Pay reference period procedures
Changes to the legislation covering auto-enrolment came into force on 1 November last year. Mike Nicholas explains the implications of the change affecting PRPs
E
arly in 2013, the Department for Work and Pensions (DWP) held a consultation exercise on a range of proposals one of which was to amend the statutory definition of pay reference period (PRP) as it was giving rise to problems for employers and software developers. Amongst other things, it proved hard to match a payment of salary or wages to the relevant PRP for the purpose of assessing jobholder status and it also caused significant challenges for payroll systems when the earnings trigger and qualifying earnings bands changed. These earnings figures normally change from the start of a tax year (6 April) which would most likely fall part-way through a worker’s PRP. To make it easier for employers to use existing payroll processes the DWP proposed adding to the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010 an alternative definition of PRP. This alternative definition would run alongside the existing definition which would remain unchanged. From 1 November 2013, the alternative definition of PRP is available for the purpose of assessing whether a worker is to be auto-enrolled. It is, however, open to employers to continue with the pre- November 2013 provisions (‘the original definition’) or to adopt the alternative definition (‘the tax-period definition’). Furthermore, employers can choose to use the original definition for some workers
and the tax-period definition for others.
The original definition The original definition is aligned to the period by reference to which a person is paid their regular wage or salary. In the case of a person who is paid their regular wage or salary: l by reference to a period of a week, the PRP is a period of one week l by reference to a period longer than a week, the PRP is that period.
Example – Employee A receives a fixed basic salary which is paid monthly on the last working day of the calendar month. The payment relates to work done during the period from 1st of the month to the end of the month. The PRP for March runs from 1–31st March. The first day of the next pay reference period is 1 April.
The tax-period definition The tax-period definition is aligned to tax weeks or months. The PRP is whichever of the following is the longer: l a period equal in length to the usual interval between payments of the person’s regular wage or salary, or l the period of a week. Under this definition, the PRP commences: l on the first day of a tax month, if the person is paid monthly, or
...ALTERNATIVE DEFINITION WOULD RUN ALONGSIDE THE EXISTING DEFINITION...
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l on the first day of a tax week, if the person is paid weekly or the PRP is a week, or l if the person is paid at intervals of multiple weeks (or months), on 6 April and the first day of the tax week/month which commences immediately after the expiry of a pay interval period beginning on 6 April. (‘Pay interval period’ means a period which is equal in length to the usual interval between payments and each whole multiple of that period.) In the above, ‘tax month’ means the period beginning with the sixth day of a calendar month and ending on the fifth day of the following month; and ‘tax week’ means one of the successive periods in a tax year beginning on 6 April and every seventh day after that (so that the last day of a tax year or, in the case of a tax year ending in a leap year, the last two days is treated as a separate week). The tax-period definition provides for various situations which will occur at: l the end/start of tax years l the point an employer decides to move from using the original definition to the tax-period definition l the employer’s staging date. Each of these situations has its own implications.
End and start of tax years Under the tax-period definition the first PRP of the tax year must always start on 6 April.
But what is the rule to be followed where the previous PRP starts on 5 April (or 4 April, in the case of a leap year)? In most circumstances that PRP will end on 5 April (‘short PRP’), but ending it on 5
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