutory leave, up to 28 days, to carry into the next year. A regular-hours, all-year-round worker who could not take leave due to sickness may carry over up to 20 days, used within 18 months of the end of the accrual year; an irregular-hours or part-year worker in the same situation may carry over up to 28 days within 18 months. Leave above 28 days may be carried over only as the contract allows. What if an employer fails to allow a worker to take leave? If a worker was prevented from taking statutory leave by the employer's failures, they can carry the whole of that leave over. This applies where the employer refused to recognise the right or to pay for it, did not give a reasonable opportunity to take leave and encourage it, or failed to warn that untaken leave would be lost. Regular-hours workers may carry over up to 20 days for these reasons, while irregular-hours and part-year workers may carry over their entire entitlement. A worker who did not receive rolled-up holiday pay they were due can also carry over their whole entitlement. Avoid these situations, because the purpose of leave is genuine rest. How does notice for booking and refusing holiday work? The statutory notice a worker must give is at least twice the length of the leave requested plus one day, so three days' notice for one day's leave. An employer can refuse or cancel approved leave but must give notice at least equal to the leave length plus one day, so 11 days' notice to cancel 10 days. An employer can require staff to take leave at set times, such as a Christmas shutdown, by giving notice at least twice the length of the leave before it begins. The contract applies if it sets different rules. Employers can refuse leave at a particular time but cannot refuse to let a worker take leave at all. Where can I find calculators and further help? GOV.UK provides a holiday entitlement calculator at https://www.gov.uk/calculate-holiday-entitlement for full-time, part-time, casual and irregular-hours workers, including those starting or leaving part way through a leave year. The detailed rules sit in the GOV.UK guidance on holiday entitlement and the reforms guidance on 12.07% accrual. For how to work out the amounts to pay, see the companion article "Holiday pay: how to calculate it." Acas offers free, impartial advice on disputes. Check the relevant contract first and seek independent legal advice where a situation is genuinely uncertain.

Last updated on Jun 26, 2026

Holiday pay: how to calculate it

This article explains how to calculate holiday pay for UK workers, including those with regular hours and those with variable pay, under the Working Time Regulations and the rules in force from 1 January 2024. A companion article, "Holiday entitlement and accrual: a guide for employers," covers how much leave staff are entitled to and how it builds up. How is holiday pay calculated for workers with regular hours and fixed pay? For workers with regular hours and fixed pay, whether full-time or part-time, holiday pay is simply their normal pay for the period of leave. A worker on a fixed monthly salary who takes a week off receives the same pay as normal, so no separate calculation is needed. The principle is that a worker should not lose out financially for taking holiday. Where regular-hours workers have shift premiums built into their normal working, those premiums should be reflected in their holiday pay. The calculation only becomes complex when hours or pay vary, which is where the 52-week reference period comes in. What is the 52-week reference period and when must I use it? The 52-week reference period is the method for working out a week's pay for workers whose pay varies, such as those on irregular hours, variable pay or term-time contracts. You look back over the previous 52 weeks in which the worker was paid and average the pay to produce a week's holiday pay. A week normally runs Sunday to Saturday, and the reference period starts from the last complete week ending on or before the first day of leave. Only weeks in which the worker was actually paid count, so any week with no pay is skipped and you count back a further week to reach 52. Weeks of sick leave, maternity or other family-related leave, and weeks containing only statutory payments are also excluded. How far back can I go to reach 52 weeks of pay data? There is a cap of 104 weeks. You count back only as far as needed to gather 52 weeks of paid data, but never beyond the 104 complete weeks before the first day of holiday. If, after counting back the full 104 weeks, fewer than 52 paid weeks are found, the reference period is shortened to however many paid weeks exist. For instance, a worker paid in only 40 of the last 104 weeks has their holiday pay averaged over those 40 weeks. Where a worker has been employed for less than 52 weeks, the reference period is shortened to their weeks of employment, and where they have not yet completed a week, you pay an amount that fairly represents their pay for the leave. Which payments must be included when calculating holiday pay? From 1 January 2024 the components of normal pay are set out in regulations, and the four weeks of leave derived from EU law must be paid at this normal rate. Normal pay must include: payments, including commission, that are intrinsically linked to performing tasks the worker is contractually obliged to carry out; payments relating to professional or personal status, such as allowances for length of service, seniority or qualifications; and other payments, such as overtime, that have been regularly paid in the 52 weeks before the calculation date. Regular overtime, commission and results-based commission must therefore be reflected in holiday pay. Whether a bonus is included depends on its nature, and normal pay does not usually include one-off bonuses or reimbursement of expenses incurred only while working. What is the difference between normal and basic rate of pay for holiday? UK statutory leave is made up of two pots: four weeks derived from EU law and an additional 1.6 weeks under UK law, giving 5.6 weeks in total. For regular-hours workers, employers must pay at least the four weeks at the worker's normal rate, which includes commission, regular overtime and status-related payments, and may pay the remaining 1.6 weeks at the basic rate, stripped of bonuses and extras. The regulations do not say which pot must be used first, and many employers pay the whole 5.6 weeks at the normal rate to reduce admin. If you do pay the pots at different rates, explain this clearly and consistently in the contract or handbook. For irregular-hours and part-year workers, all leave must be paid at the normal rate. How do I calculate a week's pay for a worker paid monthly with variable pay? For a monthly-paid worker whose pay varies, you cannot simply average the last twelve payslips, because twelve months does not line up with the 52-week reference period. Instead you work in weeks. First calculate the worker's average hourly pay for the relevant month by dividing the month's pay by the hours worked that month, then multiply that hourly rate by the hours worked in each week to get a weekly figure. You build up 52 such weekly figures, using records of hours to split pay correctly where a week straddles two monthly pay periods, and exclude any unpaid weeks. The average of those 52 weekly figures is the week's holiday pay. What is rolled-up holiday pay and when is it lawful? Rolled-up holiday pay means adding an amount to each payslip to cover holiday pay, instead of paying the worker when they actually take leave. It is calculated as 12.07% of the worker's total pay in each pay period, that uplift being the proportion of 5.6 weeks of leave to the 46.4 working weeks of the year. Following the reforms, rolled-up holiday pay is lawful only for irregular-hours and part-year workers, and only for leave years beginning on or after 1 April 2024. It remains unlawful for regular-hours workers, whether full-time or part-time. It is also not available to irregular-hours or part-year workers whose leave year began on or before 31 March 2024, until that leave year renews. How must rolled-up holiday pay be shown and paid? If you use rolled-up holiday pay, you must calculate the uplift on the worker's total pay in the pay period and pay it at the same time as the pay for the work done. The 12.07% amount has to be itemised as a separate line on each payslip, and it is paid in addition to normal salary, which must itself be at or above the National Minimum Wage. Because moving to rolled-up pay may amount to a variation of contract, check the worker's contract and tell the worker before introducing it; for agency workers, the information must also go into the Key Information Document. The uplift is 12.07% of total pay regardless of differing hourly rates, so if a worker does some hours at a premium rate, it still applies to the combined total. Should statutory payments such as Statutory Maternity Pay be included in holiday pay? No. Statutory payments are payments for state-mandated leave, such as maternity leave, where the cost is partly met by the government, and holiday pay itself is not a statutory payment. Statutory payments should not be included in the 52-week holiday pay calculation. A week in which the worker received a statutory payment instead of normal pay should be excluded from the reference period, and you count back a further week to bring the total to 52 weeks of genuine pay data. This keeps holiday pay reflective of normal earnings from work rather than government-funded leave payments. Can a worker be paid in lieu of holiday instead of taking it? The only time someone can be paid in place of taking statutory leave, known as payment in lieu, is when they leave their job. While in employment, workers must actually take their statutory holiday and be paid when they take it, and an employer cannot buy out the statutory 5.6 weeks. If an employer offers more than 5.6 weeks, separate arrangements can be agreed for the extra contractual leave. The rule exists to ensure workers genuinely rest. How is holiday pay calculated when a worker leaves their job? When a worker leaves, you must pay for any statutory holiday accrued but not yet taken, pro-rated to the proportion of the leave year the worker was actually employed, measured in calendar days. Calculate the full annual entitlement, work out the proportion of the leave year in employment (days employed divided by days in the leave year, multiplied by 100), and pro-rate accordingly; for fixed-hours workers this is then converted into hours using the average working day. For example, a worker entitled to 28 days employed for 139 of the 365 days is in employment for 38.08% of the year, giving about 10.7 days. Deduct any holiday already taken, and pay the remaining days using the worker's average weekly pay over the relevant reference period. Payment in lieu must be made even if the worker is dismissed for gross misconduct. What if a worker has taken more holiday than they had accrued when they leave? If a worker has taken more leave than they were entitled to at the point of leaving, you must not deduct money from their final pay to recover the overpayment unless this was agreed beforehand in writing. The position should be set out in advance in the employment contract, company handbook or intranet. Without that prior written agreement, you cannot claw the value back from final wages. This makes clear, written holiday policies important for both untaken and over-taken leave. What are the rules for redundancy, insolvency and TUPE transfers? Where a worker is made redundant, they are entitled to be paid for any accrued but untaken holiday and for any holiday taken but not paid, calculated using the standard 52-week reference-period method. If the employer is insolvent, the worker can claim from the Insolvency Service's Redundancy Payments Service for accrued but untaken holiday and for holiday taken but unpaid, up to a maximum of six weeks, with the weekly amount capped under the Employment Rights Act. In a TUPE transfer, where employment is continuous, the worker can look back over pay received across the transfer, including before it, as part of their reference period. Where a contract is terminated and the worker re-hired on a new contract, the reference period for the new contract should not include paid weeks from the original one. Where can I find official calculators and further help? GOV.UK provides a holiday entitlement calculator at https://www.gov.uk/calculate-holiday-entitlement, and detailed guidance on calculating holiday pay for workers without fixed hours or pay. For how much leave staff are entitled to and how it accrues, see the companion article "Holiday entitlement and accrual: a guide for employers." The Advisory, Conciliation and Arbitration Service (Acas) offers free, impartial advice to workers and employers on disputes. Because individual contracts differ, check the relevant contract first and seek independent legal advice where a situation is genuinely uncertain.

Last updated on Jun 26, 2026

Benefits in kind, P11D and Class 1A National Insurance: the basics

If you give employees anything beyond their salary, from a company car to private medical cover, you may have a reporting and National Insurance obligation. This article explains benefits in kind, the P11D and P11D(b), Class 1A National Insurance, payrolling, and the changes coming from April 2027, for the 2026 to 2027 tax year. A companion article, "Company cars, vans, loans and other benefits: how they are valued," explains how to work out the value of specific benefits. What is a benefit in kind? A benefit in kind (BiK) is something of value you provide to an employee or director that is not part of their normal cash salary, such as a company car, private medical insurance, an interest-free loan, living accommodation, or assets you give them to use. Because these have a cash value, HMRC generally treats them as taxable employment income even though no extra money passes through the payslip. Some benefits are exempt or covered by a relief, but where no exemption applies you must report the benefit and usually pay employer National Insurance on it. The amount you report is normally the cash equivalent, broadly the cost to you of providing the benefit, less anything the employee pays towards it. What is the difference between an expense and a benefit? For reporting purposes an expense is usually a payment to reimburse an employee for a cost they incurred, while a benefit is something you provide directly. Many routine business expenses, such as genuine business travel and subsistence, are covered by an exemption and do not need to be reported at all. Where a payment or reimbursement is not covered by an exemption, it is treated like a benefit and reported on the P11D. The key question is always whether an exemption applies; if it does not, the item is reportable and may attract Class 1A National Insurance. What is a P11D? A P11D is the form you use to report the cash equivalent of expenses and benefits provided to an individual employee or director during the tax year, where those items have not been taxed through payroll. You complete one P11D per employee who received reportable benefits, and you must give each of them a copy of the information reported. The form is divided into lettered sections, each covering a type of benefit. P11D and P11D(b) forms can only be submitted to HMRC online; paper forms are no longer accepted, and the full set for the PAYE scheme must be submitted together. What is a P11D(b)? The P11D(b) is the employer's declaration that does two things: it confirms all the required P11Ds for the PAYE scheme have been completed and submitted, and it reports the total Class 1A National Insurance you owe on the benefits provided across all employees. It carries the total benefit figure, the Class 1A rate and the amount payable, with a declaration that the contributions are due or are not due. You must submit a P11D(b) even where you have payrolled all your benefits, because payrolling deals with the employee's tax but does not remove the need to report and pay employer Class 1A National Insurance. The P11D(b) and the related P11Ds must be sent in a single submission. What are the standard P11D benefit categories? HMRC structures the P11D into lettered sections, and each reportable benefit belongs in one. They are: Section A, assets transferred; Section B, payments made on behalf of the employee; Section C, vouchers and credit cards; Section D, living accommodation; Section E, mileage allowance payments not taxed at source; Section F, cars and car fuel; Section G, vans and van fuel; Section H, interest-free and low-interest (beneficial) loans; Section I, private medical treatment or insurance; Section J, qualifying relocation expenses and benefits; Section K, services supplied; Section L, assets placed at the employee's disposal; Section M, other items such as subscriptions and professional fees; and Section N, expenses payments made on behalf of the employee, including travel and subsistence. What is Class 1A National Insurance? Class 1A National Insurance is an employer-only contribution due on most taxable benefits in kind. Unlike Class 1, there is no employee deduction; the charge falls entirely on the employer. For the 2026 to 2027 tax year the Class 1A rate is 15.00%, an increase from the previous 13.80%. You work out Class 1A on the total cash equivalent of the benefits that attract it, then report and pay that total through the P11D(b) process. Not every benefit attracts Class 1A: items already subject to Class 1 National Insurance through payroll, and items covered by an exemption, are excluded. How is Class 1A calculated and reported? Class 1A is calculated by adding up the cash equivalent of all the benefits that attract it and multiplying that total by the Class 1A rate. For 2026 to 2027 that means the total benefits figure multiplied by 15.00%. You report the total benefits, the rate and the resulting Class 1A figure on the P11D(b), which serves as both your declaration and your statement of what is owed. Because the calculation runs off the same cash equivalents you report on the individual P11Ds, accuracy on the P11Ds feeds directly into the Class 1A figure. When are the P11D and P11D(b) due? For the 2026 to 2027 tax year you must report your expenses and benefits to HMRC and give your employees their copies by 6 July 2027, and submit the P11D(b) reporting the total Class 1A National Insurance by the same date of 6 July 2027. Missing the P11D(b) deadline triggers a penalty of £100 per 50 employees for each month or part-month the return is late, so it is worth diarising the date well in advance. The P11Ds and the P11D(b) must be filed together in a single online submission. When do I pay the Class 1A National Insurance? Class 1A National Insurance for 2026 to 2027 must reach HMRC by 22 July 2027 if you pay electronically, or by 19 July 2027 if you pay by post. The reporting deadline of 6 July and the July payment deadline are separate, so submitting the P11D(b) on time does not by itself settle the liability; you still need to make the payment. Late payment can attract interest and penalties, so allow time for the payment to clear by the relevant date. What is payrolling benefits in kind? Payrolling benefits in kind means putting the taxable value of a benefit through your payroll so the employee pays the income tax on it in real time, rather than the tax being collected later through a tax code adjustment. You divide the annual cash equivalent across the pay periods and add it to taxable pay each time the employee is paid. Where a benefit is payrolled, you do not include it on that employee's P11D, but you must still work out the Class 1A National Insurance and complete a P11D(b). Payrolling does not change the overall tax due; it changes when and how it is collected. Do I need to register before payrolling benefits? Yes. To payroll benefits voluntarily under the current rules you had to register with HMRC before the start of the tax year in which you wanted to payroll them, because you cannot change the way you report a benefit partway through a tax year that has already started. For the current arrangements, you can only payroll benefits you registered to payroll before 6 April 2026, and the older registration service is being wound down ahead of mandatory payrolling. Two benefits cannot be payrolled under the voluntary rules and still require a P11D: living accommodation and beneficial loans. Is payrolling of benefits becoming mandatory? Yes. HMRC has confirmed that real-time reporting of income tax and Class 1A National Insurance on most benefits in kind and taxable expenses will be mandated through payroll software, phased in with Phase 1 from 6 April 2027 and Phase 2 from 6 April 2028. From April 2027 most benefits and expenses will be reported through the Full Payment Submission (FPS), the same real-time submission you use to report pay, so both income tax and Class 1A National Insurance are reported as the benefit is provided. Keep your payroll software up to date and watch HMRC's employer communications for the detailed rules as the start date approaches. What happens to loans and accommodation under mandatory payrolling? Beneficial loans and living accommodation are treated differently because they are harder to value in real time. Under the published plans they are excluded from the initial mandation: HMRC will retain the P11D and P11D(b) route for employment-related loans and accommodation for a temporary period, with voluntary payrolling of these benefits available from April 2027. So while most benefits move to mandatory real-time reporting, loans and accommodation can continue to be reported on the P11D until further notice. Employers who provide these benefits should expect to keep using the P11D process for them beyond the point at which other benefits move fully onto the FPS. Will there be penalties during the transition? HMRC has indicated a soft-landing approach for the first year. For 2027 to 2028, customers who make an error related to mandatory payrolling in their real-time returns will not be charged inaccuracy penalties, unless there is evidence of deliberate non-compliance. This recognises that real-time reporting of benefits is a significant change to payroll processes. It does not remove the obligation to report correctly or pay what is due; it simply protects against penalties for genuine mistakes while employers adapt. You should still take reasonable care to get the figures right and correct errors promptly. Which benefits attract Class 1A National Insurance? Most taxable benefits in kind reported on the P11D attract employer Class 1A National Insurance at 15.00% for 2026 to 2027. This includes company cars and car fuel, vans and van fuel, private medical insurance, beneficial loans above the exemption, living accommodation, and qualifying relocation support above the £8,000 limit. Items already subject to Class 1 National Insurance through payroll, such as cash payments and most vouchers exchangeable for cash, do not attract Class 1A because National Insurance has already been collected. Exempt benefits, including trivial benefits and items covered by a specific relief, attract neither Class 1A nor a reporting requirement. The test is whether the benefit is taxable and not already within Class 1; if so, Class 1A is usually due. What records should I keep for expenses and benefits? Keep clear records of every reportable benefit and expense, including how you arrived at each cash equivalent, any amounts the employee paid towards a benefit, and the dates a benefit such as a car or accommodation was available. Good records make the year-end P11D and P11D(b) much easier to complete accurately and support the figures if HMRC asks questions. For cars you will need details such as list price, accessories, CO2 emissions, fuel type, capital contributions and, for the lowest-emission cars, the zero-emission mileage. As payrolling becomes mandatory from April 2027, accurate in-year records become even more important, because the values will need to be reported through payroll as benefits are provided rather than once a year. For how to value specific benefits, see the companion article "Company cars, vans, loans and other benefits: how they are valued."

Last updated on Jun 26, 2026

Student loan and postgraduate loan deductions

Student and postgraduate loans taken out for higher education are repaid through PAYE once a former student starts work, with the employer calculating and deducting the repayments alongside tax and National Insurance. This article explains how those deductions work for the 2026 to 2027 tax year: the plan types, thresholds and rates, how you are told what to operate, and how everything is reported. What are student and postgraduate loan deductions through payroll? A student or postgraduate loan deduction is a repayment the employer takes from an employee's pay and passes to HMRC on behalf of the Student Loans Company. Once a former student's income is high enough, repayments are collected through PAYE in the same way as Income Tax and National Insurance. The employee does not arrange these repayments separately; the employer operates them automatically based on the instructions HMRC or the employee provides. The amount is a percentage of earnings above a set threshold, paid over to HMRC as part of the regular PAYE remittance. Employers do not need to know the outstanding balance, because HMRC and the Student Loans Company handle that; the employer's job is to calculate and deduct correctly each period and to stop when told to. Which loan plan types exist for 2026 to 2027? There are four student loan plans plus a separate postgraduate loan: Plan 1 (introduced from 6 April 2000), Plan 2 (from 6 April 2016), Plan 4, the Scottish plan (from 6 April 2021), Plan 5 (from 6 April 2026), and the Postgraduate Loan or PGL (from 6 April 2019). Plan 1, 2, 4 and 5 are mutually exclusive in payroll terms, so you only ever operate one of them at a time for a given employee, even if the person holds more than one. The postgraduate loan is different: it can run on its own or at the same time as one of the four student loan plans. 2026 to 2027 is the first year that Plan 5 borrowers (broadly, students in England who started undergraduate courses from the 2023 to 2024 academic year) reach the point of repaying through payroll. What makes Plan 4 the Scottish plan? Plan 4 is the plan used for borrowers whose loans are administered by the Student Awards Agency Scotland. The distinction is about which body administers the loan, not about where the employee lives or works. You should never decide that someone is on Plan 4 simply because they have a Scottish address; the plan type is always confirmed by HMRC or by the employee's own loan account. Plan 4 has its own annual threshold, which for 2026 to 2027 is higher than the thresholds for Plan 1, Plan 2 and Plan 5. What are the 2026 to 2027 thresholds and rates? Deductions are only taken on earnings above an annual threshold, which payroll software converts to your pay frequency. The annual thresholds are: Plan 1, £26,900 (£2,241.66 a month); Plan 2, £29,385 (£2,448.75 a month); Plan 4, £33,795 (£2,816.25 a month); Plan 5, £25,000 (£2,083.33 a month); and Postgraduate Loan, £21,000 (£1,750.00 a month). The recovery rate is 9% for Plan 1, 2, 4 and 5, and 6% for the Postgraduate Loan. The rate is applied only to the slice of earnings above the relevant threshold, not the whole of the employee's pay. If someone has both a student loan plan and a postgraduate loan, both rates apply at the same time on their respective thresholds. How is a single deduction calculated? You take the employee's earnings subject to Class 1 National Insurance for the pay period, subtract the periodic threshold for the relevant loan, and apply the recovery rate to the remainder, then round the result down to the nearest whole pound. For example, a monthly-paid Plan 2 employee earning £3,000 in a month has £3,000 minus £2,448.75, which is £551.25, multiplied by 9%, giving £49.6125, rounded down to a deduction of £49. If the period's earnings do not exceed the periodic threshold, no deduction is taken. The deduction is always rounded down, so any pence are dropped. What earnings is the deduction based on? The deduction is based on the employee's earnings subject to Class 1 National Insurance, which is the National Insurance definition of earnings rather than the figure used for Income Tax. This matters because the two can differ; for instance, pension contributions under a net pay arrangement reduce taxable pay but not the figure used for student loans in the same way. Make sure your software feeds the correct National-Insurance earnings figure into the loan calculation and not the taxable pay figure. Are deductions cumulative or worked out period by period? Student and postgraduate loan deductions are non-cumulative. Each pay period is treated on its own, and the deduction is worked out only on that period's earnings against that period's threshold, with no reference to earlier periods or a year-to-date total. This differs from PAYE Income Tax, which is normally cumulative. The effect is that fluctuations are not smoothed out: in a period where earnings fall below the threshold no deduction is made, and that is not corrected later. This is why a one-off bonus can trigger a larger-than-usual loan deduction in that single period. How will I be told which loan plan to operate? There are three ways you are told to start a deduction, and in every case the instruction tells you what to do; you do not decide it. First, HMRC may issue a start notice: an SL1 to start a student loan, which states the plan type (Plan 1, 2, 4 or 5), or a PGL1 to start a postgraduate loan. Second, a new employee's P45 may have the "continue student loan" box completed, in which case you ask the employee what type of loan they are repaying and set up the appropriate single plan or postgraduate loan. Third, a new employee may complete a starter checklist that indicates loan deductions are due. HMRC automatically issues SL1 and PGL1 start notices when a new employment is notified, even if deductions have already started from a P45 or starter checklist. What are start and stop notices? A start notice is the formal instruction from HMRC to begin a deduction: an SL1 to start a student loan (stating the plan type) or a PGL1 to start a postgraduate loan. A stop notice is the instruction to end one: an SL2 to stop student loan deductions or a PGL2 to stop postgraduate loan deductions. Act on the effective date shown on the notice, and do not stop deductions on your own initiative, because only HMRC knows when the loan is fully repaid or no longer due. If a notice conflicts with what you are operating, the HMRC notice takes precedence. Keep these notices on file in case of any later query. What if a new employee does not know their plan type? If an employee with a student loan does not know which plan they are repaying, you must operate the student loan plan with the lowest threshold until HMRC tells you otherwise. The employee can confirm their plan type by signing in to their student loan account with the Student Loans Company. You continue with the lowest-threshold plan until an SL1 arrives confirming the correct plan, then switch to whatever the SL1 states. You should never guess the plan type, because operating the wrong one means the employee repays at the wrong threshold and potentially the wrong amount, and it is HMRC, not the employer, who confirms the correct plan. Guessing risks under-deducting or over-deducting, both of which create corrections later. Can an employee have both a student loan and a postgraduate loan? Yes. An employee can have both a student loan plan (Plan 1, 2, 4 or 5) and a postgraduate loan running at the same time, because the postgraduate loan is separate from the undergraduate plans. You operate one student loan plan plus the postgraduate loan together, each with its own threshold and rate. You never operate two student loan plans at once. So the maximum combination in a single pay run is one student loan plan at 9% plus a postgraduate loan at 6%, calculated on their separate thresholds and then added together. Where there is not enough pay to take everything, for example where a priority attachment of earnings order with protected earnings applies, the postgraduate loan is dealt with first because it carries a higher rate of interest, and the loan deductions cannot reduce pay below the protected earnings amount. How does the deduction appear on the payslip? Student loan and postgraduate loan deductions are shown on the payslip as deductions from gross pay, separate from Income Tax and National Insurance, so the employee can see what has been taken. Where both a student loan plan and a postgraduate loan are in operation, good practice is to show them as separate lines so the 9% plan deduction and the 6% postgraduate deduction are each identifiable. The deducted amounts reduce the employee's net pay in the period and are paid over to HMRC as part of the PAYE remittance. How are loans reported on the Full Payment Submission? The Full Payment Submission (FPS) carries the loan data each pay period: the value of the student loan repayment in the period, the student loan plan type in use, the value of the postgraduate loan repayment in the period, and the year-to-date totals for each in the current employment. There are also starter indicators showing that a student loan or postgraduate loan deduction is needed. Reporting the plan type each period lets HMRC reconcile the repayment against the correct loan and spot if the wrong plan is being operated. Once a year-to-date amount has been sent, it must continue to be supplied for the rest of the tax year, and the plan type reported must match the plan you actually used. What happens when an employee changes jobs? When an employee leaves, their loan repayments stop with that employer when employment ends, and the P45 shows whether a student loan was being deducted via the "continue student loan" indicator. The new employer picks up the obligation: they ask what type of loan is being repaid and set up the appropriate plan or postgraduate loan, supported by the starter checklist, and HMRC automatically issues SL1 and PGL1 start notices once the new employment is notified. Because the deductions are non-cumulative and worked out per period, the new employer simply starts fresh from the start date and does not need year-to-date loan figures from the previous employer. What about off-payroll workers, and does the deduction affect tax, NI or pensions? Where a worker is a deemed employee under the off-payroll working rules, student and postgraduate loan repayments are not collected through the client's payroll and the start-notice process does not apply; the worker settles any repayments through their own arrangements. Separately, loan deductions are calculated independently and do not change the figures used for Income Tax, National Insurance or pension contributions. They are taken after tax and National Insurance and do not reduce the earnings on which those are calculated. The only effect on the employee is a lower take-home figure. What records and good practice should employers keep? Keep the start and stop notices (SL1, PGL1, SL2, PGL2) received from HMRC, any P45 showing a continuing student loan, and completed starter checklists, because these are your evidence for the plan type and the dates you operated. Make sure your payroll software holds the correct 2026 to 2027 thresholds and rates, applies the right one to each pay frequency, and uses the National-Insurance earnings figure as the basis. Act promptly on every HMRC notice, on the effective date shown, to keep repayments accurate and avoid corrections. Where an employee queries a deduction, you can explain that the amount follows from the plan type, the threshold and the rate, and that the plan type comes from HMRC or the employee's own loan account rather than the employer's judgement.

Last updated on Jun 26, 2026

Employment Allowance and Small Employers' Relief

This article explains two National Insurance reliefs that UK employers handle through payroll for the 2026 to 2027 tax year: the Employment Allowance, which reduces employer National Insurance, and Small Employers' Relief, which lets smaller employers recover more of their statutory parental and bereavement payments. Both are claimed through the Employer Payment Submission (EPS). A companion article covers the Apprenticeship Levy. What is the Employment Allowance and how much is it? The Employment Allowance is a reduction in the employer (secondary) Class 1 National Insurance you pay to HMRC. It is not a cash payment or refund: it lets you keep back a portion of the secondary Class 1 National Insurance you would otherwise owe, until the allowance is fully used for the year. For 2026 to 2027 the allowance is worth up to £10,500. You claim against your actual secondary Class 1 liability, so if your total employer National Insurance for the year is less than £10,500 you only benefit by the smaller amount; the allowance cannot create a repayment beyond the National Insurance you have incurred. It only reduces employer secondary Class 1 National Insurance and does not affect employee contributions, income tax, or Class 1A National Insurance on benefits. Who can claim the Employment Allowance? You can claim for the current tax year if you are a business or charity (including a community amateur sports club) that pays employer Class 1 National Insurance, and you do less than half of your work in the public sector. From April 2025 the previous restriction that prevented employers with secondary Class 1 liabilities above £100,000 in the prior year from claiming was removed, so larger employers can now claim too. You can also claim if you employ a care or support worker. The allowance is claimed against a single PAYE scheme, so where you run more than one payroll you choose one to set it against. Who cannot claim the Employment Allowance? Several situations prevent a claim. You cannot claim if you are a limited company whose only employee paid above the secondary threshold is also a director, because at least one other person must be liable for secondary Class 1 National Insurance. So a one-person company where the sole director takes a salary above the secondary threshold and has no other staff is not eligible; eligibility is usually restored once a second employee or director is paid above the secondary threshold during the year. You also cannot claim if you do more than half of your work in or for the public sector (unless you are a charity), or if you are part of a group of connected companies or charities and another company in the group is already claiming, because only one employer in the group may claim. Which employees cannot be included in a claim? Even when your business is eligible overall, certain workers' secondary National Insurance cannot count towards your claim. You cannot include someone whose earnings fall within the IR35 off-payroll working rules (a deemed employee). You also cannot include someone you employ for personal, household or domestic work, such as a nanny, gardener or housekeeper, with one exception: a care or support worker employed to look after someone with a physical or mental disability can be included. So a family employing a personal carer can still benefit, while a family employing domestic help generally cannot. How do I claim, and do I need to claim each year? You claim by setting the Employment Allowance indicator in your payroll software and submitting it to HMRC on an Employer Payment Summary (EPS). Once the indicator is sent, HMRC treats you as claiming for that tax year and you reduce the employer Class 1 National Insurance you pay over as the allowance is used; you do not need to apply separately or wait for approval, but you must hold records to show you were eligible. The allowance does not always carry forward automatically, so HMRC's guidance is to make a fresh claim at the start of each tax year. This matters because eligibility can change, for example if your staffing falls to a single director or you become part of a connected group. If you forget to claim early in the year, you can still claim later and apply the allowance to National Insurance already paid, subject to HMRC's time limits. How is the allowance used up across the year, and what about state aid? The allowance is used month by month against your employer secondary Class 1 liability until exhausted. An employer with a modest bill may spread the £10,500 across many months, while an employer with a large bill may use it within the first month or two; once the £10,500 is absorbed you pay your employer secondary Class 1 National Insurance in full for the rest of the year. For some employers the allowance counts as de minimis state aid, a capped category of public support tied to your sector. If that applies to you, make sure receiving it does not take you over the relevant sector ceiling when combined with other de minimis aid. Most ordinary employers who receive no other state aid are not affected, but if you operate in a sector with state aid limits, check your position before claiming. What is Small Employers' Relief? Small Employers' Relief lets qualifying smaller employers recover more than the full amount of certain statutory parental and bereavement payments they make to employees. Larger employers can already recover most of these payments, but a small employer can recover the whole payment plus an extra amount as compensation for the employer National Insurance associated with it. The relief is designed to ease the cash-flow burden that statutory payments place on smaller businesses. Like the Employment Allowance, the recovered amounts are reported to HMRC through the Employer Payment Summary. How do I qualify for Small Employers' Relief in 2026 to 2027? You qualify as a small employer if your total Class 1 National Insurance, counting both the employee and employer portions, was £45,000 or less in the relevant qualifying tax year. This is a single combined figure across your PAYE scheme, not a per-employee test. If your total Class 1 National Insurance was above £45,000 you are treated as a larger employer for recovery purposes. Confirm your prior-year Class 1 total before the new tax year begins, because it determines whether you recover at the small-employer rate or the standard rate. What are the recovery rates for 2026 to 2027? For payments made from 6 April 2026, a qualifying small employer can recover 109% of the statutory payments covered by the relief, which is 100% of the payment plus an extra 9% as compensation. An employer that does not qualify as a small employer recovers 92% of the same payments. The 9% uplift is intended to offset the employer secondary Class 1 National Insurance that arises on statutory payments, which is why only small employers receive it. Which statutory payments does the relief apply to? The recovery rates apply to the family-related and bereavement statutory payments, not to sick pay. You can recover Statutory Maternity Pay, Statutory Paternity Pay, Statutory Adoption Pay, Statutory Shared Parental Pay, Statutory Parental Bereavement Pay and Statutory Neonatal Care Pay. You cannot recover Statutory Sick Pay at all, regardless of your size, so you should budget for the full cost of Statutory Sick Pay as an employer expense and only expect to recover the parental and bereavement payments through the EPS. How do I claim the relief and recovered payments? You report the amounts you are recovering on the Employer Payment Summary (EPS) as year-to-date figures by tax month. Payroll software holds separate fields for the recovered payment and the associated National Insurance compensation, for each of the recoverable statutory payments. The recovered figure represents the statutory payment you are reclaiming, and the compensation figure represents the additional 9% available to small employers. A larger employer reports only the recovered amount that produces 92% recovery and does not report compensation, while a small employer reports both so the combined figure reaches 109%. By submitting these on the EPS you reduce the amount you pay over to HMRC for the period, rather than receiving a separate refund in most cases. If you set your employer size incorrectly in the software, you risk over-recovering or under-recovering, so confirm your prior-year Class 1 total before the year begins. For the Apprenticeship Levy, see the companion article.

Last updated on Jun 26, 2026

The Apprenticeship Levy

The Apprenticeship Levy is a charge on larger UK employers that helps fund apprenticeships, reported through the Employer Payment Summary (EPS) alongside your other payroll submissions. This article explains who pays it, how it is calculated for 2026 to 2027, and how the levy funds are used. A companion article covers the Employment Allowance and Small Employers' Relief. What is the Apprenticeship Levy? The Apprenticeship Levy is a charge set at 0.5% of an employer's pay bill. It was introduced from 6 April 2017 and applies across the UK. There is an annual levy allowance of £15,000 to offset against the charge, which means that in practice, subject to the connected-company rules, only employers with annual pay bills greater than £3 million actually pay any levy. The levy is reported through the Employer Payment Summary alongside your other real-time submissions. Who has to pay the Apprenticeship Levy? Subject to the connected-company and charity rules, only employers with an annual pay bill greater than £3 million pay the levy. Because the levy is 0.5% of the pay bill and the £15,000 annual allowance offsets exactly 0.5% of £3 million, an employer with a pay bill of £3 million or less ends up with no levy to pay once the allowance is applied. All UK employers with a Class 1 National Insurance liability are technically within scope, but the allowance removes any liability for the great majority of smaller employers. If you are part of a connected group, you consider the combined position of the group rather than each company in isolation. How is the pay bill calculated? Your pay bill is all of the employee earnings liable to Class 1 secondary National Insurance, including earnings below the secondary threshold. This covers items such as wages, bonuses, commissions and some pension contributions on which National Insurance is due. It also includes the earnings of employees under 21 and apprentices under 25, even though the employer National Insurance rate on those earnings can be 0%, because the underlying earnings are still liable to secondary Class 1 National Insurance. The pay bill excludes earnings on which you are not liable to employer Class 1 National Insurance, such as the earnings of employees under 16, earnings outside UK National Insurance legislation, benefits in kind liable to Class 1A National Insurance, and payments to employees working abroad who make employee-only contributions. How much is the levy allowance and how does it work? The annual levy allowance is £15,000. You offset it against your levy liability on a cumulative, pro-rata basis, with one twelfth of the allowance (£1,250) becoming available each tax month. So by month one you have £1,250 of allowance, by month two £2,500, and so on up to £15,000 by month twelve. Because the allowance is cumulative, an employer whose pay bill rises during the year may have carried-over allowance that delays or reduces when they start paying, and in some cases means no levy is due even though the monthly pay bill increased. The levy you actually pay in a tax month is the cumulative levy liability to date, less the allowance to date, less anything already paid in earlier months. How do I work out the levy due each month? You add together all the earnings subject to employer Class 1 National Insurance from each payday in the tax month to get the monthly pay bill, then apply the 0.5% rate to the cumulative pay bill to date to find the cumulative levy liability. You subtract the cumulative allowance to date (a twelfth of £15,000 for each month so far) to find the levy payable to date, and subtract any levy already paid in earlier months to find the amount due for the current month. For example, an employer with a steady pay bill of £300,000 a month reaches £1,500 of levy in month one against £1,250 of allowance, paying £250, and continues paying £250 each month for a total of £3,000 across the year. An employer whose total pay bill for the year is £3 million or less pays nothing, because the cumulative allowance always matches or exceeds the cumulative levy. How is the levy reported to HMRC? The levy is reported through the Employer Payment Summary as part of your normal payroll process, carrying the levy due year to date, the tax month, and the annual allowance allocated to that scheme. You only need to report the levy if you are likely to have a liability, which generally means your previous year's Class 1 secondary pay bill was over £2.8 million, or you expect this year's pay bill to be over £3 million, or your share of the allowance within a connected group means you expect to pay. Once you start submitting levy figures you must keep submitting them for the rest of the year, even if the levy due to date is zero in later months. How is the allowance shared between connected companies or multiple PAYE schemes? Connected companies and charities can share the single £15,000 allowance between them, with each employer claiming its agreed portion against its own levy liability, but no more than £15,000 in total across the whole group. An employer running more than one PAYE scheme can likewise split the allowance across those schemes, again without exceeding £15,000 in total. The split must be agreed at the start of the tax year and then fixed for that year; an employer in a connected group cannot change the amount of allowance allocated part-way through. So group structures and PAYE arrangements should be reviewed before the tax year starts so each scheme reports the correct annual allowance on its EPS. When is the levy due for payment? The levy is paid alongside your other PAYE liabilities, with the due date falling 14 or 17 days after the end of each tax period depending on your payment method. The amount due for a period is your levy liability for that tax month, less any levy already paid to HMRC in earlier periods, which is the cumulative approach described above. You do not make a separate annual levy return; instead each EPS carries the year-to-date position, and the EPS for a month is generally expected by the 19th of the following month. How do I access the levy funds for training? Levy funds are accessed through the digital apprenticeship service, which English employers use to arrange and pay for apprenticeship training and assessment. The location of your employees within the UK does not change how much levy you pay, but it does affect the maximum amount you can spend through your apprenticeship service account, which reflects the proportion of your workforce in England. Once funds are in your account you draw them down to pay approved training providers, and the government's arrangements for unused funds and additional support sit alongside the core levy mechanism. The apprenticeship funding rules are administered separately from the payroll reporting of the levy. How do the Apprenticeship Levy and the National Insurance reliefs interact? The Employment Allowance, Small Employers' Relief and the Apprenticeship Levy are independent of one another but all handled through the same Employer Payment Summary. The Employment Allowance reduces your employer secondary Class 1 National Insurance, Small Employers' Relief lets a qualifying small employer recover statutory parental and bereavement payments at 109% rather than 92%, and the Apprenticeship Levy adds a charge for employers with very large pay bills. A small employer is unlikely ever to pay the levy, since a £3 million pay bill is far above the £45,000 Class 1 threshold for the relief, so in practice most businesses deal with the allowance and the relief while only the largest deal with the levy. Keeping your prior-year figures and group structure accurate is what ensures each adjustment is reported correctly on the EPS. Always check current HMRC guidance before the start of a tax year, as values and rules can change.

Last updated on Jun 26, 2026

The Construction Industry Scheme (CIS)

The Construction Industry Scheme (CIS) sets out how contractors handle payments to subcontractors for construction work in the UK. This article explains how CIS works for the 2026 to 2027 tax year: who it applies to, the deduction rates, monthly returns, gross payment status, and how CIS connects to your payroll and Real Time Information submissions. What is the Construction Industry Scheme? CIS is a tax deduction scheme run by HMRC that applies to most construction work carried out in the UK. Under it, a contractor deducts money from a subcontractor's payments and passes it to HMRC, where it counts as advance payments towards the subcontractor's tax and National Insurance. The scheme exists because construction has historically had many self-employed workers, and CIS lets HMRC collect tax closer to the point the work is done. It applies to payments for construction operations made by contractors to subcontractors, and the rules are set out in HMRC's guide CIS 340. CIS is not a separate tax; it is a mechanism for collecting tax and National Insurance in advance. Who does CIS apply to? CIS applies to contractors and subcontractors. A contractor is a business that pays subcontractors for construction work; a subcontractor is a business that carries out construction work for a contractor. Many businesses are both at once, because they are paid for construction work by one party and pay others to help carry it out. The scheme covers sole traders, partnerships and limited companies, as well as some bodies that would not think of themselves as builders, such as government departments, local authorities and large businesses with significant construction spend. Contractors must register, verify subcontractors, make the correct deductions, file monthly returns and issue statements. Subcontractors should register so they suffer the standard rate rather than the higher rate. What is a deemed contractor? A deemed contractor is a business whose main activity is not construction but which spends heavily on it and is therefore brought within CIS. The trigger is an average construction spend of more than £3 million in the previous rolling 12-month period, measured from the date of the first payment. Once that threshold is crossed, the business must register as a contractor and operate CIS on its construction payments like a mainstream construction firm. Typical examples include large retailers, banks, manufacturers, property investment companies, housing associations and government departments. The £3 million figure excludes VAT and the cost of materials. A deemed contractor can later apply to deregister if its spend falls back below the threshold and it does not expect to exceed it again. What work is covered, and what is excluded? CIS covers most construction work on a permanent or temporary building or structure, and civil engineering such as roads and bridges. Covered operations include site preparation, demolition, building work, alterations, repairs and extensions, installing heating, lighting, power, water and ventilation, cleaning the inside of buildings after construction, and painting and decorating. Excluded activities include the professional work of architects, surveyors and certain consultants; the manufacture or delivery of materials, plant or machinery; carpet fitting; hire-only scaffolding where the firm does not erect or dismantle it; and clearly non-construction work such as running a site canteen. If a single contract mixes excluded work with covered construction work, the whole contract is generally within CIS, so exempt work usually needs a separate contract to keep its exclusion. How do I register for CIS? If you are a contractor you must register before you take on and pay your first subcontractor. You register with HMRC as a new employer for the scheme, which gives you the references you need, including an employer reference and an accounts office reference. Subcontractors are not legally required to register, but it is almost always in their interest: a registered, verified subcontractor suffers 20% deductions rather than the 30% rate that applies to unregistered subcontractors, and they register using their Unique Taxpayer Reference (UTR). Many businesses register as both because they pay and are paid for construction work. When registering as a subcontractor you can also apply for gross payment status if you meet the conditions, which allows you to be paid in full with no deduction. How do I verify a subcontractor? Before paying a new subcontractor, a contractor must verify them with HMRC to confirm whether they are registered and which deduction rate to use. You verify online through HMRC's CIS service or compatible payroll software, providing your own UTR, accounts office reference and employer reference, plus the subcontractor's details: their UTR and National Insurance number if a sole trader, or the company UTR and Companies House registration number if a company. HMRC responds with the correct rate (0%, 20% or 30%) and a verification reference number, which you should keep with your records. You do not need to verify a subcontractor you have already included on a CIS return in the current or previous two tax years. What are the CIS deduction rates? There are three rates, depending on the subcontractor's status. The standard rate is 20%, for subcontractors who are registered for CIS and successfully verified. The higher rate is 30%, where the subcontractor is not registered or cannot be matched during verification. The third rate is 0%, for subcontractors with gross payment status, who are paid in full with no deduction. The verification process tells the contractor which rate to apply. The deduction is only ever applied to the labour element of a payment, never to the whole invoice where materials and other excluded items are involved. What is the deduction taken from? CIS deductions apply only to the labour element, not the full invoice. Before working out the deduction, the contractor removes the cost of materials the subcontractor paid for, including consumable stores, fuel for plant, plant hire and the cost of manufacturing or prefabricating materials. VAT charged by the subcontractor is excluded, as are amounts for the Construction Industry Training Board levy. What remains is the figure the rate is applied to. For example, if a registered subcontractor invoices £1,000 for labour plus £400 of materials, the 20% deduction applies only to the £1,000 labour, giving a £200 deduction, and the subcontractor is paid £1,200. Materials must be a genuine cost and must not be inflated to reduce the deduction. What is gross payment status? Gross payment status allows a subcontractor to be paid in full, with no CIS deduction taken from any of their payments. The subcontractor then accounts for all of their tax and National Insurance through their normal tax return, or for a company through its corporation tax and PAYE arrangements. It is valuable for cash flow, because the business holds its own money during the year rather than having 20% deducted at source. To get it, a subcontractor must apply to HMRC and pass three qualifying tests: the business test (it carries out construction work or supplies labour for it in the UK and runs its business mainly through a bank account), the turnover test (net construction turnover of at least £30,000 for a sole trader, £30,000 for each partner or £100,000 for the partnership, and £30,000 for each director or £100,000 for the company), and the compliance test (tax affairs kept up to date, including Self Assessment, PAYE, National Insurance, CIS and, since 6 April 2024, VAT). HMRC reviews the status regularly and can remove it if the business stops meeting the tests. What is a CIS monthly return and when is it due? A contractor must send HMRC a CIS monthly return, often called the CIS300, showing the payments made to all subcontractors in the tax month and the deductions taken. A CIS tax month runs from the 6th of one month to the 5th of the next, and the return must reach HMRC by the 19th of the month in which that tax month ends. For example, the return covering payments from 6 May to 5 June must be filed by 19 June. The return includes a declaration that the employment status of each subcontractor has been considered and that the verification requirements have been met. Returns are filed online, and the 19th deadline applies even if that date falls on a weekend or bank holiday. Do I still need to file a return if I made no payments? If you are registered as a CIS contractor but did not pay any subcontractors in a tax month, you must still tell HMRC. You can submit a nil return for that month, which carries the same 19th deadline, or notify HMRC that you expect to make no further payments for a period so returns are not expected. A nil return filed late attracts the same penalties as any other late return, so a quiet month should never be ignored. If you stop using subcontractors permanently you can ask HMRC to make your scheme inactive, which removes the obligation to file. What is a payment and deduction statement? A payment and deduction statement is the document a contractor must give to each subcontractor they have made a deduction from, setting out what was paid and what was withheld. It must be provided within 14 days of the end of the tax month, meaning by the 19th of the following month. It must show the contractor's name and employer reference, the tax month, the subcontractor's UTR or verification number where the higher rate was applied, the gross amount paid, the cost of any materials taken into account, and the amount deducted. These statements are the subcontractor's evidence of tax already taken during the year, which they need to reclaim or offset the deductions. Subcontractors with gross payment status are not given statements because no deduction is made. How does a limited company subcontractor reclaim CIS deductions suffered? A limited company that has had CIS deductions taken from its income reclaims them through its payroll, not its corporation tax return. Each month the company reports the total CIS deductions suffered to HMRC on its Employer Payment Summary (EPS), submitted through Real Time Information by the 19th. HMRC then reduces the company's own PAYE and National Insurance bill for that month by the deductions suffered. If the deductions suffered exceed the PAYE and National Insurance due, the excess is carried forward to set against later months in the same tax year. If there is still an unrecovered balance at year-end, the company can ask HMRC to repay it or set it against other liabilities such as corporation tax. The same EPS is used to report recovered statutory payments and the Apprenticeship Levy, so a company that is both an employer and a CIS subcontractor reports everything on one submission. Trying to recover company CIS deductions through the corporation tax return instead can lead to a penalty, so the payroll route should always be used. How does CIS interact with PAYE? CIS and PAYE are separate systems. PAYE applies to employees, where the employer operates income tax and National Insurance on wages and reports them through the Full Payment Submission each payday. CIS applies to subcontractors, who are normally self-employed, and the contractor deducts a flat-rate amount on account of the subcontractor's eventual tax bill rather than calculating tax on a personal tax code. A worker should be on PAYE if they are genuinely an employee, and treating an employee as a CIS subcontractor to avoid employer obligations is a serious compliance risk, which is why CIS returns include an employment status declaration. The one place the two systems meet is the EPS, where a limited company offsets its CIS deductions suffered against its PAYE liabilities. What are the penalties for filing a CIS return late? HMRC charges automatic penalties when a CIS monthly return, including a nil return, is not filed by the 19th deadline. The penalties escalate: an initial £100 penalty applies as soon as the return is one day late; a further £200 penalty once it is two months late; and at six months and again at twelve months late, a further penalty of £300 or 5% of the deductions on the return, whichever is higher. For very late returns, HMRC can apply a higher final penalty of up to £3,000 or 100% of the CIS deductions, whichever is greater, particularly where information has been deliberately withheld. New contractors filing their first returns may benefit from a capped penalty in some circumstances, and you can appeal a penalty if you have a reasonable excuse. Filing on time, even with a nil return, is the only reliable way to avoid these charges. What records do I need to keep, and how does the VAT reverse charge interact? Both contractors and subcontractors must keep CIS records for at least three years after the end of the tax year they relate to. Contractors should keep the gross amount of each payment, the cost of any materials deducted, the amount deducted, and the verification reference number where the higher rate was applied; subcontractors should keep the payment and deduction statements they receive. If HMRC asks to see your records and you cannot produce them, you can face a penalty of up to £3,000. Separately, the VAT domestic reverse charge for building and construction services, in force since 1 March 2021, applies to many of the same supplies as CIS: where both parties are VAT-registered in the UK, the supply is reported within CIS, and the customer is not an end user, it is the customer rather than the supplier who accounts for the VAT. Because the rules overlap heavily, businesses that operate CIS usually need to consider the VAT reverse charge on the same contracts; check HMRC's domestic reverse charge guidance or take professional advice for a specific supply.

Last updated on Jun 26, 2026

Automatic enrolment: who to enrol and what to pay

Automatic enrolment places a legal duty on every UK employer to put certain members of staff into a qualifying workplace pension scheme and pay into it. This article explains who must be enrolled, how much you must contribute and how contributions are worked out for the 2026 to 2027 tax year. A companion article covers postponement, opt-out, re-enrolment and compliance. What is automatic enrolment and why does it exist? Automatic enrolment, introduced by the Pensions Act 2008, obliges employers to enrol eligible members of staff into a workplace pension scheme and make contributions on their behalf. It was created because many people were not saving enough for retirement, and it works on inertia: staff are placed into a scheme automatically and must take active steps to leave, rather than to join. The policy is overseen by The Pensions Regulator, while the earnings thresholds sit with the Department for Work and Pensions and are published on GOV.UK. Every employer with at least one member of staff has duties, and those duties apply from the first day the first member of staff begins working for you. Automatic enrolment is not optional for the employer, although individual staff retain the right to opt out after enrolment. Do all employers now have duties? Yes. The staged roll-out that gradually brought existing employers into scope between 2012 and 2018 has finished, so every established employer now has live, ongoing duties rather than a future staging date. For any employer setting up for the first time, duties begin immediately on the day the first member of staff starts work, known as the duties start date, so there is no lead-in period. A brand new business that takes on its first employee must assess that person and act on the result straight away. The practical question for every employer is simply whether they are meeting their continuing legal obligations. What are my legal duties as an employer? Your core duties are to assess your workforce, automatically enrol any eligible members of staff into a qualifying scheme, make the minimum employer contributions, and write to your staff to tell them how automatic enrolment applies to them. You must also complete a declaration of compliance with The Pensions Regulator and keep records. Beyond set-up, you must monitor the ages and earnings of your staff each pay period and enrol anyone who becomes eligible, process opt-in or joining requests, handle opt-outs and refunds, and maintain contributions. You must not take any action whose sole or main purpose is to induce a worker to opt out or avoid enrolment, and you must not screen out job applicants on the basis of whether they are likely to opt out. These are the employer safeguards, and breaching them is a serious matter. Who has to be automatically enrolled? The staff you must automatically enrol are eligible jobholders. A member of staff is an eligible jobholder if they are aged at least 22 and under State Pension age, earn more than the earnings trigger of £10,000 a year (or the equivalent for the pay period), and ordinarily work in the United Kingdom. If a person meets all three tests you must enrol them and begin contributions, whether or not they ask. State Pension age is used rather than a fixed number because it changes over time and differs between individuals. Someone can move into or out of the eligible category as their age or earnings change, which is why ongoing assessment every pay period is essential. What are the different categories of worker? Every member of staff falls into one of three categories, determined by age and earnings in the pay period. Eligible jobholders are aged 22 to State Pension age and earn more than the £10,000 trigger; you must automatically enrol them and pay employer contributions. Non-eligible jobholders are either aged 16 to 21, or from State Pension age to 74, and earn more than the £10,000 trigger; or aged 16 to 74 and earn above the lower limit of the qualifying earnings band (£6,240) but at or below the £10,000 trigger. You do not have to enrol non-eligible jobholders automatically, but they have the right to opt in, and if they do you must enrol them and pay employer contributions as if they were eligible. Entitled workers are aged 16 to 74 and earn at or below £6,240; they have the right to join a scheme, but you are not legally required to contribute, although you may choose to. You must tell each member of staff which category applies and what their rights are. What is the earnings trigger for 2026 to 2027? The earnings trigger is the level of earnings at or above which an eligible jobholder must be automatically enrolled, and for 2026 to 2027 it remains £10,000 a year. It has been held at £10,000 since 2014 to 2015, and the government confirmed it stays at this level for 2026 to 2027 to provide stability. For pay periods shorter than a year the trigger is pro-rated, equating to roughly £833 a month or £192 a week, and you use the figure for the relevant pay reference period when you assess a member of staff. A person who earns above the trigger in one period but not another can move between the eligible and non-eligible categories, so the assessment must be repeated each pay run. What is the qualifying earnings band for 2026 to 2027? The qualifying earnings band is the slice of a worker's earnings on which minimum contributions are calculated when you use the default qualifying earnings basis. For 2026 to 2027 the lower limit is £6,240 a year and the upper limit is £50,270 a year, both unchanged. Qualifying earnings are gross earnings between these two figures, so earnings below £6,240 and above £50,270 are disregarded for the statutory minimum. They include salary, wages, commission, bonuses, overtime, and statutory payments such as sick pay and maternity, paternity and adoption pay. The upper limit of £50,270 aligns with the National Insurance Upper Earnings Limit for 2026 to 2027. As with the trigger, the band is pro-rated for shorter pay periods. What are the minimum contributions, and who pays what? The total minimum contribution is 8% of qualifying earnings, of which the employer must pay at least 3%, with the remaining 5% made up of the worker's own contribution together with tax relief from the government. Where the scheme uses the relief at source method, the employee pays 4% and the government adds 1% in tax relief to reach the 5%, so the figures are commonly described as 3% employer, 4% employee and 1% tax relief. The employer is free to pay more than 3%, and if the employer pays 5% or more the employee's required contribution reduces so the total still reaches at least 8%. These rates have applied since 6 April 2019, and there are no further statutory increases scheduled for 2026 to 2027. If you contribute on a basis other than qualifying earnings, different minimum percentages apply under the certification rules below. How are contributions calculated on qualifying earnings? On the qualifying earnings basis you calculate contributions only on the slice of pay between the lower and upper limits of the band, which for 2026 to 2027 means between £6,240 and £50,270 a year. For example, a worker earning £30,000 a year has qualifying earnings of £23,760 (£30,000 minus £6,240), and the 8% total is calculated on that £23,760, not the full £30,000. The same logic applies per pay period using the pro-rated band, so for a monthly payroll you deduct the lower limit (around £520 a month) from pensionable pay and cap it at the upper limit (around £4,189 a month) before applying the percentages. This is the default statutory basis, used by schemes such as NEST, and its advantage is certainty because the percentages and band are fixed by law and need no certification. What are the alternative contribution bases and certification sets? Instead of qualifying earnings, an employer may calculate contributions on a different definition of pensionable pay, but must then certify that the scheme meets one of three alternative quality standards, known as sets. Under set 1, contributions are based on basic pay (excluding bonuses, commission and overtime), with a total minimum of 9% of which at least 4% comes from the employer. Under set 2, contributions are again on basic pay but basic pay must be at least 85% of total pay across the workforce, with a total minimum of 8% of which at least 3% is from the employer. Under set 3, contributions are based on all earnings, with a total minimum of 7% of which at least 3% is from the employer. Certification is the employer signing a certificate confirming the chosen basis will at least match the qualifying earnings basis, typically valid for up to 18 months. These alternatives let employers whose payroll calculates pension on full basic salary avoid switching to the banded calculation. What is the difference between relief at source and net pay arrangements? These are the two methods by which income tax relief is given on employee pension contributions. Under a net pay arrangement, the contribution is deducted from gross pay before income tax is calculated, so the employee automatically gets full relief at their highest rate and no further claim is needed; the contribution reduces taxable pay in the run. Under relief at source, the contribution is deducted after tax, the scheme reclaims basic rate relief from HMRC and adds it to the pot, and higher and additional rate taxpayers claim extra relief through Self Assessment. A key consequence is that low earners who pay no income tax get effective relief under relief at source but not under a net pay arrangement, because there is no tax to relieve. You need to know which method your scheme uses to set up the deduction correctly: a relief at source scheme such as NEST takes the contribution net of basic rate relief, whereas a net pay scheme takes the full gross contribution before tax. How does salary sacrifice work for pension contributions? Salary sacrifice is an arrangement where the employee gives up part of their gross salary in exchange for the employer paying an equivalent amount into their pension as an employer contribution. Because the sacrificed amount is no longer paid as salary, it is not subject to income tax or National Insurance for either party, which makes it more efficient than an ordinary employee contribution; the employee saves the National Insurance they would have paid, the employer saves the secondary National Insurance, and many employers add some or all of their saving to the pension. To set this up you must vary the employee's contract to reflect the lower salary, and you must ensure the reduced salary does not fall below the National Minimum Wage or National Living Wage, because salary sacrifice cannot take pay below the legal minimum. Note that from April 2029 only the first £2,000 of pension contributions made through salary sacrifice each year will be exempt from National Insurance, with amounts above that becoming liable; this is a change to plan for but it does not affect 2026 to 2027. For postponement, opt-out, re-enrolment and compliance, see the companion article.

Last updated on Jun 26, 2026

Automatic enrolment: postponement, opt-out, re-enrolment and compliance

This article explains the ongoing automatic enrolment processes after staff have been assessed: postponement, opting out, opting in and joining, cyclical re-enrolment, the declaration of compliance, choosing a scheme, taking on new staff, record-keeping and penalties, for the 2026 to 2027 tax year. A companion article covers who must be enrolled and how much to contribute. Can I delay enrolling staff using postponement? Yes. Postponement lets you delay assessing and enrolling a member of staff for up to three months from a chosen date, such as the duties start date, the day a new employee joins, or the date an existing worker first becomes eligible. It is commonly used to avoid enrolling staff on short-term contracts or who are unlikely to remain past probation, and to align enrolment with a regular payroll date. During the postponement period you do not assess the member of staff or pay contributions, but you must write to them within six weeks of the postponement start date to tell them enrolment has been postponed and explain their right to opt in during that period. At the end of the period you must assess the member of staff on that day, and if they are then an eligible jobholder you must enrol them from that date with no further delay. Postponement can only be applied at these specific trigger points and cannot be used at cyclical re-enrolment. How does opting out work, and when is a refund due? After you have automatically enrolled an eligible jobholder, they have the right to opt out, but only during the one-month opt-out window. The window normally begins on the later of the date their active membership starts and the date they receive the letter telling them they have been enrolled, and it lasts one calendar month. If the member of staff opts out within the window, they must be treated as though they were never a member, and any contributions they and the employer have paid must be refunded in full. To opt out, the member of staff must obtain an opt-out notice from the pension scheme provider rather than from you, which protects against employers pressuring staff to leave. If a member of staff decides to leave after the window has closed, this is treated as ceasing membership rather than opting out, and the normal scheme rules apply: contributions already paid usually stay invested and are not refunded. What is the difference between opting in and joining? Opting in and joining are the two routes by which a member of staff who was not automatically enrolled can choose to be put into a scheme, and the route depends on the worker's category. A non-eligible jobholder has the right to opt in, and when they do you must enrol them into a qualifying scheme and pay the minimum employer contributions just as for an eligible jobholder. An entitled worker, who earns at or below the lower limit of the qualifying earnings band, has the right to ask to join a scheme, but in that case you are not legally obliged to make employer contributions, although you may choose to. In both cases the member of staff makes the request in writing and you must act on it. Because the two rights carry different employer obligations, identify correctly which category a requesting worker falls into before processing the request. What is cyclical re-enrolment? Cyclical re-enrolment is the requirement to put certain staff back into a pension scheme approximately every three years, even if they previously opted out or ceased membership. On your chosen re-enrolment date you must assess any eligible jobholders who, more than 12 months earlier, opted out, left the scheme, or reduced their contributions below the minimum, and re-enrol any who still meet the eligible jobholder criteria. You may choose your re-enrolment date from within a six-month window that opens three months before, and closes three months after, the third anniversary of your previous automatic enrolment or re-enrolment date. Re-enrolled staff have the same one-month opt-out window and the same right to a full refund as on initial enrolment, so re-enrolment does not trap anyone. Postponement cannot be used at cyclical re-enrolment, and after the exercise you must submit a re-declaration of compliance to The Pensions Regulator. What is the declaration of compliance, and when must I submit it? The declaration of compliance is an online form you submit to The Pensions Regulator to tell them how you have met your duties, and it is a legal requirement, not an optional confirmation. A new employer must complete it within five calendar months of their duties start date, providing details such as the number of staff assessed, the number enrolled, and the scheme used. Failing to submit on time is itself a breach that can lead to a penalty, even if you have correctly enrolled and paid for your staff, because The Pensions Regulator uses the declaration to verify compliance. After each cyclical re-enrolment you must submit a re-declaration, again within five calendar months of the third anniversary of your previous duties start date or re-enrolment date. Keep a record of your declaration and the information you used to complete it. How do I choose a pension scheme? You must use a scheme that is suitable for automatic enrolment, meaning it meets the qualifying scheme rules and is willing to accept all the staff you need to enrol without requiring them to provide extra information or take action. Many employers use the National Employment Savings Trust (NEST), a government-backed scheme set up specifically to support automatic enrolment, which has a public service obligation to accept any employer and is designed to be straightforward for smaller businesses. When choosing, consider whether it works with your payroll software, the tax relief method it uses (relief at source or net pay), the charges that apply to staff, the investment options and default fund, and the administrative support provided. The Pensions Regulator publishes guidance on what to look for, and you should satisfy yourself that the scheme is registered, well governed and able to handle ongoing duties such as processing opt-outs. The choice of scheme is the employer's responsibility. What happens when I take on a new employee or become a new employer? If you are a new employer taking on your first member of staff, your duties begin on the day that person starts work, and you must assess them straight away and act on the result, either enrolling them, recognising their right to opt in or join, or applying postponement. There is no staging date or preparation window, so have a scheme ready or be prepared to set one up quickly. When an existing employer takes on a new member of staff, assess that person on their first day and treat them according to their category, again with the option of postponing for up to three months. In all cases you must write to the new member of staff with the information relevant to their category within the statutory timescales, generally six weeks from the day the duty arises. The assessment must be repeated in every subsequent pay period as the person's age and earnings change. What records must I keep, and for how long? You must keep records that show you have met your duties, both to prove compliance to The Pensions Regulator and to administer the scheme correctly. These include the names and addresses of those you have enrolled, the gross earnings and contributions for each pay period, the dates contributions were paid into the scheme, any opt-in, joining or opt-out notices, and the pension scheme reference or registry number. Most of these records must be kept for six years, with the single exception of opt-out notices, which must be kept for four years. You can keep records electronically or on paper, and much of the information can come directly from your payroll system, but you must be able to produce them on request. What penalties can The Pensions Regulator impose? The Pensions Regulator has statutory powers to enforce automatic enrolment and generally takes an escalating approach that starts with education and warnings before financial penalties. If an employer fails to comply, it can issue a compliance notice requiring them to put things right by a deadline, and if that is ignored a fixed penalty notice of £400. Where non-compliance continues, it can issue an escalating penalty notice charging a daily rate, from £50 a day for the smallest employers up to £10,000 a day for employers with 500 or more staff, accruing until the employer complies. It can also issue an unpaid contributions notice requiring missed contributions to be paid, sometimes including the amount the worker should have paid, and in cases involving the employer safeguards it can take further enforcement action. Persistent or wilful non-compliance can ultimately lead to court action, so meet your duties on time and engage promptly if you fall behind. Where can I check the current figures and detailed guidance? The authoritative sources are GOV.UK and The Pensions Regulator at thepensionsregulator.gov.uk, which you should treat as definitive because the rules and figures are set by the Department for Work and Pensions and enforced by The Pensions Regulator rather than HMRC. For 2026 to 2027 the confirmed figures are an earnings trigger of £10,000, a qualifying earnings band of £6,240 to £50,270, a total minimum contribution of 8% of qualifying earnings with at least 3% from the employer, and eligibility from age 22 to State Pension age. Make sure your payroll software is configured with the correct thresholds and contribution method for your scheme, and verify the qualifying earnings upper limit against the National Insurance Upper Earnings Limit, which is also £50,270 for 2026 to 2027. For who must be enrolled and how much to contribute, see the companion article.

Last updated on Jun 26, 2026

Payroll year-end and the key forms (P60, P45, P11D)

Payroll year-end is the process of closing off one tax year, telling HMRC your final figures are complete, and getting your employees and software ready for the next year. This article explains the 2026 to 2027 year-end for UK employers: the final submissions, the P60, P45, P11D and P11D(b), tax code uplifts, week 53 payments, opening balances and record keeping. What are the tax year dates for 2026 to 2027? The UK tax year always runs from 6 April in one calendar year to 5 April in the next, so 2026 to 2027 begins on 6 April 2026 and ends on 5 April 2027. Every payroll figure you report, including pay, tax, National Insurance and statutory payments, is measured against this period. The P60 for this year is headed "Tax year to 5 April 2027." All of the year-end deadlines below, such as 31 May and 6 July, fall in 2027 because they relate to the year that ended on 5 April 2027. What does payroll year-end involve? Year-end is a sequence of tasks rather than a single event. You process your final pay run of the year, send your last Full Payment Submission (FPS) and, if needed, a final Employer Payment Summary (EPS) flagged as the final submission for the year, give every relevant employee a P60 by 31 May, deal with expenses and benefits on P11D and P11D(b) by 6 July, update tax codes for the new year, and roll your software forward into the next year with the correct year-to-date opening balances. You also reconcile what you have paid HMRC against what your records show is due. Because Real Time Information (RTI) means you report each payday during the year, year-end no longer involves a separate annual return of every figure; it is mostly about confirming the year is complete and starting the next one cleanly. What is the final Full Payment Submission of the year? The Full Payment Submission is the report you send to HMRC on or before each payday containing employees' pay, tax, National Insurance and other deductions. The final FPS of the tax year is simply the one covering your last regular payday on or before 5 April 2027, and it can carry the "final submission for the year" indicator, which tells HMRC you do not expect to send any further FPS for the year. You send it on or before the date you last pay your employees in the tax year, exactly as for any normal pay run. If you realise afterwards you still have a payment to report, you can send a further FPS for the year, but you would then want the last one you send to carry the final indicator. What is the final Employer Payment Summary, and the final submission indicator? The Employer Payment Summary tells HMRC about amounts that reduce what you owe, such as recovered statutory payments, the Employment Allowance, the Apprenticeship Levy position and periods where you made no payments. Not every employer needs a year-end EPS, but you must send one if you have an adjustment to report for the final month, or if you need to set the final submission for the year indicator and your last FPS did not carry it. The EPS is normally submitted by the 19th of the month following the tax month it relates to, so the year-end EPS for the period ending 5 April 2027 would be sent by 19 April 2027. The final submission for the year indicator is a flag (the ForYear element) that tells HMRC this is your last submission for the tax year; it can be set on either the final FPS or a final EPS, and it helps HMRC reconcile your account. A separate flag is used only if you have stopped being an employer altogether, in which case you also report a leaving date for every employee and the date the scheme ceased. What is a P60 and who must receive one? A P60 is the End of Year Certificate that summarises an employee's total pay and the Income Tax deducted in the tax year, along with National Insurance details, student and postgraduate loan deductions, and any statutory payments included in their pay. You must give a P60 to every employee who was working for you on 5 April 2027, in other words anyone still employed at the end of the tax year. The 2026 to 2027 certificate is headed "Tax year to 5 April 2027" and tells the employee to keep it safe because they need it to complete a tax return and to claim Universal Credit or Pension Credit. You do not give a P60 to anyone who left during the year, because they receive a P45 instead. You must provide the P60 by 31 May 2027, on paper or, where the employee agrees, electronically; the figures should match the year-to-date totals on your final FPS for that employee. What is a P45 and what are its four parts? A P45 is the form you give to an employee when they stop working for you; it records their pay and tax to their leaving date so their next employer or HMRC can pick up the correct figures. It has four parts: Part 1, which you send to HMRC (in practice done by reporting the leaving date on your FPS); Part 1A, which you give to the employee for their own records; Part 2, which the employee gives to their new employer; and Part 3, which the new employer completes and sends to HMRC. Your name and address must appear on Parts 1 and 1A, and you give the completed Parts 1A, 2 and 3 to the employee when they leave. The P45 shows the employee's tax code at leaving, whether a week 1 or month 1 basis applied, and the total pay and tax to date, so accuracy matters. How do I give a P45 to a leaver, and report it on the FPS? When an employee leaves, you fill in the P45 in full, enter the leaving date on the Full Payment Submission, and hand the employee the completed Parts 1A, 2 and 3, normally on or around the leaving date or with the final payment; you must not give it before they have actually left. Entering the leaving date on the FPS is what transmits the equivalent of P45 Part 1 to HMRC, so you do not send anything separately. If the employee has a student loan deduction, the P45 records that deductions should continue so the new employer carries them on. If you later make a payment after someone has left, you report that payment and set the payment-after-leaving indicator, and you deduct tax using code 0T (or S0T or C0T for Scottish or Welsh prefixes) on a non-cumulative basis. If the employee has died, you do not issue a P45; instead you enter the date of death on the final FPS. What does a new employer or employee do with a P45? When a new employee gives you Parts 2 and 3 of their P45, you check the information is correct, transfer the details onto your payroll record, complete Part 3 and report the new starter to HMRC. The P45 gives you the previous tax code, the pay and tax to date, and any student loan position, which lets you operate the correct cumulative code from the first payday rather than an emergency code. If a new starter does not have a P45, you instead collect a starter declaration and report the starter information on your first FPS for them. An employee who is not starting a new job keeps their Part 1A and, if relevant, uses the P45 to claim a tax refund or to register as newly self-employed. What are the P11D and P11D(b) and when are they due? The P11D reports the cash equivalent value of expenses and benefits provided to an employee or director that were not taxed through payroll, such as a company car or private medical insurance, while the P11D(b) is the employer's declaration and the return of the Class 1A National Insurance due on those benefits. These must be filed together as a single submission. For 2026 to 2027 the Class 1A National Insurance rate on the P11D(b) is 15.00%. Both forms are due by 6 July following the end of the tax year, so the deadline for 2026 to 2027 benefits is 6 July 2027, and any Class 1A National Insurance must be paid shortly afterwards. For how to value and report benefits, and the payrolling of benefits, see our dedicated benefits in kind and P11D articles. How do I update employee tax codes for the new tax year? Before 6 April 2026 you get each employee's record ready by identifying the correct tax code for the new year, following HMRC's P9X guidance. The P9X confirms that for 2026 to 2027 the basic Personal Allowance is £12,570, the PAYE threshold is £242 per week (£1,048 per month) and the standard emergency code is 1257L. For most employees there is no change this year, so you copy the authorised tax code from the previous year's record and carry it forward, but you do not copy or carry over any week 1 or month 1 markings. Where HMRC has issued a new code on a form P9(T) or an online coding notice, you use the notification with the most recent date, scrap any earlier one for the same employee, and copy the new code onto the record. Apply the correct prefix where relevant, for example S for Scottish taxpayers or C for Welsh taxpayers. Why do I remove the week 1 or month 1 flag at year-end? A week 1 or month 1 code is a non-cumulative basis that taxes each pay period on its own without reference to earlier pay in the year, usually applied temporarily where HMRC does not yet have a full picture of someone's income. The P9X is explicit that when you carry a code forward into the new tax year you must not copy or carry over any week 1 or month 1 markings. At the start of the new year everyone effectively begins on a cumulative basis again, because the year-to-date figures reset to zero, so retaining a non-cumulative flag would tax the employee incorrectly. Removing the flag is a standard year-end housekeeping step that your software usually prompts, but it is worth checking manually for anyone who was on that basis. What is a week 53 payment? A week 53 (and sometimes week 54 or 56) situation arises only for employees paid weekly, fortnightly or four-weekly, when an extra payday falls within the tax year because of how the calendar lands. It happens when your regular payday is 5 April, or 4 April in a leap year, so an additional pay period is squeezed in beyond the usual 52 weeks: week 53 for weekly pay, week 54 for fortnightly and week 56 for four-weekly. To stop the employee losing out, you apply the code on a week 1 or month 1 basis for that final period only, giving them a further tranche of personal allowance, which your software handles automatically when it detects the extra period. Monthly paid employees never have a week 53. The figures still flow through your final FPS as normal, and the P60 reflects the full year. What do I do when starting a new tax year in payroll software? When you roll your software into the new year you start each employee with their year-to-date figures reset to zero, because the new tax year is a fresh accumulation period for pay, tax, National Insurance, student loans and statutory payments. Continuing employees keep their personal details and carried-forward tax code, but their cumulative totals begin again from nil. Make sure the correct tax codes are in place with any week 1 or month 1 flags removed, the new National Insurance and PAYE thresholds are loaded, and any new statutory payment rates apply. Most software performs this roll-forward as a guided step, but confirm that nobody has been left with last year's figures or an out-of-date code before you run your first pay run. If you took on a scheme mid-year or are switching software, you enter the existing year-to-date figures so the cumulative calculations remain correct. How do I correct errors after year-end, and issue a replacement P60? How you correct an error depends on when you spot it. Within the same tax year, before your final submission, you simply send a corrected FPS with the right year-to-date figures. If you have already sent your final FPS but the year has not long ended, you can send an additional or amended FPS to update the figures, setting the final submission for the year indicator on the corrected report. For errors in a year that has already closed, you report the correction through an additional FPS for that year or, where your software supports it, an Earlier Year Update style correction. Whichever route applies, reissue any affected employee document, such as a corrected P60, and keep a note of why the change was made. If an employee loses their P60 or needs another copy, you can issue a replacement from your software or a copy clearly marked as a duplicate; the figures must match those originally reported, there is no charge and no special HMRC permission is needed, and it should still be headed "Tax year to 5 April 2027" for 2026 to 2027. How long do I keep payroll records, and what is the year-end checklist? You must keep your payroll records for at least three years from the end of the tax year they relate to, so for 2026 to 2027 (which ends on 5 April 2027) that means until at least 5 April 2030. The records include what you paid employees and the deductions you made, the reports and payments you sent to HMRC, employee leave and sickness, tax code notices, and details of taxable expenses and benefits. A typical year-end checklist runs in this order: process and check your last pay run on or before the final payday up to 5 April 2027; send your final FPS for the year, setting the final submission indicator where appropriate; send a final EPS if you have recovery, an Employment Allowance or other adjustment, or to carry the final indicator if the FPS did not; reconcile what you have reported and paid against your own records; produce and give a P60 to every employee employed on 5 April 2027, by 31 May 2027; prepare and submit any P11D and P11D(b) by 6 July 2027 and pay the Class 1A National Insurance; update tax codes following the P9X, carrying codes forward and removing week 1 or month 1 markings; roll your software into the new tax year, resetting year-to-date figures and loading the new thresholds; and file and retain your records for at least three years.

Last updated on Jun 26, 2026

Managing CIS subcontractors in Moonworkers

Moonworkers lets you manage your CIS subcontractors alongside your employees, so you can verify them with HMRC and include them in your CIS 300 return without leaving the app. This article explains how subcontractors work in Moonworkers, and the Construction Industry Scheme (CIS) rules a business needs to know when it pays subcontractors for the first time. For the full statutory detail, see our companion article "The Construction Industry Scheme (CIS)." Where do I find subcontractors in Moonworkers? Subcontractors are managed under People > Subcontractors. The list works like the employee list: you can open a subcontractor to see their details and their work information, which is deliberately simpler than an employee profile because a subcontractor runs their own business and needs fewer fields. As in the UK a subcontractor is still paid through your payroll, you can set a working pattern and define their pay in the same way as for an employee, with the same range of options. The key difference is that a subcontractor carries the extra CIS information (such as their UTR) that Moonworkers uses when it verifies them and builds the CIS 300. What is CIS and who has to operate it? The Construction Industry Scheme is an HMRC tax deduction scheme for most construction work in the UK. Under it, a contractor deducts money from a subcontractor's payments and passes it to HMRC as advance payments towards the subcontractor's tax and National Insurance. If your business pays subcontractors for construction work, you are a contractor and must register for CIS before you pay your first subcontractor, verify each subcontractor, deduct the correct amount, file a monthly CIS 300 return and give each subcontractor a payment and deduction statement. A business whose main activity is not construction but which spends more than £3 million on construction in a rolling 12-month period is a "deemed contractor" and must also operate CIS. Why do I need the subcontractor's UTR? The UTR (Unique Taxpayer Reference) is the number HMRC uses to identify the subcontractor, and Moonworkers needs it to verify them and to report them on the CIS 300. Verification is the step where HMRC confirms whether the subcontractor is registered and tells you which deduction rate to use, and it cannot be done without the correct UTR. For a sole trader you record their UTR and National Insurance number; for a company you record the Company Registration Number and the Company UTR. If the UTR is missing or wrong, the match with HMRC will fail and you may have to deduct at the higher rate, so it is worth entering it carefully before you run the verification. What are the mandatory CIS rules when I pay a subcontractor for the first time? Before you make the first payment to a new subcontractor you must verify them with HMRC. Verification confirms whether they are registered for CIS and returns the deduction rate you must apply, along with a verification reference number that you should keep. You verify using your own details (your UTR, Accounts Office reference and employer reference) together with the subcontractor's details. You do not need to verify a subcontractor you have already included on a CIS return in the current or previous two tax years. In Moonworkers you can run this verification directly from the subcontractor's profile, so the match is done in a click once the UTR is in place. What is the "match" during verification, and what are the deduction rates? When you verify a subcontractor, HMRC either matches their record and confirms they are registered, or fails to match them. The result determines the deduction rate, of which there are three. The standard rate is 20%, which applies to a subcontractor who is registered for CIS and successfully matched. The higher rate is 30%, which applies where the subcontractor is not registered, or cannot be matched during verification. The third rate is 0%, which applies to a subcontractor who holds gross payment status and is therefore paid in full with no deduction. Moonworkers records the rate returned by HMRC against the subcontractor so the correct amount is deducted automatically when you pay them. What is the deduction actually taken from? The CIS deduction only ever applies to the labour element of a payment, never the whole invoice. Before working out the deduction, you remove the cost of materials the subcontractor has paid for, any VAT they have charged, and any Construction Industry Training Board levy, and the rate is applied to what remains. For example, if a registered subcontractor invoices £1,000 for labour plus £400 of materials, the 20% deduction applies only to the £1,000 labour, giving a £200 deduction, and the subcontractor is paid £1,200. Materials must be a genuine cost and must not be inflated to reduce the deduction. How do sole traders, companies, partnerships and trusts differ? A subcontractor can be a sole trader, or trade through a company, a partnership or a trust, and the type changes which details Moonworkers uses on the CIS 300. For a company you record the trading name and the company name, because both can appear on the return, together with the Company Registration Number and the Company UTR. Moonworkers also lets you handle the VAT position for a company subcontractor. Selecting the correct type and entering the matching references is important, because the CIS 300 has to carry the details that let HMRC identify the subcontractor correctly. What is the CIS 300 and how does Moonworkers use these details? The CIS 300 is the monthly return a contractor must send to HMRC showing the payments made to all subcontractors in the tax month and the deductions taken from them. A CIS tax month runs from the 6th of one month to the 5th of the next, and the return is due by the 19th of the month in which that tax month ends. Because Moonworkers holds each subcontractor's type, references and verified deduction rate, it can pull these into the CIS 300 and into the payment and deduction statements automatically, which is why it matters to enter the UTR, registration numbers and subcontractor type correctly from the start. For the deadlines, penalties, gross payment status tests and how a limited company reclaims CIS deductions suffered, see the companion article "The Construction Industry Scheme (CIS)." Get started To manage your subcontractors, sign in and go to People > Subcontractors, open or add a subcontractor, enter their UTR and details, then run the verification from their profile. Sign in at https://payroll.moonworkers.co.uk/auth/login.

Last updated on Jul 06, 2026

Finalising a payroll run: payslips, FPS and closing the period

Finalising is the last step of a payroll run in Moonworkers: it closes the period, sends your employees their payslips, and reports the pay to HMRC. This article explains what happens when you finalise, how the Full Payment Submission (FPS) works, and why you cannot simply edit a period once later ones exist. A companion article, "Running a payroll run in Moonworkers," covers the earlier steps. What happens when I finalise a run? When you are happy with the run, click Finalise. This opens a pop-in that lets you complete the period in one place: you can send all the payslips to your employees by email, and you can submit your Full Payment Submission (FPS) to HMRC for the period. If the submission is going in late, you can add a reason to explain why the payroll run was reported late. Finalising is what turns the draft payslips into the final documents for the period and locks in the figures. What is the FPS and when should I submit it? The Full Payment Submission is the report you send to HMRC each time you pay your employees, containing their pay, tax, National Insurance and other deductions for the period. HMRC's rule is that the FPS must be sent on or before the date you pay your employees, so the recommended approach is to finalise the run and submit the FPS on or before payday, not afterwards. Submitting on time each period is what keeps your PAYE record accurate and avoids questions from HMRC. Moonworkers lets you submit the FPS directly from the finalise pop-in, so reporting to HMRC is part of closing the period rather than a separate task. What if my FPS is late? If for some reason you report after payday, you should still submit as soon as you can, and you can add a late-reporting reason on the FPS to tell HMRC why it is late. Valid reasons are limited (for example a genuine system issue), so the reason should reflect what actually happened. Reporting late without a valid reason can lead to penalties, so the safe habit is always to finalise and submit on or before payday. Where a run has genuinely been reported late, adding the reason is better than sending nothing. When do I pay HMRC? Submitting the FPS tells HMRC what you owe, but it is not the payment itself. You pay the PAYE tax and National Insurance you have reported separately, and the deadline is the 22nd of the following tax month if you pay electronically (or the 19th if you pay by post). So the FPS reports the figures on or before payday, and the payment follows by the 22nd of the next month. Keeping the two steps in mind, report on time and pay on time, is what keeps your HMRC account clean across the year. Can I send the payroll journal to my accounting software? Yes. If you have a supported accounting package connected, you can submit the payroll journal to it directly from the run, so the pay cost is posted into your accounts without re-keying the figures. If you do not have accounting software connected, you can still download the journal (including as a CSV) and use it to post the entries yourself. Sending the journal each period is what keeps your books in step with what you have actually paid and what you owe HMRC and the pension provider. What do I get when the run is finalised? Once you finalise, you get a digest for the period from which you can download all the payslips and related documents together, and your employees receive their payslips if you chose to email them. At that point the period is closed: the figures are fixed, the FPS has been submitted, and you can start the next period. In practice, finalising, emailing payslips, submitting the FPS and starting the next run form a single clean sequence you repeat each pay period. How do I start the next period? After a period is finalised and closed, you simply start the next payroll run for that schedule, exactly as you did for the current one, from Payroll > Payroll Run. Because each period is closed before the next begins, your runs follow one after another in order, which is important for the way PAYE is calculated (see below). You do not need to carry anything forward manually; Moonworkers keeps the year-to-date figures running from one period to the next. Why can't I just edit an earlier period? If you need to change a period that has already been finalised, you cannot edit it in isolation: you have to delete the later periods first and then re-open the period in question. This is because payroll is cumulative. PAYE tax in particular is normally worked out on a cumulative basis, meaning each period takes account of the pay and tax for the whole year to date, so the figures in every period depend on the periods before it. If you changed an earlier period while later ones still existed, their year-to-date figures would no longer line up. Deleting the later periods, correcting the earlier one and then re-running forward keeps the cumulative calculation correct, which is why the values on a payslip can change from one period to the next as the year-to-date position updates. Get started To finalise a run, sign in, open the payroll run from Payroll > Payroll Run, review it, then click Finalise and complete the pop-in to email payslips and submit your FPS. Sign in at https://payroll.moonworkers.co.uk/auth/login.

Last updated on Jul 06, 2026