All Posts By

Bob L

Student Loans

Student Loans

There are currently two student loan plan types payable through the payroll, and which one depends upon when the first year of studies were started.  Plan 2 is where the first year of studies were started after 1st September 2012, and Plan 1 is where the studies were started before this.

The interest rates charged on each loan type are also different, with 1.75% on plan 1 and RPI (currently 3.3%) to RPI + 3% for Plan 2.  For more information on how much is repaid see here.

For employers you need to know when a student loan is repayable through the payroll, and where plan type is not known the default is Plan 1.  HMRC have said they will always issue a student loan start notice together with the plan type where a new employee should be repaying the loan.

We should also mention that some employees may have other student loans taken before 1998 that are not normally taken through payroll, and are based on a fixed term.

Thresholds for repayments increase in April

From April 2019 the threshold for Plan 1 will be increased by £605 to £18 935 pa, and for Plan 2 by £725 to £25 725pa.  These equate to around £1575 and £2140 per month.

Plan 1 and Plan 2 are both paid back at a rate of 9% on earnings above these thresholds.

Post Graduate Loan repayments starting April 2019

Post graduate loans are a new type of student loan that will first become eligible for repayment from April 2019.  There is currently only one type of Post Graduate Loan as far as payroll is concerned, and hopefully this will remain so.

The interest is calculated in a similar fashion to Plan 2, so RPI + 3%, and updated each September.

Repayments are at 6% and paid above a threshold of £21 000pa, or £1750 per month.

Multiple Loans

It is possible to have multiple loans and pay up to 15% of student loan repayment, this is where an employee has a Plan 1 and/or Plan 2 and a Post Graduate Loan.  The different thresholds would still apply.

Summary

Student Loans are not as straightforward as they could be, and there are other aspects not covered here that could catch people out in payroll, such as Attachment of Earnings Orders.  Employee questions about student loans are not uncommon, but the answers are not always simple to find.

If you want more general information on student loans, or your employees have further questions, you can follow this link.

A Brief Overview of Pensions

An Overview of Pensions

Pensions seem to cause more issues and confusion within payroll than they should.  We will attempt to simplify and demystify their treatment by providing a brief overview of pensions, focusing on how they are managed within payroll as well as touching on auto-enrolment.

The Tax Treatment of Pensions

There are only three ways a pension can be dealt with for tax purposes:

  1. Tax Relief at Source. Here the pension is deducted from the net pay, with tax relief at basic rate reclaimed by the pension provider. The gross pay is not affected, and National Insurance Contributions are made as usual.
  2. Deducted under a net pay arrangement. This is an unhelpful term, but is referring to where the deductions are made before tax, and sometimes referred to as ‘gross for tax’ deductions. Again total gross pay is not affected, and NICs calculated as usual.
  3. Salary Sacrifice. The employee gives up part of their salary in exchange for a benefit, in this case a pension contribution. Gross pay and NICs will be reduced.

The impact of the tax treatment

  1. Tax Relief at Source. The employee will receive tax relief, so a top up to their net contribution, at the basic rate at the pension provider, even if they do not pay tax. This method is considered fairer to lower paid workers, but higher rate earners can still claim additional tax relief via their tax return.
    The other note with this method is that a contribution of 3% against the gross will actually be seen as a 2.4% contribution on the payslip, with the rest reclaimed as tax relief by the pension provider to bring the total back to the 3% (current basic rate tax at 20%).
  1. Deducted under a net pay arrangement. The employee receives full immediate tax relief on their contributions, and so higher rate tax payers do not need to make an additional claim via their tax return. The amount of taxable pay is also reduced, which higher paid employees may find useful if they are approaching thresholds. Employees paid below the tax threshold will not receive tax relief.
  1. Salary Sacrifice. These schemes have become more popular since the introduction of auto-enrolment pensions but they are the most complex. The employee gives up some of their salary, so now the whole contribution is from the employer.  For this reason salary sacrifice pensions do not even need to be processed through payroll, although it is more usual to do so.  Full tax relief is gained immediately on the contribution as well as reducing the employee and employer NICs.
    Care must be taken that the reduced gross pay does not fall below the National Minimum Wage rates, and there are also implications with statutory absence payments as well as other considerations.

The pension calculation basis

Pensions could also be divided in two, as to whether they are based on pensionable pay types or banded earnings.  Since the introduction of auto-enrolment Qualifying Earnings has become the most common form of banded earnings, and probably the most common basis for pension calculations.

  1. Pensionable Pay.  Individual elements of an employee’s gross pay may be subject to pension calculations, such as salary only.  Sometimes it is all pay, or total gross pay, but some care needs to be taken, as often the intention is all pay subject to National Insurance, so that payments such as business expenses or mileage would be excluded.
    For automatic enrolment it is possible to use pensionable pay but the basis needs to be self-certified, usually using one of the predefined sets from The Pensions Regulator.
  1. Banded Earnings.  Qualifying earnings is a band of earnings set by The Pensions Regulator, and is currently the band of earnings between the lower and upper earnings limits for National Insurance.  It is possible to have banding other than qualifying earnings, but this now rarely seen.

A brief overview of Pensions?

So three types of treatment for tax, and two for the basis of the contribution.  Five items to consider for a basic pension set up in payroll.

Accurate and On Time Reporting of Payroll Information

Accurate and on Time Reporting of Payroll Information

In the latest Employers Bulletin (August) published by HMRC there are several sections devoted to RTI submissions and including for new starters.  HMRC again stress the need for accurate and on time reporting of payroll information.

What is RTI?

RTI is possibly the most significant change ever made to Pay As You Earn (PAYE).  RTI, or Real Time Information, is a method of reporting payroll submissions to HMRC and is aiming to make this process more efficient and responsive.

RTI is made up of two parts, a full payment submission, or FPS, and an employer payment summary, or EPS.

The FPS submission contains information about payments and deductions to employees, and must be made to HMRC on or before pay day.  An EPS contains company information for items such as SMP, Employment Allowance or Apprenticeship Levy.  The EPS must arrive with HMRC by the 19th of the following month.

What has changed?

Within the bulletin there are no major changes announced for RTI submissions, but they do have some reminders and guidelines.  The payroll information must be reported accurately and on time, and your organisation faces penalties if you fail with this.

HMRC have said they will not automatically impose a penalty, but will be following a risk based approach for late filing penalties as for last tax year.  At the same time they have requested that people do not ignore the automatic warning messages sent out.

What is needed for new starters?

New starter information is determined to some extent by your particular organisation’s needs.  If you do not have an electronic payslip portal, then your payroll does not need an employee email address for instance.  Date of birth is probably essential, as so much within payroll can now be affected by this.

In this month’s bulletin the interesting highlight is regarding the employee postcode.  This must be accurate as this is one of the fields HMRC use to identify the employee.  If this is inaccurate as well as issues with HMRC, there can also be ramifications with the Department for Work and Pensions.

What is the significance?

There may be no changes, and these are all just timely reminders from HMRC to take care with your payroll.  But, there may be changes with the speed in which tax codes are issued, and faster changes in benefits, and inaccurate submissions will make errors far more likely.  Remember the announcement last summer of dynamic PAYE tax coding, and also the changes in treatment of transferred employees in April 2017 resulting in widespread Employee Duplication.

In Summary

A new employee should double check the information they provide, leaving fields blank is preferable to inaccurate information.  This, together with some care with the payroll process, should help ensure compliance with the HMRC request for accurate and on time payroll submissions.

Welsh Income Tax

Change is coming for tax payers residing in Wales

Tax payers resident in Wales will start paying Welsh Income Tax from April 2019.  They will have a proportion of their income tax paid directly to the Welsh Government, rather than just via the block grant.  The Welsh Government will also be able to set and vary rates of tax paid.

The Welsh income tax will be applied based upon residency, and so employees should make sure HMRC is holding their correct address.  If an employee needs to change their address they could be directed to their online personal tax account.  HMRC will remain responsible for collecting the taxes.

A New Tax Code Prefix

An employee subject to Welsh Income Tax will have a ‘C’ prefix to their tax code, so for instance their tax code could be C1185L.  This is similar to the Scottish Rate of Income Tax where ‘S’ is used as the prefix.

It is too early to say whether we expect very much to change, and in the first year of Scottish Income Tax the changes were minimal.  Initially it appears that there will only be changes with the rates, if any changes at all, and no introduction of new thresholds.  However, as can now be seen, Scotland have made their income tax scheme more complex, and there are marked differences from the main UK thresholds.

Acronyms and Abbreviations

On a positive note, although the acronym / abbreviation SRIT was frequently used for the Scottish Rate of Income tax, I have not spotted HMRC attempting WIT in this context.

Rates and Thresholds

Guide to Rates and Thresholds for 2018/19 Tax Year

(to aid employers – not for use for processing payroll)

Tax Rates

Showing each portion of a monthly salary and the tax rate that may be applied to it.
Based on a monthly paid employee with an 1185L tax code and month 1 (not a Scottish tax code)

Rate Monthly Pay
Tax Free Allowance  Up to £987.50
20% £988 – £3 862.50
40% £3 863 – £13 487.50
45% Above £13 489

Based on a monthly paid employee with an 1185L Scottish tax code and month 1

Rate Monthly Pay
Tax Free Allowance Up to £987.50
19% £988 – £1 154.17
20% £1 154.17 – £2 000
21% £2 001 – £3619.17
41% £3 620 – £13 487.50
46% Above £13 489

 

Auto-Enrolment

Monthly
Automatic Enrolment Earnings Trigger £833
Qualifying Earnings £503 – £3863

 

National Insurance

Monthly
Lower Earnings Limit £503
Employee Starts to Pay NI £702
Employer Starts to Pay NI £702
Upper Earnings Limit (employee contributions fall to 2%) £3863

 

National Minimum Wage

Hourly Rate
National Living Wage (over 25) £7.83
Aged 21 – 24 £7.38
Aged 18 – 20 £5.90
Aged 16 – 17 £4.20
Apprentice Rate £3.70

 

Statutory Payments

Weekly
Sick Pay £92.05
Maternity Pay (weeks 7 – 39) £145.18

 

The above rates are a guide only and subject to change and interpretation.  Please visit HMRC for up to date information.

 

Download a PDF version here

Payrolling Benefits Deadline

Register with HMRC before the end of this tax year if you want to process Benefits in Kind through the payroll in 2018.

Benefits in Kind

Benefits in Kind (BIKs) traditionally have to be reported via a P11D.  These are benefits an employee receives outside of the payroll but usually needs to pay tax for, such as a company car.  There is also a National Insurance liability for the employer.

Benefits in Kind and Payroll

No more P11Ds!

The main advantage for the company of using payroll to report Benefits in Kind is that there is no longer a requirement to submit the P11D forms.  You currently will still need to submit the form P11D(b) to report the Class 1A NICs liability, but this is far less onerous than multiple P11Ds.

Not all BiKs can go through the payroll, but if you have benefits such as medical or health insurance these are really straightforward to manage in this way.

Registration Deadline

To report Benefits in Kind through the payroll you must register your intention with HMRC before the start of the tax year.  If you ask to register mid-tax year HMRC may be able allow this, but you would still need to produce P11Ds but mark them as ‘payrolled’.

We reported this development last year, but as the deadline is rapidly approaching thought a reminder might be useful if you still intend to register.  This does not replacement PAYE Settlement Agreements, but these are changing slightly from April too.

 

28th February 2018

National Minimum Wage April 2018

National Minimum Wage Rates from April 2018

The National Minimum Wage and National Living Wages rates will increase in April, and all the rates will change together this year.  The minimum wage rates from April 2018 are as below:

From April 2018 Previous Rate Increase
The National Living Wage, workers aged over 25 years  £7.83  £7.50  4%
 Aged 21 – 24 years  £7.38  £7.05  5%
 Aged 18 – 20 years  £5.90  £5.60  5%
 Aged 16 – 17 years  £4.20  £4.05  4%
 Apprentice Rate  £3.70  £3.50  6%

Companies should ensure they meet these minimum requirements, although this is not always straightforward if, for instance, the employer provides accommodation.

The worker must be paid, on average, at or above the minimum wage for the pay reference period.  The pay reference period is determined by pay frequency and cannot be greater than 31 days.  The employer must ensure these minimums are met, and criminal action can be taken if they are not.

Care must be taken if the employer makes deductions for various items such as uniform or safety equipment, as these may bring the employee below the minimum.  Care must also be taken with salary sacrifice schemes, as the minimum wage will be calculated on the post sacrifice salary.

The rates were confirmed by the government in the Autumn Budget, and if you want further information on the National Minimum Wage please see here.

Pension Contribution Changes

Be prepared for the Auto-Enrolment Pension Contribution Changes!

There are auto-enrolment pension contribution changes that employers need to be aware of to make sure they are compliant this April.

The last employers to stage for their pensions will be in February 2018, then all employers will be involved with pensions in some way.  Even if an employer is not required to provide a pension scheme they will still need to make a declaration with The Pensions Regulator.

Most companies have chosen a tiered start to auto-enrolment, with the current default of 1% from the employer and 1% from the employee giving a total contribution of 2%.  When auto-enrolment pensions were launched in the UK the original 2% was to have increased in October, but now it will be increasing this coming April.

All new employers already have their pension duties starting from day one, and will need to comply with the current minimum contributions.  This means in April new employers will start with the 5% minimum the same as everyone else.  Ultimately there will be no tiered start at all.

Pension Contribution Changes

From the 6th April 2018 the following rates will apply –

5% minimum total contribution.  2% minimum from the employer with the employee to make up the remainder.

If an employer uses pensionable pay, and has self-certified the scheme’s compliance using set 1, then the total minimum contribution is 6%, with 3% minimum from the employer and the remainder from the employee.

So from April 2018 most employers will need to increase their contribution rates to remain compliant with the pension legislation.

The total can be made up wholly of an employer contribution, but can be split with an amount from the employer and the remainder from the employee.  There are minimum amounts for the employer as well as a total, as shown above.

Looking Ahead

April 2019 is when the contributions arrive at the targeted 8% for everyone.  For employers with self-certified schemes it may be slightly different, but for everyone else it is 8% with 3% minimum from the employer.

These changes should not present an issue, but companies need to make sure they are aware and the appropriate minimums applied.  For further information see here.

Scottish Income Tax

Scottish Income Tax 2018 / 19

There were a number of announcements in the Scottish Budget earlier this month, the most significant related to payroll is the introduction of a five tier Scottish income tax system.  These changes affect those employees paying Scottish income tax, which is determined by the main residence of the employee.

Employees paying Scottish Rates will have an ‘S’ suffix to their tax code, such as S1150L, and if an employee needs to notify HMRC of a change of address they can do so here.

The bandings are as follows for an employee with the standard tax allowance –

Personal Allowance (set at UK level) £11 850 0%
Starter Rate (new) £11 850 – £13 850 19%
Basic Rate £13 850 – £24 000 20%
Intermediate Rate (new) £24 000 – £44273 21%
Higher Rate £44 273 – £150 000 41%
Top Rate £150 000+ 46%

This will make for some interesting conversations as tax is already not straightforward, and if ever there are employees that want an explanation of how their net pay was reached there is more opportunity for confusion.  Also note the tax rate changes as well as the changes in bands.

The Scottish Government have an impact document available here and some further guidance available here.

What Does the Autumn Budget Mean for Payroll?

What does the autumn budget mean for payroll?

The Autumn Statement brought relatively few changes that will affect PAYE payrolls this coming April.

Probably the biggest change was in the announcement of further changes possible with the IR35 tax system.  This would bring the private sector in line with the public sector with more ‘contractors’ treated as ‘employees’, with their tax and NI deducted at source.  There is a consultation planned next Spring.  There was some anticipation of a move in April, but now it appears there will be a consultation process first.

Personal taxation thresholds will be adjusted in April, but the rates of 20%, 40% & 45% remain the same.  The thresholds for Scotland will be announced after the Scottish budget is fixed in December.  The marriage allowance has also had some adjustment.

2017 2018
Personal Allowance £11 500 £11 850
Basic Rate Tax Band £33 500 £34 500
Additional Rate Tax Band £150  000 £150 000
Marriage Allowance £1 150 £1 185

 

The National Insurance thresholds have also been increased a little, although the rates remain the same.

Weekly Rates 2017 2018
Lower Earnings Limit (to qualify for SMP etc) £113 £116
Primary Threshold (Employee starts paying NI) £157 £162

 

The National Minimum Wage and National Living Wage (NLW) rates also will be increasing from April 2018.

2018 Rate
25yrs old and over (NLW) £7.83
21 – 24 years old £7.38
18 – 20 years old £5.90
16 – 17 years old £4.20
Apprenticeship Rate £3.70

The employment allowance remains at £3000 per year, and the Apprenticeship Levy allowance also remains at £15000.

What impact do the tax and NI changes have to my employees?

There are too many variables to give an accurate answer to this, but there will generally be a little less tax and a little less National Insurance deducted.

However, if we consider an employee of thirty years old on £20 000 per year, with a standard tax code giving the full personal allowance –

2017

Tax : 20 000 – 11 500 = 8 500 Basic rate at 20 % = £1700
NICs: 20 000 – 8 164 = 11 836 Employee NI at 12% = £1420.32

Employer NI at 13.8% = £1633.37

 2018

Tax: 20 000 – 11 850 = 8 150 Basic Rate at 20% = £1630
NICs: 20 000 – 8424 = 11 576 Employee NI at 12% = £1389.12

Employer NI at 13.8 % = £1597.49

So in this example the employee will pay around £100 less per year in tax and NI, and the employer around £35 less NI.  Remember, these rough calculations make many assumptions and do not take into account items such pension contributions.

So, what does the Autumn Budget mean for Payroll?

There will be a small uplift in tax codes in April 18, and employees and employers may notice a small reduction in their PAYE payments.  Those employees on National Minimum Wage or National Living Wage will see their rates increase by around 4.5%.

For further information on rates please see here.