Payroll processing for furloughed employees due to COVID-19

[Joe]

If you cannot maintain your current workforce because your operations have been severely affected by Coronavirus (COVID-19), you can furlough employees and apply for a grant that covers 80% of their usual monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and pension contributions (up to the level of the minimum automatic enrolment employer pension contribution) on that subsidised furlough pay.

You can obtain further information and make a claim online through GOV.UK.

The link below will allow you to workout the amounts you may be able to claim and the figures you will need to enter on the claim form:

HMRC Coronavirus Job Retention Scheme calculator

Working out what you can claim

The total grant for employer National Insurance contributions cannot exceed the total amount of employer National Insurance contributions you are due to pay. Therefore, adjust the total amount of employer National Insurance contributions by subtracting any Employment Allowance claimed in each pay period, this information will be on your payroll monthly summary reports.

Employee taxes

Your employees will still pay the taxes they normally pay out of their wages. This includes pension contributions (both employer contributions and automatic contributions from the employee), unless the employee has opted out or stopped saving into their pension.

Processing monthly payroll

The monthly payroll would be processed as usual to pay your furloughed employee(s) either 100% of their gross salary (including 20% top up salary) or only 80% of their usual gross pay (using HMRC’s calculator to obtain the correct figure) with the relevant employee(s) marked as “furloughed”.

You cannot claim for:

• additional National Insurance or pension contributions you make because you choose to top up your employee’s wages
• any pension contributions you make that are above the mandatory employer contribution

Please see the following post for further information on entering the payroll journals and how to process reclaimed SSP due to COVID-19:

How to process payroll and SSP COVID-19 Reclaims

How to process the COVID-19 Job Retention Scheme Payment Grant received from HMRC

Using HMRC’s calculator for following example of a furloughed employee below:

• Fixed monthly gross salary of £3,226.00
• Claim period: 1 March 2020 to 31 March 2020
• Furlough period: Started 1 March 2020
• They are paid every month
• Their National Insurance category is A, B, C or J
• They receive employer pension contributions as part of an automatic enrolment pension scheme

The calculation results are as follows:

Total Grant claimed = £2,811.74, the breakdown is shown below:

METHOD 1: GRANT PAYMENT ALLOCATED TO INCOME:
The simplest method is to tag the payment received to ‘Miscellaneous Income’ as shown below:

METHOD 2: GRANT PAYMENT ALLOCATED TO SPECIFIC EXPENSES:
This method would be used to ensure that the grant claimed is allocated against the specific expense on the nominal code.

1. the above payment received would be tagged as ‘Something else not on this list’ to Gross Wages (7000), as follows:

2. Enter the following journals to allocate the Employer National Insurance contributions and Employer minimum pension contributions elements of the grant to the correct nominal codes:

The Chart of Accounts now shows the correct balances for the COVID-19 Job Retention Scheme Payment Grant received:

Once the payroll journals are entered, if not already done so, the nominal accounts will balance to Zero.

Using this method, at the Company’s year end your accountant will need to journal the grant received to ‘Misc Income / Grant Income’, therefore the following information can be provided to them and must be kept as confirmed by HMRC: After you’ve claim.

After you’ve claimed:
Once you’ve claimed, you’ll get a claim reference number. HMRC will then check that your claim is correct and pay the claim amount by Bacs into your bank account within 6 working days.

You must:

• keep a copy of all records, including:
  • the amount claimed and claim period for each employee
  • the claim reference number for your records
  • your calculations in case HMRC need more information about your claim
• tell your employees that you have made a claim and that they do not need to take any more action
• pay your employee their wages, if you have not already

[Andy_B]

This is great however how would one proceed if you are a director and also if your wages consisted of part furlough pay and part normal monthly PAYE pay, because you furloughed part way through the month?

Thanks in advance

[Paul_Courtier]

Being a director isn’t relevant. The same process would be followed. If you have no Employer ni then you ignore that part. But for part furlough claims you would follow this process and your usual process but obviously you would be entering two lots of data. One for the furlough and one for the topped up amount.

[manleyc]

Hi Paul, Thanks for the information.

I am a Director and only employee. I was going to try and process any payment, once received, as follows and would be grateful of you could let me know if you can see any issues.

1. I have applied for the grant for the periods 01/03/2020 to 30/04/2020 (2 months)
2. Once I get the payment I was going to post the amounts received to 7001 and 7006
3. I would then process my wages for the same amounts as normal.
4. As 5 April starts the new tax year, and I have already closed off last year with HMRC, I was going to process the March and April payments to April. They will then tally with the exact amounts received.

Would this work?

Chris

[daveh001]

On a slight deviation, we have already paid our employees from the Directors loan account so what would be the best way to tag that payment, clearly the Directors would want their loan paid back?

[Joe]

Run the payroll and mark the relevant employees as ‘Furloughed’, then enter the payroll journals as usual.

When the grant funds are received into the Bank from HMRC, repay the Directors and tag the payment to the DLA.

Pay the employees any balancing payments i.e. the difference from the amount paid to each employee and the net amount due to them, as calculated on the payroll software.

[Paul_Courtier]

In theory what you should do before closing the year off is create your payroll journal to show the salary expected to to be taken in March This will leave a balance in the nominals carried forward to the following year. Then when you receive the money you tag it to other income, and finally when you draw it out you tag it to paye so it reduces the balance.

And also do the same for April’s pay.
So two journals. One for March and one for April.

Dr Directors salaries
Cr net staff salaries paid
Cr p.a.y.e
Cr pension

The above assumes your settings are set to record salaries to the net salary nominal.

When you’ve received a payment tag it as other income. When you draw the salary out, tag it as net staff salary paid. When you pay your tax and ni tag that to p.a.y.e and again tag the pension payment to your pension nominal.

This will then clear the balance left at year end.
The advantage to this is you claim your salary as an expense in March but don’t actually take it till the jrs payment is made.

[daveh001]

Thanks - great response time

[Paul_Courtier]

@daveh001 @Joe I’m not 100% sure that is correct. The grant is taxable income. It should be registered as such before anything else. Even if it had gone directly to paying staff it would first be recorded as income from money in and then as a salary from money out.

With your method its just balancing the DLA with nothing touching the income side.
While they may both have the same net affect you have effectively reduced the turnover by the amount of grant which again is also incorrect.
And surely if there is available funds in a bank account there was no need to tag it as money from the DLA in the first place. It seems very odd to me that it would be done in this way.

I’m pretty sure hmrc will start compliance proceedings when this is all over with, and you may find they wouldn’t be happy with recording it the way it has been.

[daveh001]

Hi Paul, surely this ‘grant’ should not be considered ‘income’ as such, for the reason that the Gov has awarded that payment to pay directly to waged staff on Furlough at 80%, if it’s shown as ‘income’ then Corp tax would take another 20% from it??

[Paul_Courtier]

No it wouldn’t because it would be netted off by the employee salary payment so there’d be no tax. Its the turnover that would be wrong.

[Joe]

The above post is addressing the repayment of the DLA once the funds have been received into the bank, therefore this relates to tagging the actual repayment of the DLA once the funds have been repaid to the Director.

The actual receipt of the grant would be posted to ‘Miscellaneous Income’ as shown above in method 1 of the previous post.

As the grant can only be used for a specific purpose claimed, using method 2 provides a clear audit trail as the grant is allocated against the specific expenses it was provided for on the relevant nominal code.

Therefore, the taxable profits remain the same using either method.

[Paul_Courtier]

You can’t tag one entry twice. So either it’s tagged as a DLA repayment or its tagged as misc income. It can’t be both.

The issue isn’t taxable profit. The issue is your way it avoids even hitting misc income it’s tagged straight to the DLA and as a result understating turnover.

Grants are taxable income, regardless of whether there’s any tax to pay. Taxable income increases turnover. Grants received increase turnover.

[Joe]

It might be better explained with an example:

Money into Bank (Grant) = Tagged to misc income:

Money out of bank (Repayment to Director) = Tagged to Directors Loan Account:

[Paul_Courtier]

I think maybe we’re getting our wires crossed. Perhaps it’s the way I’m trying to explain myself.

I think I’ll just leave it there.

[daveh001]

Paul,

I understand what you are saying and that is correct, Joe is showing how the payment is ‘Tagged’, you are right that you can’t tag the same item twice, but from what I can see from Joe, the second part is the payment of the directors loan so that can be tagged and a separate item.

The whole way works as long as we can show that the Director, who paid the full wages, then receives the Furlough money back as repayment, the wages have already been paid on a separate entry.

Thanks to you both, this showed me the way.

[George_H]

There is an easy way to account for the JRS Grant when it’s received.

Simply tag it as miscellaneous income to a sales account for HMRC.

The HMRC say the JRS grant is another income which is taxable like your usual income from, say, bank interest.

It makes no difference if you have already paid some or all of the wages as your
Payroll is run the same way you usually do with the same tagging and/or journal entries.
However it must be for at least 80% of the furloughed employee(s) usual wages that you based your claim on, and this will ensure you use the grant income for wages.

HMRC say you must:
Keep a copy of all records, including:
the amount claimed and claim period for each employee.
Keep the claim reference number.
Keep your calculations in case HMRC need more information about your claim.
Tell your employees that you have made a claim and that they do not need to take any more action
Pay your employee their wages, if you have not already.