Farm payroll: Rules employers need to consider

Gone are the days when farmers only had to work out income tax deductions and national insurance contributions (NIC) before paying staff.

With pension auto-enrolment, new rules on holiday pay, student loan repayments and attachment of earnings orders in the mix, there is much more to consider.

Keeping up to date with the legislation can be challenging for businesses, says Richard Maitland, an employment tax partner at accountant and business adviser MHA.

Mr Maitland, MHA consultant Joanna Rose, and payroll manager Alex Scott-Ruddock, set out key areas that need to be considered.

See also: Staff matters – capability issues with long-standing employees

Pensions

Farm recruits aged 22 or over receiving an annual salary of at least £10,000 must be automatically enrolled into a pension scheme.

Under the statutory requirement of auto-enrolment, there is a minimum employer contribution of 3% and a 5% deduction from the worker’s pay.

Enrolment doesn’t have to start immediately – the business can have a reference period, such as three months after the job started.

The worker can opt out of making pension contributions via auto-enrolment but an employer must not coerce an employee into making that decision.

Employees who don’t want to pay into a scheme must be automatically re-enrolled every three years, but they can again opt out at this point.

There are also certain exceptions to the statutory requirement for auto-enrolment, set out on the gov.uk website.

National insurance

Businesses must pay Class 1 employer’s NIC at a rate of 13.8% on any employee’s earnings higher than £758/month.

For staff aged under 21, the business pays no Class 1 NIC on monthly earnings below £4,189, while above this threshold the 13.8% rate applies.

Minimum wage

Agricultural workers in England must be paid at least the minimum wage applicable to all workers.

Specific arrangements are in place in Wales, Scotland and Northern Ireland for agricultural workers; in some circumstances those workers must be paid more than general minimum wage rates. 

On 1 April 2023, significant increases to the minimum wage rates for all workers took effect.

The national living wage, paid to staff who are 23 or older, now stands at £10.42/hour, up from £9.50 – the biggest uplift to this rate since it was introduced in 2016.

The national minimum wage, which applies to younger staff, is £10.18/hour for 21-22 year olds and £7.49 for 18-20 year olds.

Farmers hiring apprentices and under-18s must pay those staff at least £5.28/hour.

Employers who pay at or near these thresholds must be careful to ensure that staff are getting what they are entitled to once certain reductions in pay are accounted for. For example, in pension salary sacrifice schemes, staff must receive a minimum wage net of those contributions.

Also, where staff are paid a salary rather than an hourly rate, care must be taken that long hours worked do not take them under the legal minimum hourly pay rates.

Holiday entitlement

Since July 2022, regardless of the number of hours worked, workers in the UK have been entitled to 5.6 weeks of annual leave or the equivalent in pay.

Also, holiday pay must be calculated on the employee’s average pay for the previous 52 weeks, which includes overtime, and not based on weekly pay for standard hours.

A recent decision by the Supreme Court in Harpur Trust v Brazel requires employers to calculate holiday entitlement for part-year workers in a similar fashion to that of full-time workers. 

This affects employees on a permanent contract but who work irregular hours and for only part of the year, part-time workers with no regular hours and workers on non-permanent, short- or fixed-term zero-hour contracts.

However, these new rules do not apply to part-time workers with regular hours.

Before the court ruling, it had been common practice to calculate the holiday entitlement on a pro-rata basis, using the “percentage method” to add 12.07% to earnings.

The changes have added significant cost to many businesses, including agriculture, where these contracts are relatively common.

Some employers are adopting a “wait and see approach” while the government considers a consultation, which closed on 9 March 2023 and could see new legislation introduced to set workers’ holiday pay and entitlement at a proportionate level to the number of hours worked in a year. 

MHA’s advice is to use the full 52-week reference period for now because failure to do so could result in employment tribunal claims for unlawful deduction of wages.

Attachment of earnings orders

An attachment of earnings orders (AEO) is an official form issued to an employer, usually by a court, instructing them to deduct an outstanding debt directly from an employee’s wages.

Attachments can be issued for several reasons including unpaid fines and child maintenance support.

A council or the Department for Work and Pensions can also issue a variation of this, a Direct Earnings Attachment (DEA), to recover overpayments of benefits or council tax debt.

An employer has a legal obligation to make the deductions from the employee’s net earnings until the balance is paid in full and to keep a record of each deduction.

Maternity, paternity and shared parental leave pay

Employees are entitled to up to 52 weeks’ maternity leave.

Employers must pay at least 39 weeks of maternity pay if an employee earns an average of at least £123/week and has worked for them for 26 weeks before the 15th week of their due date.

The first six weeks is paid at a rate of 90% of average weekly earnings before tax and the remaining 33 weeks at the statutory maternity pay (SMP) rate, which is £172.48 or 90% of the employee’s average weekly earnings, whichever is the lower.

An employer can claim potentially all, or most, of this money back from HMRC, depending on their Class 1 NICs.

If a UK business has paid less than £45,000 in Class 1 NICs over the last tax year, the full SMP can be claimed plus an extra 3% on top. Larger employers can reclaim 92% of SMP.

Two weeks of paternity leave is available to employees if they and their partner are having a baby, adopting a child or having a baby through a surrogacy arrangement. 

This leave cannot start before the birth; it must either be the actual date of birth, an agreed number of days after the birth or an agreed number of days after the expected week of childbirth. 

This is paid at the minimum statutory paternity pay (SPP) rate, which is either 90% of average weekly earnings or the weekly rate of £140.98, whichever is lower.

To qualify, weekly earnings must again be £123 before tax.

Employees may be able to get shared parental leave (SPL) and statutory shared parental pay (ShPP) if they’ve had a baby or adopted a child.

Rates change periodically so it is important to stay on top of these from year to year.

The 2023-24 weekly rate for SMP, SPP and ShPP is £172.48.