Thinking of deferring that Christmas bonus?

In the last few years, it has been the prevailing convention that legislation affecting payrolls part way through a tax year has been unhelpful to employers, and yet we have another change less than four weeks away.

After chancellor Jeremy Hunt’s announcements in his Autumn Statement, MPs rushed a new NICs bill through the House of Commons on 30 November. This will see an estimated 27.3 million employees benefit in 2024/25 from reduced NICs as of 6 January 2024. 

As a result, employers may already be fielding questions from employees, particularly those paying discretionary bonuses in December. Some of these employees may be keen for their employers to defer these bonuses until after 6 January. However, it is not quite as straightforward a request as it may seem, with potentially a lot of work involved to ensure payroll payments are properly processed from 6 January onwards. 

Under the changes made in the new NICs bill, the main rate of employee NICs (class 1 primary) will be reduced to 10% (currently 12% on earnings between £12,570 and £50,270). No changes have been made to the rates of employer NICs (ie, class 1 secondary, class 1A on employer-provided benefits-in-kind and class 1B on PAYE settlement agreements). In addition, for directors, who are assessed to NICs on an annual basis, the class 1 NIC rate reduction results in a blended rate of 11.5% applying to the annual earnings period for the 2023-24 tax year. 

This all means that payroll software will need to be updated very quickly, putting pressure on payroll teams during an already busy period, with many shutting down over Christmas and opting to pay people early. No employer wants to be badged as Scrooge at this time of year and will therefore be keen to ensure that they are paying staff the correct amount from 6 January onwards. 

Employers should check that their payroll software has been reconfigured correctly. Has it been tested? What pay period will they have it operational from? Employee communication will therefore be key, particularly as weekly payrolls have an extremely tight turnaround time.

But what if the change can’t be implemented quickly enough? What will employers do? NICs are calculated on a pay period basis so capturing information about payroll adjustments should be robust. If employers are unable to update their payroll software before 6 January, HMRC will require them to rerun their payroll retrospectively for past periods where higher NICs rates have been incorrectly applied. 

Employees should therefore contact their employer for any refunds in the first instance. All this means employers are likely to have an increase in employee queries in January and February.