Ask the Expert: How to avoid underpayments during a UK ‘Week 53’ tax year?

As I am sure you know, the UK’s tax year runs in complete weeks, starting on 6 April. In a non-leap year, the fact that we have 52 weeks of seven days means that the tax year actually ends on 4 April. So if an employee is paid in multiples of weeks (that is, weekly, fortnightly or four-weekly), there will be some tax years in which there are:

• Fifty three weekly paydays instead of 52;
• Twenty seven fortnightly paydays instead of 26;
• Fourteen four-weekly paydays instead of 13.

In 2019, 4 April is a Thursday, which means you are correct - we are looking at a ‘Week 53’ scenario here. It is clear you are aware of the implications of this situation: that you will be subject to 53 paydays in 2018/19 rather than the normal 52. This means that:

• Because there will be 53 payments during the tax year, Pay as you Earn (PAYE) will treat 5 April as an additional week in terms of calculating income tax and National Insurance;
• As all income tax codes are operated on a non-cumulative basis, taxpayers will be given an additional week’s Personal Allowance;
• Because taxpayers are entitled to only 52 weeks’ Personal Allowance, an extra one in Week 53 means they will receive too many. As a result, they will end up underpaying income tax;
• If Her Majesty’s Revenue & Customs (HMRC) evaluates an individual’s salary and related tax payments, they will send out a demand for the amount of tax underpaid, or adjust their tax code for the following year.

It is the final point that employers understandably become concerned about - or should do. Although they may have undertaken PAYE procedures as directed by HMRC – see the CWG2 ‘Further Guide to PAYE’  - by assigning employees an additional week’s allowance, staff end up inadvertently underpaying their income tax. 

Conversely, if an employee is on a ‘K’ code, it means an additional week’s pay adjustment is required, which could lead to them overpaying.

So with all of this potential for tax under- and overpayment, the question becomes, what is the point of giving additional allowances in a Week 53 situation? Simply put, it is about smoothing net pay, that is, ensuring staff do not have some weeks in which their wages vary significantly due to the amount of tax they pay.

Another anomaly though is that HMRC will not necessarily notice that everyone undertaking an assessment or receiving a P800 tax calculation form has under- or overpaid their tax. HMRC advises that a P800 is only issued if a taxpayer:

• Finished one job, started a new one and was paid by both employers in the same month;
• Started receiving a pension at work;
• Received Employment and Support Allowance or Jobseeker’s Allowance.

A P800 will not be issued if a taxpayer is registered for Self-Assessment.

Mitigating actions

All employers in a Week 53 (54 or 56) situation face a dilemma caused by two conflicting issues: They are obliged to operate Week 53 (54 or 56) in accordance with HMRC’s instructions to ensure net pay smoothing, but doing so may result in an employee under- or overpaying income tax

As a result, it is important for employers and payroll departments to put themselves in an almost defensive position:

1. Ensure you are aware of the correct processes

Although it may lead to tax under- or overpayments, it is perfectly acceptable and 100% correct that the payroll department operates Week 53 as per HMRC’s guidance. This means the extra pay adjustment is given to employees, as above, and you flag the situation on your Full Payment Submission (FPS) report. There is extensive coverage of what this scenario entails in the CWG2,  but also be sure to check whether your payroll software includes the appropriate functionality.

2. Communicate with staff

Staff should be made aware that a Week 53 scenario is going to take place and what its possible consequences will be. You also need to make it clear that you are doing everything required to deal with the situation. Because the position is a difficult one for both the payroll department and taxpayers, it always helps to communicate what is happening as early as possible.

Ian Holloway is head of legislation and compliance at Cintra HR and Payroll Services.  He was involved in processing payrolls large and small from organisations across all sectors until 2011 when he started helping to educate the profession by developing course material, newsletters and face-to-face presentations.

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As I am sure you know, the UK’s tax year runs in complete weeks, starting on 6 April. In a non-leap year, the fact that we have 52 weeks of seven days means that the tax year actually ends on 4 April. So if an employee is paid in multiples of weeks (that is, weekly, fortnightly or four-weekly), there will be some tax years in which there are:

• Fifty three weekly paydays instead of 52;
• Twenty seven fortnightly paydays instead of 26;
• Fourteen four-weekly paydays instead of 13.

In 2019, 4 April is a Thursday, which means you are correct - we are looking at a ‘Week 53’ scenario here. It is clear you are aware of the implications of this situation: that you will be subject to 53 paydays in 2018/19 rather than the normal 52. This means that:

• Because there will be 53 payments during the tax year, Pay as you Earn (PAYE) will treat 5 April as an additional week in terms of calculating income tax and National Insurance;
• As all income tax codes are operated on a non-cumulative basis, taxpayers will be given an additional week’s Personal Allowance;
• Because taxpayers are entitled to only 52 weeks’ Personal Allowance, an extra one in Week 53 means they will receive too many. As a result, they will end up underpaying income tax;
• If Her Majesty’s Revenue & Customs (HMRC) evaluates an individual’s salary and related tax payments, they will send out a demand for the amount of tax underpaid, or adjust their tax code for the following year.

It is the final point that employers understandably become concerned about - or should do. Although they may have undertaken PAYE procedures as directed by HMRC – see the CWG2 ‘Further Guide to PAYE’  - by assigning employees an additional week’s allowance, staff end up inadvertently underpaying their income tax. 

Conversely, if an employee is on a ‘K’ code, it means an additional week’s pay adjustment is required, which could lead to them overpaying.

So with all of this potential for tax under- and overpayment, the question becomes, what is the point of giving additional allowances in a Week 53 situation? Simply put, it is about smoothing net pay, that is, ensuring staff do not have some weeks in which their wages vary significantly due to the amount of tax they pay.

Another anomaly though is that HMRC will not necessarily notice that everyone undertaking an assessment or receiving a P800 tax calculation form has under- or overpaid their tax. HMRC advises that a P800 is only issued if a taxpayer:

• Finished one job, started a new one and was paid by both employers in the same month;
• Started receiving a pension at work;
• Received Employment and Support Allowance or Jobseeker’s Allowance.

A P800 will not be issued if a taxpayer is registered for Self-Assessment.

Mitigating actions

All employers in a Week 53 (54 or 56) situation face a dilemma caused by two conflicting issues: They are obliged to operate Week 53 (54 or 56) in accordance with HMRC’s instructions to ensure net pay smoothing, but doing so may result in an employee under- or overpaying income tax

As a result, it is important for employers and payroll departments to put themselves in an almost defensive position:

1. Ensure you are aware of the correct processes

Although it may lead to tax under- or overpayments, it is perfectly acceptable and 100% correct that the payroll department operates Week 53 as per HMRC’s guidance. This means the extra pay adjustment is given to employees, as above, and you flag the situation on your Full Payment Submission (FPS) report. There is extensive coverage of what this scenario entails in the CWG2,  but also be sure to check whether your payroll software includes the appropriate functionality.

2. Communicate with staff

Staff should be made aware that a Week 53 scenario is going to take place and what its possible consequences will be. You also need to make it clear that you are doing everything required to deal with the situation. Because the position is a difficult one for both the payroll department and taxpayers, it always helps to communicate what is happening as early as possible.

Ian Holloway is head of legislation and compliance at Cintra HR and Payroll Services.  He was involved in processing payrolls large and small from organisations across all sectors until 2011 when he started helping to educate the profession by developing course material, newsletters and face-to-face presentations.

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