|From the employer's point of view|
When an employer agrees to pay a gross wage with their employee their total costs are protected, and they will not normally be affected by any changes in legislation, nor will they run the risk of getting lumbered with any unpaid tax from a previous employment. But by agreeing a net pay the employer is essentially writing a blank cheque – committing to pay ALL their employee's tax and National Insurance contributions, irrespective of any changes in the legislation and without taking into account their individual tax code or tax position.
There are several reasons why a tax code may vary from a standard person’s tax code; for instance, if they have two part-time jobs and their other employer is already using up their personal tax-free allowance in their wage calculations, then the second employer must pay tax from the first penny, since the personal tax-free allowance can only be claimed once.
Another reason for an unusual tax code would be if HMRC were collecting unpaid or underpaid tax from a previous employment. If the new employer agrees a net pay they will be responsible for paying any unpaid or underpaid tax even if it is in relation to employment that may have ended several years earlier. This may seem unfair, but the only way to avoid this situation is to agree a gross wage.
An increasing number of state benefits and tax reliefs are paid through the payroll mechanism as an offset to employee tax and NI liability. Any taxable benefit provided by the employer, such as the personal use of a car, will increase costs if they are based on a fixed net wage.
The difference between a net pay and the actual employment costs can be staggering (up to 50% more) and may come as an unpleasant surprise, especially to an inexperienced first-time employer. To view an example, please click here.