Implications of paying weekly employees in advance over the Christmas period

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With Christmas fast approaching many businesses will be starting to factor in the payment processes to cope with periods of shut down for their weekly paid clients over the Christmas period. However….please read below an issue identified for one of our weekly paid clients that we are having to provide a work around for!

They shut down for a couple of weeks over Christmas and as a result pay their staff three weeks’ pay in the week before Christmas. They then pick up pay in January as normal. “Great” I here you say, “a good payday just before Christmas!” And you would be right.

However, there is now the issue of assessment and Auto Enrolment pension contributions, where a client looks a little like this:

  • The firm has defined pensionable earnings as qualifying earnings i.e. banded earnings, so between £112 and £815 till 5 April 2016
  • They are paying at least some of their staff weekly
  • They will be advancing pay by two weeks over the Christmas period, meaning three weeks’ pay will be paid in one week followed by two weeks without pay.

Response from The Pensions Regulator

I spoke to The Pensions Regulator about this issue and they gave the following comments that you may want to consider:

“This point is not addressed specifically in the Detailed guides (No 4 or Appendix 4e), but both include reference to the definition of pensionable earnings in the rules of a scheme. In particular paragraph 53 of Detailed Guide No 4 includes the following sentence “The assessment of whether a component of pay constitutes an element of qualifying earnings is for the employer to make”. The Scheme rules may be silent on the point in question, but the intent would be that contributions would be due on the regular weekly pensionable earnings, up to the upper level of qualifying earnings that week.”

That may all sound a bit complicated so by way of an example, if weekly pay is £1,000, and there are no other variables, then in the week prior to Christmas £3,000 would be paid, but we would still expect contributions to be based on

  • (£815 – £112) x 3 weeks x 2% = £42.18

and not

  • (£815 – £112) x 1 week x 2% = £14.06

It is also worth noting that an unintended action resulting from this aggregated pay may be that this has the effect of changing the workers status to a non-eligible or eligible jobholder. Again the Regulator says:

This is covered in Detailed Guide No 3 paragraph 109, which reads as follows:

“Many employers will enter into administrative pay arrangements to pay salary in advance, for example, holiday pay arrangements or arrangement for advances of salary to new starters. Such administrative arrangements do not negate the fact that although the salary was paid in one period, it was due to be paid in a different period.”

This means that the assessment is based upon the regular weekly earnings that would have been paid. It is important that whoever is carrying out the worker assessment and calculation of contributions is able to make the required separation, even if by way of a workaround.

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About Author

Steve Brice

Steve has over 20 years of experience in providing financial advice, particularly on pensions and employee benefits strategy. Steve is senior consultant with LP Auto Enrolment Solutions, a Bristol-based firm specialising in advising businesses on how to successfully implement auto enrolment. He is also Co-Chair of Bristol Friends of Auto Enrolment group, an organisation set up by the Chartered Institute of Payroll Professionals to help auto enrolment specialists share their knowledge, discuss issues and provide the best quality auto enrolment solutions for employers. Steve can be contacted at LP Auto Enrolment Solutions Ltd on steve.brice@lpaes.co.uk or visit www.lpaes.co.uk

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