ESM10033B - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: how to calculate statutory payments

A worker may receive some earnings that have been subject to deductions under the off-payroll working rules and some that have not. When establishing statutory payment entitlement all earnings in relevant periods are considered, so both off-payroll working income and non-off-payroll working income should be included in those entitlement considerations

This guidance page sets out steps to take to calculate a worker’s statutory payment entitlement where the worker’s intermediary has received amounts net of income tax and NICs. Please see ESM10033A to understand the principles of when the worker’s entitlement to statutory payments arises.

Background

Payroll software will all broadly use similar steps to calculate statutory payment entitlement using payment information already held within the software. This means the first step is for payments subject to Class 1 National Insurance contributions to be made through the software. This could be payments such as salaries, bonuses or commission.

Payroll software calculates statutory payment entitlement by using the gross earnings subject to Class 1 NICs from a relevant period. The relevant period used is dependent upon which statutory payment is being claimed. The software uses the total gross earnings subject to Class 1 NICs in the relevant period to calculate average weekly earnings to identify statutory payment entitlement, providing other qualifying conditions are met. If a person has the requisite average weekly earnings, the software will calculate the level of statutory payment to pay to the individual.

As explained in ESM10033A, when off-payroll working income is paid to a worker’s intermediary, it is already net of tax and NICs. Therefore, no further deductions of tax and NICs should be made when off-payroll working related payments are made to a worker by their intermediary. As a result, payroll software will not automatically include these payments as earnings in the relevant period for statutory payment purposes. The worker’s entitlement however should include all gross amounts of earnings subject to Class 1 NICs paid in the relevant periods. This guidance page is aimed at highlighting the process to be followed to ensure that consideration is given to the gross amounts when only net amounts of off-payroll working income will be processed within the payroll software.

Earnings period for off-payroll working income

The point at which the deemed employer makes the deemed payment to the worker’s intermediary for the worker’s services under the off-payroll working rules does not determine the earnings period for statutory payment entitlement. This is because statutory payment entitlement arises with the worker’s intermediary, not the deemed employer. Equally, the point in time when the worker’s intermediary receives payment for the services provided by the worker does not decide the earnings period. This is a payment to another business, so it cannot determine the earnings period for the worker.

To be entitled to statutory payments, sufficient earnings subject to Class 1 NICs must be paid in the relevant period. As the worker’s entitlement to statutory payments arises from their employment with their own intermediary and not with the deemed employer, the earnings period for statutory payment purposes will be determined by when their intermediary makes payments of earnings to them. This is the case even though those payments will be made net of income tax and NICs.

NOTE – Non-taxable and non-NICable payments will be reported in data item 58A on the Full Payment Submission (FPS) submitted by the worker’s intermediary. This is solely a consequence of the amounts being non-taxable and non-NICable. The key principle is that for statutory payment entitlement to arise, payments of earnings must be made by the worker’s intermediary, even though these payments will be net of income tax and NICs. If a worker choses to remunerate themselves solely by way of dividends, entitlement to statutory payments will not arise. See ESM10033A for further detail.

Finding out gross income for off-payroll working engagements

In each of the options listed below, the amount of gross earnings subject to Class 1 NICs for off-payroll working engagements must be identified to ensure all qualifying earnings are included when determining eligibility. In most cases this amount will be known to the worker as the deductions will be shown on any payslips, remittance notices or other payment documentation received.

If none of these documents were received, or those documents did not contain amounts of deductions already suffered, then the worker will need to seek that information from the deemed employer. The deemed employer’s payroll software will hold this information, so they should be able to provide it.

Once the deductions are known, they can be attributed to the relevant net amounts paid through payroll relating to off-payroll working engagements when considering the processes set out below.

If the worker’s intermediary receives amounts for off-payroll working engagements, then only pays part of that as a net amount to the worker, a just and reasonable apportionment must be made when attributing the tax and NICs paid on that net amount.

For example, Quinn Ltd receives a net payment of £1000 relating to an off-payroll working engagement, where Quinn provided his services to a client through Quinn Ltd. This £1000 has already suffered tax of £200 and NICs £120, so the gross amount was £1,320. Quinn Ltd pays Quinn £500, 50% of the amount received and retains the other £500. When determining what gross amount should be used for the £500 paid to Quinn, a just and reasonable apportionment may be to apportion £100 tax and £60 NICs to it, this being 50% of tax and NICs deducted. The resulting gross amount to use in statutory payment calculations would be £660.

The remaining £500 (£660 gross) which has not been taken as earnings cannot be included in the calculations for statutory payments.

NOTE - If a worker received net amounts from their intermediary that were previously subject to tax but not Class 1 NICs, these would not be included in statutory payment calculations. This would need to be taken into account if any just and reasonable apportionment was made.

Working out statutory payment entitlement including off-payroll working income

This section explains 3 different ways the gross amount of off-payroll working income can be taken into consideration when calculating statutory payment entitlement. The functionality of the payroll software in use will determine which of these options can be used. Workers will therefore need to check the payroll software being used by their intermediary and use the option below that works for them.

1 – Total gross pay subject to Class 1 NICs for the relevant period can be overwritten

To calculate average weekly earnings and identify any entitlement to statutory payments, first the total gross pay for the relevant period must be calculated. Whilst the payroll software will automatically calculate the total gross pay, this will not include the gross amounts of off-payroll working income. This option involves manually calculating what that total gross pay is to include income from engagements both within the off-payroll working rules and outside the rules, and typing it into the payroll software so it can calculate the entitlement. The steps would be:

1. Find out any net payments made by the worker’s intermediary to the worker that relate to off-payroll working engagements within the relevant period and attribute the relevant amount of tax and NICs already paid on those amounts to come to the gross figure as explained above.
2. Find out gross income NICs paid in the relevant period by the worker’s intermediary that do not relate to the off-payroll working rules. This could include, amongst others, any salary, wages, bonuses or commission. This information would be within the intermediary’s payroll software.
3. Add the figures from steps 1 and 2 together to get a total amount of gross pay for the relevant period.
4. When entering statutory payment details into the payroll software, overwrite the total gross pay figure for the relevant period within the payroll software.
5. Complete all the other relevant fields the software requires to enable it to calculate statutory payment entitlement, for example, expected date of childbirth when considering SMP.
6. The payroll software will now use this new gross pay figure to calculate average weekly earnings, as well as considering other qualifying criteria, to see if the worker is entitled to the statutory payment. If the worker is entitled, the payroll software will calculate how much the worker should be paid.

NOTE – Some payroll software may only allow the average weekly earnings figure to be overwritten rather than the total gross pay for the relevant period. If this is the case, take the calculated gross earnings for the relevant period and work out the average weekly earnings (see SPM170000 for detail), then overwrite this figure instead.

Example

NOTE - Even though this example uses Statutory Maternity Pay to demonstrate the principles laid out above, the same principles are applicable to any statutory payment type.

Consortium Ltd engages with Martha Ltd to provide the services of Martha. Consortium Ltd determines the engagement to be within the off-payroll working rules. Martha Ltd receives £1,360 from Consortium Ltd net of income tax and NICs. The remittance notice confirms £400 income tax and £240 NICs were deducted.

Martha is taking maternity leave and is being paid SMP by her intermediary. In the qualifying period for SMP Martha is paid a non-taxable and non-NICable payment of £1,360 in relation to the off-payroll engagement and also a further £2,000 in salary relating to engagements outside of off-payroll working. As the total gross pay subject to Class 1 NICs for the qualifying period must be considered, this would be £4,000. This £4,000 includes:

• £1,360 paid net to Martha by Martha Ltd
• £640 (£400 tax plus £240 NICs) deducted under the off-payroll working rules by Consortium Ltd
• £2,000 salary paid to Martha by Martha Ltd

£4,000 should be overwritten in the total gross pay for the qualifying period box within the payroll software so this amount is used when calculating SMP entitlement.

2 – Final statutory payment amount to be paid can be overwritten

This option involves manually determining whether a worker is entitled to statutory payments and if they are entitled, calculating the amount of any statutory payment that should be paid. It will include determining the total gross pay subject to Class 1 NICs for the relevant period and then calculating the entitlement. The software is being told an amount to pay rather than calculating this amount itself based on average weekly earnings. The steps would be:

1. Find out any net payments made by the worker’s intermediary to the worker that relate to off-payroll working engagements within the relevant period and attribute the relevant amount of tax and NICs already paid on those amounts to arrive at the gross figure as explained above.
2. Find out gross income paid in the relevant period by the worker’s intermediary that do not relate to the off-payroll working rules. This could include, amongst others, any salary, wages, bonuses or commission. This information would be within the intermediary’s payroll software.
3. Add the figures from steps 1 and 2 together to get a total amount of gross pay for the relevant period.
4. Either use Basic PAYE Tools, HMRCs statutory payment calculators or another statutory payment calculator to work out whether the worker is entitled to statutory payments and if they are, what the payment should be. Alternatively, work out entitlement manually following HMRCs published guidance under the relevant statutory payment here.
5. When entering statutory payment details into the payroll software, overwrite the statutory payment entitlement figure within the payroll software to tell the software what to pay.

Example

NOTE - Even though this example uses Statutory Maternity Pay to demonstrate the principles laid out above, the same principles are applicable to any statutory payment type.

Using the figures from the option 1 example above where the gross earnings subject to class 1 NICs in the relevant SMP period are calculated at £4,000.

Martha uses HMRC Basic PAYE Tools SMP function to work out that she is entitled to SMP and during the maternity pay period she is due £450 SMP for the first 6 weeks and £151.97 for the following 33 weeks.

Within Martha Ltd’s payroll, Martha manually enters how much SMP she is entitled to, to tell the software how much to pay. Martha is then paid SMP in line with those amounts.

3 – Additional box in payroll software where gross off-payroll working income can be added to non-OPW income for the relevant earnings period

To calculate average weekly earnings and see if entitlement exists for statutory payments, first the total gross pay subject to Class 1 NICs for the relevant period must be calculated. This option involves finding out what the gross pay for off-payroll working engagements is and entering this into a separate box specifically for this purpose within the payroll software. The payroll software then adds the gross pay for off-payroll working engagements (entered into that box) to any engagements not related to off-payroll working picked up automatically by the software to arrive at the total gross pay for the relevant period. The software can then calculate whether the worker is entitled, and if they are, how much to pay. The steps would be:

1. Find out any net payments made by the worker’s intermediary to the worker that relate to off-payroll working engagements within the relevant period and attribute the relevant amount of tax and NICs already paid on those amounts to come to the gross figure as explained above.
2. When entering statutory payment details into the payroll software, type the figure from step 1 into the ‘off-payroll working income’ box within the payroll software.
3. Complete all the other relevant fields the software requires to enable it to calculate statutory payment entitlement.
4. The payroll software will then add the off-payroll working income to any income not related to off-payroll working picked up automatically to calculate the average weekly earnings for the relevant period to determine whether the worker is entitled to statutory payments. Then if they are entitled, calculate how much to pay.

Example

NOTE - Even though this example uses Statutory Maternity Pay to demonstrate the principles laid out above, the same principles are applicable to any statutory payment type.

Using the figures from the option 1 example above where the gross earnings subject to class 1 NICs in the relevant SMP period are calculated at £4,000.

Martha Ltd’s payroll software should pick up the £2,000 salary paid to Martha automatically when calculating total gross earnings in the relevant period. Within the box for off-payroll working income, Martha then types in £2,000. This relates to the gross equivalent of the £1,360 she was paid net, with the £400 tax and £240 NICs added back. The total of £4,000 is then used by the software when calculating SMP entitlement.

RTI reporting

The full payment submission (FPS) should be submitted as normal by the worker’s intermediary on or before payday. The FPS will report to HMRC the statutory payments that have been made. As the worker will have taken payments through payroll, even though these were paid net, HMRC will have the information it needs to do business as usual checks for any statutory payments made.

An Employer Payment Summary (EPS) should also be submitted as normal to declare amounts of statutory payments that will be recovered by the worker’s intermediary. If there is not enough PAYE owing to HMRC in a period to offset amounts to be recovered, for example if all income is off-payroll working income and taxed by the deemed employer, a refund can be sought from HMRC to claim recovered amounts or advanced funding can be sought (see SPM180600 for further information).