Avoiding unexpected costs with casual staff

August 5th 2022

You are about to take on some temporary workers over the next couple of months. But what do you need to do to ensure that the tax and NI bill is kept to a minimum? Head of Payroll Joanne Gibson takes a closer look.

When HMRC introduced real time information reporting for payroll data, the rules for temporary and casual workers changed. Until then HMRC had given employers leeway to not apply the full PAYE rules for very short term and casual workers. This concession was withdrawn, with the exception of farmworkers. This does not prevent businesses from using casual labour, but it can lead to tax and NI problems in cases where they are paid cash in hand, i.e. you agree to pay an after tax and NI amount.

If a worker is not supplied through an agency or other third party and carries out the work on a self-employed basis, PAYE tax and NI do not apply to their pay. If you go down this route, make sure you agree terms of work that do not create an employer-employee relationship otherwise HMRC can hold the business liable for the PAYE tax and NI that ought to have been deducted from the worker’s pay.

Paying a worker (whether temporary or permanent) cash in hand means that you must work out the corresponding amount of pre-tax and NI pay. As you’ve agreed a net pay figure with the worker (which is a contractual obligation) you must pick up the cost for the tax and NI (employees’ and employers’). This can be costly.

Happy Days Ltd takes on two students for three weeks, at £260 each per week, to carry out some tidying of the grounds around its premises over the summer. This doesn’t give the business sufficient time to tackle the usual tax paperwork before it pays the students. In fact, it never receives the new starter checklist from either student. Naturally, the students don’t think it’s very important. However, for Happy Days, the consequence of not obtaining the checklists is more significant as these calculations show.

The total cost of tax and NI for the two temporary workers over three weeks is £640.68. This has increased the cost of temporary summer labour by 41%, from £1,560 to £2,204. If Happy Days had obtained completed starter checklists from the students the tax and NI bill could be reduced to as little as £139, thus lowering the overall cost of the labour to £1,753. That’s a saving of £451.

You should tell temporary workers that they won’t get paid until they complete and return the starter checklist . It’s a simple two-page form and it can be completed within a few minutes. A simpler solution is not to pay temporary or casual workers on a net pay basis. Instead, agree a figure for gross pay so that the tax and NI comes out of their pocket instead of the company’s.

Paying workers a cash in hand amount leaves a company liable for all of the tax and NI (employees and employers) on their pay. This could increase the cost of labour significantly. To reduce or avoid the extra cost, tell the worker that they won’t get paid until they’ve completed HMRC’s starter checklist, or alternatively agree a pre-tax and NI (gross) wage.

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