Extra day in February could trigger unexpected tax bills for weekly-paid workers with a 53-week pay cycle
In the 2023/24 tax year, there are 53 Thursdays and Fridays instead of the usual 52. This anomaly may affect individuals who are paid weekly, particularly those who receive payments on Thursday 4 or Friday 5 April, potentially leading to what's known as a 'week 53' issue, impacting their tax situation.
For individuals paid weekly on Thursdays or Fridays, the unique calendar layout of 2024 results in an extra pay packet, termed as a 'week 53 payment', by the end of the tax year on 5 April 2024.
While week 53 can also have implications for those paid bi-weekly or every four weeks, it does not affect monthly paid employees or those paid on Saturdays through Wednesdays, as there are only 52 instances of these days in the tax year.
Typically, the PAYE system aims to allocate all tax-free pay for a tax year by week 52. Nevertheless, to mitigate the impact of week 53 payments on take-home pay, HMRC instructs employers to provide an additional amount of tax-free pay, typically £242 for weekly paid employees, to offset any disparity.
However, this adjustment often results in individuals receiving more tax-free pay than the standard personal allowance for the year, leading to underpaid tax. HMRC may rectify this by issuing a P800 calculation after the tax year ends.
If an individual's earnings remain below the personal allowance by week 53, they should not encounter further tax liabilities. For those taxed at the basic rate of 20%, the underpayment due to the week 53 adjustment typically amounts to £48.40 (£242 @ 20%) or £96.80 for 40% taxpayers. It's worth noting that in Scotland, underpayment may vary due to differing tax rates.
HMRC usually collects underpayments by adjusting the tax code, enabling the owed tax to be recouped gradually through slightly higher tax deductions from future income.
Given that P800 calculations can occasionally contain errors, it's advisable to scrutinise them carefully. If an individual expects to receive a P800 but doesn't, it could indicate that the underpayment falls within HMRC's tolerance levels for the year.
Employees should be made aware that these tax bills are not a result of any payroll processing fault but rather stem from the inherent design of the system.