The death of an employee while still in service is a challenging and sensitive event for any organisation to manage. It’s an occurrence that many payroll professionals might not think about frequently, yet statistically, it's quite likely to happen.
In What to do When Someone Dies in Service, Tim Kelsey addresses the key considerations for handling such a situation, including the frequency of such events, calculating the final salary, and understanding the tax implications.
How Often Does It Happen?
Understanding the probability of an employee's death in service helps prepare an organisation for such an eventuality. Statistically, about one in five of us doesn't reach the age of 65, which means there’s a significant chance that this will affect any given workplace. In the UK alone, around 1,500 deaths occur each day, translating to a one in 38,667 chance of death for any individual on a given day. This statistically makes the event 1,100 times more likely than winning the lottery jackpot. Given these figures, it's critical for payroll professionals to be prepared for handling the financial aspects of an employee's death.
Calculating the Final Salary
When an employee dies in service, the first step is to calculate their final salary. This calculation involves prorating the salary to the date of death, as employees, understandably, do not usually pass away neatly at the end of the month. Payroll teams must use their usual pro rata rules for part-pay periods to determine this final amount.
The final salary payment must be calculated with sensitivity and accuracy. It may require consideration of voluntary deductions such as union subscriptions or social club fees. Typically, these contributions are waived after death as the employee is no longer able to benefit from them. However, there can be exceptions; for example, some unions may insist on taking the final subscription as it might impact a life insurance payout that benefits the deceased's dependents.
Taxation in Death
One of the two certainties in life, taxes, does not cease even after death. The final salary calculation involves deducting Pay As You Earn (PAYE) tax as usual. The deceased employee’s usual tax code is used for this purpose, without any special default code that applies after death. The income tax must be calculated cumulatively if the employee was on a cumulative tax code.
In terms of National Insurance (NI), contributions cease after death since the deceased cannot accrue further benefits. Employers must ensure that the payroll software resets the NI category to reflect this change. Typically, checking the box in the payroll software that indicates the employee has passed away will automate this update.
Required Documentation
Upon the death of an employee, it's crucial to issue a P45 form as part of the official documentation. Regulation 50 of the PAYE rules requires this to be done "without unreasonable delay." The P45 form includes a box indicating that the employee has died, which must be checked. However, the P45 should not be given to anyone but rather used as part of the payroll record for final tax filing purposes.
Overpayments and Outstanding Debts
In some cases, an employee might have been overpaid at the time of their death, especially if salary payments are made in advance or there has been an outstanding loan. These overpayments need to be recovered from the employee's estate, and this might involve contacting the executor of the estate to arrange for repayment. Trustees of pension funds, for instance, are obliged to pursue overpayments to avoid breaching trust agreements.
Issuing Payments to the Estate
Final salary payments and any other unpaid benefits must be paid to the personal representative of the deceased, typically the executor of the estate. This payment should be made via check, along with a detailed statement of earnings, showing gross pay received and tax deducted up to the date of death. This ensures a clear paper trail for legal and tax purposes.
Life Insurance and Other Benefits
Many employers offer life insurance policies, which become particularly relevant upon the death of an employee. It’s essential to differentiate these life insurance payments from the final salary payments. Death-in-service insurance payments are usually paid under a trust arrangement, distinct from regular payroll. Hence, HR might need to handle these payouts separately, often involving direct communication with the insurance provider to facilitate the payment to the beneficiaries.
Dealing with the death of an employee in service is not only emotionally taxing but also complex from a payroll and taxation perspective. Understanding how often such events occur, accurately calculating the final salary, ensuring correct tax deductions, and handling related documentation and payments are all critical tasks. Employers must be both sensitive and methodical in managing these aspects to ensure that the final respects are paid accurately and in good order to the deceased and their survivors. Being prepared and having clear policies in place can help manage these challenging situations with the professionalism and care they demand.
For the full session, please click here. In this webinar, Tim Kelsey covers:
- Calculation of final salary
- Taxation in death
- National Insurance liability
- Where to pay final salary
- The deceased’s estate
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.
