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HMRC internal manual

PAYE Manual

PAYE operation: payments for PAYE purposes: holiday pay

Holiday pay paid by employers

Employers must include in gross pay all holiday pay that they pay to their employees. The Employer Further Guide to PAYE and NICs (CWG2) tells employers how to operate PAYE. If an employee receives two or more weeks pay at once before a holiday and no pay in the holiday weeks, PAYE will normally be worked out at the last week in which no pay is received.

Holiday pay after employee has left

Employers who pay holiday pay to an employee who has left should not issue an amended or additional P45. They should

  • Deduct tax at 0T on a Week 1 / Month 1 basis or S0T week 1/month 1 where the employee pays tax at the Scottish rate(s)
  • Enter details of the payment and tax deducted on the RT11 or pay records and enter 0T week 1/month 1 or S0T week 1/month 1 as the amended code

Further information about the Scottish rate of Income Tax is given at PAYE100035

Holiday Pay Stamp Fund schemes

In some industries, such as construction, employers contribute to Holiday Pay Stamp Fund schemes by buying stamps. The employer pays the employee’s holiday pay to the value of the stamps, operating PAYE in the usual way. The employer is then reimbursed by the fund.

If the employee leaves the employment or for any other reason the holiday pay is paid under an approved scheme by the fund itself, then the fund is responsible for deducting tax. This modified form of PAYE is allowed under the PAYE Regulations. The fund deducts tax at basic rate on any payment and gives the employee a Certificate of Tax Deducted.

The fund is treated as an employer for filing purposes and should submit a Full Payment Submission (FPS). The fund should enter the date of leaving on the final FPS. This is so that no new employment is created in NPS.

Deduction of tax from Holiday Pay Stamp Fund schemes is explained in the ‘Employer Further Guide to PAYE and NICs’ (CWG2).