Average Pay Calculation
The Government updated its guidance on the 5th of April 2020 to include more detail about how to calculate average pay. Although the additional information is welcomed, there are still many unanswered questions about what should and should not be included, which still requires further clarification.
The main change in the guidance refers to payments that are contractual (possibly should be included) or discretionary (should be excluded). With this in mind, Fourth has provided an average pay figure based on basic pay only as it is impossible to know what payments are contractual or discretionary based on the data within the HR & Payroll system.
The following information shows the calculation used to display the average pay, as well as details of how to run customised reports if further payment types need to be considered.
For a list of all Covid-19 related articles, please see Fourth Products and Covid-19.
Employees with Variable Hours
The government guidance refers to an average pay calculation over the 2019/2020 tax year. There are still unanswered questions about what should or should not be included, however, Fourth have worked with payroll organisations and HMRC to provide an average calculation for our customers.
The average pay calculation shown within the Furlough page is calculated using the hours, holiday, and shifts that have been processed through payroll from 6th April 2019 until 29th February 2020.
The average calculation has been worked out as follows:
The calculation of the rate to be applied has been used so the average wage for the whole tax year is calculated. This is calculated using the number of days between 6th April 2019 and 29th Feb 2020 (330 days) or the employee start date and 29th Feb 2020, if the employee started during the tax year.
Next, the annual basic is calculated using the total calculated pay for the tax year to 29th Feb, multiplied by the rate to be applied.
Finally, the annual basic is divided by pay frequency.
Employee started in 2018 so has been employed for the whole tax year.
366 ÷ 330 = 1.109 (rate to be applied)
£10,000 (total calculated pay) x 1.109 = £11,090 (annual basic)
£11,090 ÷ 12 = 924.17 (monthly average pay)
Fourth has included any payments that have been paid to employees from 6th April 2019 to 28th Feb 2020 that make up a basic wage.
Fourth has not included other payments such as overtime, commission, fees, etc, because it is still unknown whether these payments are discretionary or contractual.
If payments are included and used to apply for the Job Retention Grant, HMRC may refuse to accept the application or decide to audit the payments, which may result in a request to repay the grant.
The government guidance states that the furlough payment should be for 80% of the employee’s salary, as of 28th Feb 2020, before tax.
Keeping within this guidance, the average pay calculation for salaried employees uses the annual salary ÷ the pay frequency.
Reporting on Different Payment Types
If an employer wants to include different payment types within the average pay, a customised report can be run to get details of payments paid within the 2019/2020 tax year.
- To run a custom report to get details of individual payments, go to Payroll > Reports > Custom Reports
- Select Create Template
- Enter a Template Name
- From the Report Type drop-down, select Payslip Data (Last Tax Year)
- Select Save
Fig.1 - Create Template
- On the following page, select the required criteria that will display the required payment types in the report
Fig.2 below shows an example of the fields that could be included.
Fig.2 - Custom report selection
- Please note: Ensure that PayslipElementID is selected when running the report. Without it, identical payment types, for some employees, may not report correctly
- Once all criteria are selected, select Next > Run Report
- On the following screen, enter 2019 next to TaxYear which will provide all payments made to employees within the 2019/2020 tax year
- Select Run
Fig.3 - Custom report selection
Once the report is run, it can be filtered to show the payment types that are required for the average pay calculation. It is possible to run the report for a specific payment type.
- To do this, when selecting the fields to be included, ensure that the condition next to PaymentDescription is set to LIKE
Fig.4 - Custom report Condition selection
- When the report runs, the name of the payment type can be entered into the PaymentDescription box so the report will only display payments with that word in the name
Fig.5 - PaymentDescription
For more information about customised reports, please see WFM - HR & Payroll Custom Reports
Pay from the Same Period Last Year
The latest government guidance also refers to using the employee’s earnings from the same period last year. The same rules, in terms of payments included, will apply.
There are several reports available that will show the details of the pay from the same period in 2019, including the custom report detailed above.
Other reports are:
Payroll Summary – Individual Pay Period
- Payroll > Reports > View Reports > Payroll Summary = Individual Pay Period
- Payroll > Reports > Exports > HMRC Reconciliation
- Payroll > Pay Run > Past Pay Run > Select payrun > Post Payrun Report
Customers who use Fourth Analytics can view average earnings according to specific requirements. For more information, please liaise with the relevant Fourth contact.
The average pay amounts shown within an employee’s furlough page is 100% of their pay. The Furlough Grant will only cover 80% of this amount so it’s important that only 80% of the amount is used to pay as a furlough payment.
Employers can choose whether to pay more than 80% but they will not be able to claim this 20% back from HMRC.