Employee Tax Refunds Through the Payroll

Employee Tax Refunds Through the Payroll

Many employers are concerned about the cost of ‘paying’ employees tax refunds through the payroll. We are therefore going to explain below why this is NOT a cost to you, but to HMRC.

As an employer it is your legal obligation to deduct the correct tax, National Insurance, and any relevant student loan from your employees’ salaries and pay this over to HMRC.

This money is deducted from the employee’s gross pay and therefore is a cost to the employee.

There is also a separate cost for employer’s National Insurance that is a cost to the employer.

If HMRC issue a new tax code that generates a refund to the employee, you are required to pay this to the employee.

You recover the full cost of the tax refund from HMRC by reducing the amount of PAYE you pay over to HMRC.

If the amount due to the employee is more than the amount of PAYE due, you can apply for funding from HMRC.

HMRC will then issue a payment to cover the tax refund.  However, HMRC funding is only available if your PAYE bill for the year will be less than the tax refund due.

As the tax refund reduces the PAYE liability due to HMRC, the payment you make to your employee for the tax refund replaces the payment you would have had to have made to HMRC for your PAYE liabilities. Therefore, does not cost the employer at all.

Please be aware that failure to give your employee the tax refund they are due, could result in penalties from HMRC.