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Bob L

Employment Allowance Changes for April 2020

Employment Allowance Changes for April 2020

The Employment Allowance is changing again.  The allowance was introduced in 2014 and offers a reduction to employer’s class 1 secondary National Insurance contributions.  The allowance was initially £2000, but was then increased to £3000 in 2016.  The proposed Employment Allowance changes for April 2020 will potentially affect most business in the UK.

Employment Allowance Eligibility

Employment Allowance is generally not too complex and is fairly simple to administer, but there can be difficulty sometimes with determining eligibility.

At the moment there are guidelines in place to determine whether a company is eligible or not, and these include the following:

  1. A company which provides a function wholly or largely of a public nature will not be eligible. Examples include for the NHS such GP surgeries, or refuse collection for local government. A company could be eligible if they work partially in the public sector but this is less than 50% of their business.
  2. Public authorities such as parish councils are not eligible.
  3. Educational Institutions are only eligible if they are private companies or charities.
  4. Domestic staff payrolls will not be eligible for the employment allowance. Examples include employers of domestic gardeners, cleaners and nannies.
  5. A limited company where the only employee is a director will not be eligible.
  6. Connected businesses and Charities. Only one member within the group can claim the allowance, the rules that determine the connected status are complex and care is needed.

For further guidance on determining eligibility for employment allowance please see here.

Employment Allowance Changes from April 2020

There are two changes announced for April 2020:

  1. The employment allowance will need to be claimed each tax year, it will no longer automatically roll over if claimed the previous tax year
  2. Larger companies and groups will no longer be eligible.

The simplest change is that the allowance will need to be claimed each tax year.  This is likely to be an additional Employer Payment Summary (EPS) for companies in the April of each tax year.  This will be a declaration that the company is eligible, but the administration should be straightforward.

The more complex proposal is that companies with a secondary class I employer’s National Insurance liability of greater than £100 000 will no longer be eligible.  This also includes connected businesses, so if the combined liability is greater than £100 000 the group will no longer be eligible, even for the single nominated group member.

The £100 000 employers National Insurance is taken from the preceding tax year, so for a company to claim employment allowance in April 2020, their liability will need to be below £100 000 for the 19/20 tax year.

What is required?

We suspect the most issues will be with groups, and especially where they are around the £100 000 employer’s National Insurance total liability.  There is nothing new in this, but there will be the added complication of combining the employer’s National Insurance once the members of the group have been agreed upon.

Small companies that forget to claim annually could also face fines and interest payments if they reduce their payments to HMRC assuming they still qualify for the allowance.  Book-keepers and small business owners responsible for their own payroll will need to be aware of the changes and make sure they know the steps required in April.

Some preparation is required, but hopefully this will be fairly straightforward for most businesses.

Off Payroll Working

Off Payroll Working

As a payroll bureau we generally deal with conventional PAYE employees, however the rules are due to be changing for off payroll working in April 2020 and we thought we should highlight a few items here.  These are changes that affect companies employing contractors.

Who do the new rules apply to?

The new rules will apply to medium and large companies, with smaller companies excluded.

To qualify as a small company the proposal is that two of the following requirements must be met:

  1. Annual turnover Not more than £10.2 million
  2. Balance Sheet Total Not more than £5.1 million
  3. Number of Employees Not more than 50

(see consultation document)

What are the changes?

The change is that the business or agency becomes responsible for the contractor paying the correct amount of tax and National Insurance.  The government says they have brought these measures in to try and increase fairness in the tax system, so that individuals will pay roughly the same tax doing roughly the same job.

The governments CEST tool (Check Employment Status for Tax) is to be enhanced, and further guidance is also going to be made available.  Businesses will need to look at this before April, as it is not straightforward, and if changes are required they will require some preparation.

The first step is to consider whether the new rules apply from April, so is the business a small company or not, and then whether there are any workers who are not employees.  The business then needs to determine if these workers should have the off-payroll rules applied to their roles or not.

The proposed change to off payroll working was announced in the 2018 Budget, and those companies aware of IR35 should already be preparing.  At the moment the legislation is still being drafted, but we imagine it is very unlikely it won’t go through.

For further information on the off payroll working changes please see here.

Student Loans 2019

Student Loans 2019

Student loans seem to cause some confusion, and this is not really surprising.  There are two types loan from this tax year, Student Loans and Postgraduate Loans.  The Student Loan is then further divided to plan 1 or plan 2 depending on when the student started their course.

Student Loan Reporting

If an employee has a Student Loan but is not sure which plan it is then, then the default is plan 1.  The Student Loan details are reported in the Full Payment Submission (FPS), which is part of the Real Time Information (RTI) submitted to HMRC with the payroll.

If the loan or plan type is incorrect HMRC will issue a notice to change, start or stop the loan.  This can then be applied through the payroll.  In the past HMRC faced criticism for being slow to share information with the Student Loans Company (SLC), and vice versa, so deductions could be taken for far longer than they should be.  From April HMRC have been sharing information with SLC on a weekly basis.

The aim is for the employee and SLC to have increased and more timely visibility of all repayments made.  Although it is still early days for this process hopefully this will be of benefit to all parties.  It should be noted the increased onus on employers to ensure the correct information is supplied via the FPS.

The thresholds for the tax year starting April 2019 are:

Student Loans

Plan 1

£18 935 annually, or £1577.91 per month

Plan 2

£25 725 annually, or £2143.75 per month

Both plan types are calculated at 9% above these thresholds.

Post Graduate Loans

£21 000 annually, or £1750 per month

Repayments are calculated at 6% above this threshold

 

Further information on Student Loans including guidance is available here.

 

National Minimum Wage (NMW) Rates 2019

National Minimum Wage 2019

The National Minimum Wage (NMW) rates increase in April, and this year they are increasing by around 4% on average.

National Minimum Wage Rates 2019

Criteria

Rate

Aged 25 and Over (National Living Wage) £8.21
Aged 21 – 24 £7.70
Aged 18 – 20 £6.15
Under 18 £4.35
Apprentice Rate £3.90

 

These rates are proposed each year by the Low Pay Commission.  The government would then accept the proposals and add them to the budget for the next tax year, where HMRC then has the responsibility for enforcing the law.

There is also the voluntary organisation the Living Wage Foundation, who propose wage rates based upon the cost of living which are generally higher than the HMRC minimums.  The Living Wage Foundation also applies a weighting for living in London where costs are higher.

The minimum wage applies to workers in the UK, and takes into account the basic pay or salary as well as other payments or deductions.  Salaried staff are also considered for the minimum wage, it is not just hourly paid workers.

Examples for salaried staff

32 year old salaried worker, working 37 hours per week:  £1316.34 per month

37 x 52 = 1924 hours per year

Minimum salary would equal = 1924 x £8.21 = £15 796.04 pa

22 year old salaried worker, working 40 hours per week:  £1334.67 per month

40 x 52 = 2080 hours per year

Minimum salary would equal = 2080 x £7.70 = £16 016.00 pa

(These are minimums and care would still be need to make sure the NMW requirements were met in any 12 week period – see below)

National Minimum Wage Calculations

National minimum wage pay is not necessarily the same as gross pay, taxable pay or NICable pay however, and can get complicated where pay structures are not straightforward.

If workers receive bonuses or commissions then a 12 week average could be used to check the worker is receiving at least the correct hourly rate.  For this you would divide the total pay received by the total hours worked, which would then give an average hourly rate.

Care needs to be taken with salary sacrifice deductions, as these will reduce the pay for NMW calculations.  Common salary sacrifice arrangements include pensions, childcare vouchers and cycle to work schemes.  But there are other arrangements too.

Deductions for things like uniform can also be used to reduce the pay for NMW calculations, so employers do need to check they comply as the fines can be high if they fail in their obligations.  If a deduction can be shown to benefit the employer then it may well reduce the NMW, and advice should be taken.

If an employee feels they have been paid below the NMW their first course of action is to discuss this with their employer and see if they can find a solution.  ACAS offer an early conciliation service if a dispute between an employee and employer is not quickly resolved, and there is also the HMRC enforcement process.

Summary

In a simple pay structure it is very straightforward to check that the hourly rate is greater than the NMW rates, but where there may be deductions or variable hours it can get more complicated.  April is a good opportunity for employers to check the pay rates they have in place and adjust as needed.

Welsh Tax Codes

Welsh Tax Codes

As has been previously reported, there are changes to income tax for people living in Wales from April 2019: Some of the tax they pay will be paid directly to the Welsh Government.

Employers will need to be aware as they may start seeing the new Welsh tax codes issued in preparing for the new tax year, and they may have queries from staff as there is more media coverage. The new tax code will have a ‘C’ prefix, eg C1185L

The tax levels will be in line with England and Northern Island until 2021 according to the Welsh Assembly, but then may change. The standard tax band rates are each reduced by 10p in the pound, then that 10p is at the discretion of the Welsh Government.

HMRC will be administering the income tax, sending out the coding notices, and collecting and apportioning the revenue. The income tax will be determined by an employee’s residency, so employees should be encouraged to make sure their records are up to date with HMRC.

What this means in practice is that someone living in Wales with PAYE at the basic rate, for every 20p tax will be paying 10p to UK Treasury and 10p directly to the Welsh Government, but via a single PAYE tax deduction on their payslip. Employer will also continue to pay HMRC via a single payment in the usual way.

For more information see here.

Car and Fuel Benefits through Payroll

Car and Fuel Benefits through Payroll

If a company provides a car or fuel for private use then the employee is receiving a benefit, and this benefit needs to be reported to HMRC either through a P11D or via the payroll.  Reporting a car either through a P11D or via payroll is not completely straightforward and care does need to be taken.

Payroll the Car and Fuel Benefits

The advantage of processing the car and fuel benefits through payroll is that there are no P11Ds to complete and pro rata calculations are potentially more straightforward.

The employee tax code should increase, as the tax on account portion is removed, but this does not always happen straightaway.  There may also be an initial increase in tax on the payslips if an employee owes underpaid tax from a previous year.  For these reasons there can an increase in work for the HR and finance teams when a company first launched with benefits through the payroll.

Fuel benefit can be reduced or removed if an employee pays for their own private fuel.  The employee could just buy their own private fuel, but you would potentially need to be able to prove the employee has covered the full cost of their private miles

HMRC has published Advisory Fuel Rates that can be used, and where used properly there would be no benefit to report to HMRC.  Some care needs to be taken, and there are different rates for business miles in private vehicles and private miles in company cars where there is company fuel for instance.

Changes for April 2019

There is a supplement for diesel cars, but there is an exemption available for cars manufactured after September 2018.  Cars that meet the lower levels of Nitrogen Oxide (NOx) emissions permitted with the Euro standard 6d, will qualify for the exemption.

At the moment there are two categories of fuel, so diesel and other, but from April there will be the third – Diesel cars meeting Euro standard 6d.

 

If you do not currently process benefits through the payroll you need to register with HMRC in the tax year prior, so register now if you wish to start in April.  For help with P11Ds see here.

When Auto-Enrolment Pensions Do Not Apply

When do Auto-Enrolment Pensions not apply?

Although the majority of employers will now be in the swing of auto-enrolment pensions, in certain circumstances they are not required.  Although we do occasionally find a payroll which should have a pension in place but doesn’t, the following are examples where auto-enrolment pension do not apply:

  • Tronc payrolls (no pay subject to NI)
  • Where there is a single director and no employees
  • A company that has ceased trading with no employees

Directors

Directors of a company with employees can also sometimes be exempt from auto-enrolment duties if they are not considered to be an employee themselves.  A director without an employment contract is not considered to be an employee, so does not need to be assessed for auto-enrolment.  You can find more details here.

Notifying The Pensions Regulator

Even if you do not need to provide auto-enrolment pensions you still need to notify The Pensions Regulator that you are not considered an employer.  This declaration means The Pensions Regulator will not consider you an employer, but you need to take due care and consideration when making it.

If circumstances change, such as a new employee starting that is not a director, then you should contact The Pensions Regulator to inform them.  Your duties will start with your first employee, even if they are not eligible to join the scheme.

Staging Dates

From 1st October 2017 all new business with employees had their duties start from the first day of employing staff, before this the business would receive a ‘staging date’.  The staging date was allocated by The Pensions Regulator, and was when an employer had to start assessing and offering their staff a pension.  All staging dates have now passed, the last being February 2018, so all employers will now be affected by pensions.

New Employers

New employers can check their duties with The Pensions Regulator here.  A new employer’s duties start with their first employee.

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.