Deduction of PAYE from holiday pay

Who is responsible?
A solicitor assists employees in recovering unpaid holiday pay from current or former employers on a no win/no fee basis. He recovers his fee from any payment made
A client of ours is a solicitor and has recently started a new service helping employees claim holiday pay from their employers who, for one reason or another, have failed to make the due holiday payment.
The solicitor charges his clients on a no win/no fee basis. Once his work is completed and any unpaid holiday pay has been recovered from the employer, this is mandated to be paid to his firm under the arrangement he has with his client. The employer therefore pays the solicitor, who takes a percentage fee from the holiday pay.
Is the solicitor obliged to deduct PAYE before he pays the net of commission amount to his client? And, if so, can he first offset his commission?
Does it make any difference if the employee has already left the employment and finally, out of interest, should the employer/former employer deduct PAYE before paying the solicitor the outstanding holiday pay? Naturally, our client is keen not to fall foul of any PAYE obligations.
Readers’ thoughts would be very much appreciated here.
Query 18,255 – Working Man
Reply from David Kirk, author of Employment Status – the Tax Rules
The Income Tax (Pay As You Earn) Regulations SI 2003/ 2682, Reg 21 specifies, “On making a relevant payment to an employee during a tax year, an employer must deduct or repay tax in accordance with these regulations by reference to the employee’s code, if the employer has one for the employee.”
On the face of it, this would indicate that the payment from the employer to the solicitor was not covered, because PAYE would only apply to payments “to an employee”.
However, it probably is covered: the solicitor would normally be the agent of the employee for this purpose, in which case the payment is treated as being made to the employee under the laws of agency.
If the solicitor does receive the pay gross, he is under no obligation to deduct PAYE from the payment. He is not the employer’s agent or intermediary, but the employee’s, and this particular payment therefore does not come within the PAYE regulations.
While the payment is one of PAYE income, and thus a “relevant payment”, it is received by the employee in their capacity as employee and therefore only subject to deduction of PAYE if paid by the employer or someone paying on their behalf. The High Court judgment in R oao Oriel Support Ltd v HMRC [2008] EWHC 1304 (Admin) goes into this in some detail, if somewhat confusingly.
There are some special rules in the PAYE regulations for holiday pay, but these do not apply here. They are aimed at holiday pay funds, and require the payment to be “in exchange for a voucher, stamp or similar document”.
The situation is no different if the employee has left, except that code 0T should be used if the P45 has already been issued, on a week 1/month 1 basis, using the normal payment interval non- cumulatively.
The situation with National Insurance is somewhat simpler: liability arises when earnings are paid “to or for the benefit of an earner” (SSCBA 1992, s 6). This covers the payment to the solicitor. SSCBA 1992, s 7 specifies the employer to be responsible for the employer’s contribution, and SSCBA 1992, Sch 1 para 3 specifies the employer to be responsible for the employee’s contributions.
If the employee has left, then HMRC’s booklet CWG2 says that “for an irregular sum, such as accrued holiday pay” National Insurance should be applied using a weekly earnings period.
Categories:  Income Tax [1] Tax Topic Tags:  Forum & Feedback [2] [3] [3] [3] [3] [3]
Source URL:
Links: [1] [2] [3]

On September 11, 2012, posted in: Articles by