Closed consultation

(Draft) Explanatory Memorandum to The Income Tax (Pay As You Earn) (Amendment) (No. ***) Regulations 2024

Published 14 March 2024

1. Introduction

This Explanatory Memorandum has been prepared by HM Revenue and Customs (HMRC) and is laid before the House of Commons by Command of His Majesty.

2. Declaration

Nigel Huddleston, Financial Secretary to the Treasury at HM Treasury confirms that this Explanatory Memorandum meets the required standard.

Zoë Nettelfield and Declan Norris, Deputy Directors for Strategic Data Policy at HMRC, confirm that this Explanatory Memorandum meets the required standard.

3. Contact

For queries about the instrument please contact Colin Connor at HMRC.

Part One: Explanation and context of the instrument

4. Overview of the instrument

What does the legislation do?

This instrument is one of a package of 2 statutory instruments, with the objective of improving the quality of the data collected by HMRC to provide better outcomes for taxpayers, as well as improving compliance, resulting in a more resilient tax system.   

These regulations specify additional information about employees’ hours, which employers are required to include in Real Time Information (RTI) returns which they are required to make and deliver to HMRC. 

Where does the legislation extend to, and apply?

The extent of this instrument is the UK.

The territorial application of this instrument is the UK.

5. Policy context

What is being done and why?

Whilst HMRC currently collects information on employee hours through the RTI system, that information was originally designed to assist with eligibility decisions for Working Tax Credits. This works well for the purpose for which it was designed but the data is not sufficient to support improved compliance or better targeting of tax administration and policy interventions. Updating and improving the information provided to HMRC on employee hours will provide better outcomes for taxpayers, as well as improving compliance, resulting in a more resilient tax system. 

From April 2025, employers completing RTI returns will be required to provide HMRC with the number of hours paid for each employee within that pay period where that information is held. Where that information is not held, employers will be required to provide the reason with reference to a specific description set out in the regulations.

This instrument will result in HMRC receiving improved information on how many hours each employee has been paid for within an RTI period, allowing HMRC to more easily identify underreported earnings. This improved data will also support HMRC’s upstream compliance approach to positively influence changes in customer behaviour, supporting customers to get their tax right first time. 

What was the previous policy, how is this different?

HMRC did not hold sufficiently detailed information on employee hours for all employees. Under paragraph 21 of schedule A1 to the Income Tax (Pay As You Earn) Regulations 2003 (PAYE Regulations), employers have been required to submit this data to HMRC through the RTI return in the form of bands related to the number of hours (A to D). For workers on zero hours contracts, or anyone else without regular working patterns, employers could select a fifth band, (E), for ‘other’. This meant that HMRC had no information on their hours.  

Employers will now be required to report the total number of hours paid for each employee in a numerical format per pay period for which an individual RTI return is made. This new figure for employee hours will depend on whether the employee is paid an hourly rate of pay, or via a contract which specifies a number of hours or a combination of the two in some cases. For example, for an employee whose contract specifies a number of hours, the employer will report the number of hours in the contract for that pay period. If that employee has worked any additional paid hours in overtime in that pay period, then the reported hours will also need to include the number of overtime hours paid for.

Where all or part of a payment to an employee does not result in any hours data, employers must now tell HMRC the reason by selecting one or more relevant descriptions from a list which they should report on the RTI return.

The list of descriptions is:

• statutory payments paid through payroll such as Statutory Sick Pay
• taxable Benefits in Kind such as a company car or other employee benefit processed through payroll instead of reported to HMRC at the end of the tax year
• redundancy payments and similar termination payments made when an employment ceases
• employees who are paid by measure of output (eg piece work, activities undertaken)
• officeholders such as directors or public positions not subject to contractual terms mentioning hours worked

6. Legislative and legal context

How has the law changed?

This instrument replaces the existing information requirement at paragraph 21 of schedule A1 with 2 new requirements:

The number of hours the employee has worked in respect of the payment to be included in the return.

In certain cases, a description of the nature of all or part of the payment must be provided. 

Why was this approach taken to change the law?

Employers are already required to provide data on the hours their employees work, as specified in the PAYE regulations. The most straightforward approach for employers to provide the new data was to amend the PAYE regulations.

7. Consultation

Summary of consultation outcome and methodology (to be completed after the technical consultation).

8. Applicable guidance

Guidance will be updated ahead of this measure coming into force in April 2025.

Part 2: Impact and the Better Regulation Framework

9. Impact assessment

A full Impact Assessment is submitted in draft with this memorandum and published alongside draft statutory instruments.

Impact on businesses, charities and voluntary bodies

This measure is expected to have an impact on businesses who will be required to submit information to HMRC from April 2025. There is no significant impact on charities or voluntary bodies. 

This measure will have no significant impact on the public sector – see the (Draft) Statutory Instruments impacts published as part of this consultation.

This measure will have no significant impact on small or micro businesses – see the (Draft) Statutory Instruments impacts tax information and impact note published as part of this consultation.

10. Monitoring and review

What is the approach to monitoring and reviewing this legislation?

The measure will be monitored and reviewed alongside other measures in the government’s wider package for data collection and sharing changes.