Coronavirus: PAYE trap for employers introducing pay cuts

Employment tax expert Chris Thomas of Pinsent Masons, the law firm behind Out-Law, said: "PAYE liabilities for employers are calculated on the amounts which employees are entitled to. If the employer has not properly dealt with the formalities it could find itself still liable to HM Revenue & Customs (HMRC) for the PAYE on the full salary and not the reduced salary."

A number of businesses have been introducing pay cuts for employees earning over a certain amount to cut their costs as they cope with a downturn in business as a result of the pandemic.   

However, under most employment contracts the employer cannot unilaterally impose a pay cut or reduce the employee's hours - the employee has to consent to a change in their terms and conditions of employment.

"Timing is also important – any agreement to accept a lesser salary needs to be in place before the employee is entitled to receive their salary for the month," Chris Thomas said.

"In the current exceptional circumstances, HMRC may not actually take the point, but for businesses seeking to reduce their overheads, it makes sense to get the formalities right and comply with the strict letter of the law," he said.

"We would expect employers to ensure that the appropriate contract variation is put in place to record in writing the agreement to reduce salary," said employment expert Edward Goodwyn of Pinsent Masons.

"The amendment would need to be agreed with the employee and can be recorded by way of amending side letter or email. Where obtaining signatures is difficult in the lock down, a simple reply email or text confirming agreement will suffice," he said.

"Deemed consent may be sufficient, but advice should be sought not least in the light of the Treasury Direction issued on 15 April in relation to the Coronavirus Job Retention Scheme which suggests that under that scheme express consent is required. Employers should also ensure that the amending letters deals with the consequential impact of the pay reduction such as reduction in pensionable salary and other benefits," Goodwyn said.

The UK government has introduced the Coronavirus Job Retention Scheme to help employers retain staff who are temporarily not working due to the coronavirus outbreak. Under the scheme employers are able to 'furlough' workers and claim a grant from HMRC to cover 80% of the normal pay of furloughed employees up to a cap of £2,500. To place employees on furlough also needs agreement from the employee.

The Treasury Direction issued on 15 April to implement the CJRS says in relation to furloughed workers: “An employee has been instructed by the employer to cease all work in relation to their employment only if the employer and employee have agreed in writing (which may be in an electronic form such as an email) that the employee will cease all work in relation to their employment.”