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Bob L

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.

 

 

 

National Insurance Category

What is a National Insurance Category?

A National Insurance category letter is used by an employer to help calculate how much National Insurance they and the employee need to pay.  The category is not related to the National Insurance number; it is not the final letter as is sometimes mistakenly assumed.

Why is this important for Payroll?

The National Insurance category letter determines the National Insurance liability for both the company and the employee.  This is essential for running the payroll, as if an incorrect category is chosen it can be difficult to correct mistakes at a later date.

The majority of employees will be National Insurance category A.  National Insurance category A is the default category, and covers employees not in another category.

What categories are there?

Category Letter
A Default category for employees not in another category.  Standard rates for employee and employer apply
M Employees under the age of 21.  Reduced / Nil Employer contributions
C Employees over the state pension age.  Nil employee contributions.
H Apprentices under the age of 25 following an approved apprenticeship framework.  Reduced / Nil Employer contributions
J Employees deferring National Insurance because they are paying it in another job
Z Employees under 21 deferring National Insurance because they are paying it in another job
B Married Women and Widows entitled to pay reduced National Insurance.  This is not straightforward, see here.  We rarely see National Insurance category B employees.
X Employees who don’t have to pay National Insurance, for instance under 16s

 

There are also other categories for mariners, see here for further details.

In Summary

We find National Insurance categories are often poorly understood, and we do sometimes see mistakes made in the payrolls moving to us.  There are rumours of possible changes in the Budget on Wednesday, and it is useful to know how the employee and employer liabilities are affected by each category.

There are tables of the rates at the move common categories available here, and further information available from HMRC here.

Benefits in Kind and Payroll

Benefits in Kind have to be reported via a P11D, as 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 usually a National Insurance liability for the employer.

This is no longer quite true however, as now employers have the opportunity to report Benefits in Kind via the payroll instead.

Benefits in Kind and Payroll

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.

The advantage for the employee is that they pay as they go, so should not discover a tax liability when they reach the end of the year. More employees should ultimately have standard tax codes, despite receiving Benefits in Kind.

What do you need to do?

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 allow this but you would still need to produce P11Ds but mark them as ‘payrolled’.

You can register most benefits to go through the payroll, and it is possible to specify individual employees if you do not want their benefits to be processed in this way.

Is there any additional work to do?

Registration is an obvious addition, but once the company has registered that benefit it will continue to be included for payroll until HMRC is notified otherwise. There is no need to re-register the same benefit each tax year.

You also will need to notify your employees. Once you have registered, you should notify them that you will be entering the benefits via the payroll, and what this means for the employee. You also need to provide information after the end of the tax year.

The end of the P11D?

It seems likely that eventually all benefits will be reported via RTI via the payroll. There may still be a need for the P11D(b) but this may well disappear too. It is not completely straightforward to process the benefit through the payroll, but it is far more streamlined than multiple P11Ds.

The P11D will probably go, but not just yet.  We are very positive so far about Benefits in Kind and payroll, but you need to make sure you register this tax year if this is something you intend to take advantage of from April ’18.

For more information see here.

1st October Pension Deadline

The Pensions Regulator has issued reminders that companies registering as employers after the 1st October will have pension duties as soon as their first member of staff starts working.

The 1st October pension deadline has crept up on us a little, but new employers must be aware of this.  Employing staff on or before the 30th September of will have a later staging date, and you can check when here.

Auto-Enrolment pensions can cause some issues, so employers must make sure they are prepared.  It does not have to be difficult, but small companies especially can spend too much time on the administration and it is all too easy to make mistakes.

Dynamic PAYE Tax Coding

From this July HMRC have introduced what has been coined dynamic PAYE tax coding. This has generated some interest in the payroll world, although it is the logical progression with RTI (Real Time Information), there are some potential issues.

The initial intention was to introduce this change at the end of May, but it was delayed until July as some fixes and further testing were required prior to the system going live.

What does this mean?

“HMRC will use real time information to make automatic adjustments to PAYE tax codes as they happen, rather than waiting until the end of the tax year.”

The aim is to reduce errors, and ensure employees pay the right amount of tax rather than being owed a refund or having a liability at the end of the tax year. HMRC will issue tax code notices as soon as they believe there has been a change in employee circumstances.

What is the actual impact of the change?

For many employees there will be no impact at all. Where HMRC are adjusting a tax code they should still notify the employee, although this does not always seem to happen. These changes should be viewed in line with the Personal Tax Accounts, where employees can see and potentially amend their live tax information.

Any issues are likely to be where HMRC might apply an estimate, and this does not match an employee’s current circumstance. Employees will then need to contact HMRC and try and get the issue corrected, which can be a frustrating and long winded process.

HMRC have put together a help pack for employers with further information on the changes with PAYE available here.

Is there anything else we can do to try and reduce the possibility of errors?

This is an HMRC automatic system, and has only just gone live, so it is early days. It is certainly worthwhile considering running Benefits in Kind through the payroll, rather than via P11Ds. One of the potential areas for error is incorrect estimates of benefits to be received in the tax year, so by reporting the benefits in real time this should be avoided.

The information supplied to HMRC from the payroll must be accurate. Starter forms must be accurate, and employees must inform HMRC accurately of any change in their circumstances.

In summary

Wait and see. This could work well, but we could get incorrect estimates and more frequent tax code notices for some employees.

 

Payroll Accuracy

This was a question raised in a recent article published by learnpayroll, The Learn Centre Ltd.  The answer would appear to be – Payroll Accuracy is very important!  They refer to a survey put together by SD Worx where 44% of respondents reported they would consider leaving their job if they were paid incorrectly.

The article looks at various questions and the response of employees.  There seems to be some variation between countries, and a surprisingly high proportion of employees perceive they have been paid incorrectly in the past.  We have not seen the questionnaire and cannot comment on how representative it is, but it is interesting to see the responses and the choice of questions.  Payroll accuracy is certainly something that needs considering.

Tax code changes

The most common reason we have questions raised is about changes in employee’s net pay, which is most often due to a tax code change.  This may be reported as a payroll inaccuracy, but obviously is in the hands of HMRC, and therefore although the tax code may be wrong it will have been applied correctly.

The employee should have a notice from HMRC before the code is changed, but these notices do not always arrive.  Once a code is applied the employee should contact HMRC; we provide the details they need on the payslip.

Payroll Accuracy – The Issues

There are three main areas of opportunity for payroll inaccuracy; preparation errors, processing errors or reporting errors

Preparation Errors

We would suggest keep the amount of work and information required to a minimum at this stage to help eliminate errors.  You should not really need to generate salaries every time if there is no change.  If a pay rate, payment or deduction is the same every time why risk a data corruption by reproducing the data outside of the payroll?

Time and attendance systems are worthwhile using for hourly paid staff; make sure you have a system you trust, and manual adjustments can be made if necessary.  It is better to send a report directly from the time and attendance software than try and transpose it, although it has to be the correct report.

Make sure you have an audit trail for all changes.  If a member of staff has a salary deduction you need to know why, as this could be reported as an error.  You should also keep new starter details as provided by your new starter, as they may give you incorrect information.

Instructions should be precise, with adequate unambiguous information, and the employees accurately identified.

Processing Errors

Once the payroll information has been prepared the actually processing begins and RTI files, payslips, pension deductions, BACS payments etc are prepared.  Data is taken, processed and results in a payroll.

Considerable care should be taken at this stage, as simple human error can again very easily creep in.  The information needs to be correctly handled, as the aim is to be compliant with HMRC and The Pension Regulator guidelines.

It is useful if there are checks within the system to make sure everything is compliant, and totals can also be checked against any totals in the preparation information.  As many checks as possible at this stage can help eliminate errors before the payroll is returned.

At Payroll Options we have multiple data validation and RTI compliance validation checks.  We also process the payroll in parallel with two members of staff, cross checking by computer to help eliminate the opportunity for human error.

If the payroll is processed in house it is useful to have some separation between preparation and processing, and an audit trail should still be maintained.

Reporting Errors

This is an interesting area, as it would imply the payroll has been processed correctly, the correct information presented to HMRC, but then an issue with the reports.  The reports must accurately reflect what has occurred within the payroll, as these will form the basis of financial journals and potentially reporting to pension companies and payments to HMRC.

Consistent reporting is the key here.  If the reports are the same every time the payroll is processed, then there should be no opportunity for incorrectly configured reports to be used.  It is useful if the reports are presented to someone other than the person processing the payroll.

 

It is possible to have accurate payroll, but processes must be maintained and all stages must be understood and communicate effectively.  There must also be adequate feedback and any issues quickly addressed.

Childcare vouchers scheme

The Childcare Vouchers Scheme closes to new joiners in April 2018.

If an employer chooses to offer a Childcare Vouchers Scheme, it is possible for employees to purchase childcare vouchers through payroll as a salary sacrifice.  A maximum fixed amount can be provided free of tax and National Insurance, and the employer does not have to report anything to HMRC as long as the amounts are below these thresholds.

The scheme is still live, companies can still join, and employees can join existing schemes.  After April 2018 these schemes will continue to run but will be closed to new joiners.

Thresholds

The limits for childcare vouchers are as follows:

For an employee that joined the scheme before 6th April 2011:  £55 per week or £243 per month

For employees that joined on or after 6th April 2011:

Rate of Income Tax Weekly Limit Monthly Limit
Basic £55 £243
Higher £28 £124
Additional £25 £110

If the contributions exceed these limits then the benefit would be reported through a P11D (or payroll if applicable) and class 1 national Insurance is due on the amount above the limit.

Childcare Options

Salary sacrifice is a benefit that is received in exchange for a reduction in salary.  So if you are considering offering childcare vouchers as a salary sacrifice scheme, advice should be sort for the implications to your company and employees.

There are now far more options for tax free childcare, and parents can already apply for these.  Childcare providers should have this well in hand, as the roll out of the new schemes have already started.

The new schemes do not need to be put through the payroll and it appears that parents will have more control.  Tax-Free Childcare cannot be used at the same time as childcare vouchers, and HMRC have online calculators parents can use to try and work out which scheme is best for them.

Employee Duplication

We had a number of issues with employee duplication this April, but there are steps that can be taken that we would normally expect to prevent this.

What is Employee Duplication?

HMRC hold an individual record for each employee at their current employer.  Duplication is when HMRC creates a second identical record for that employee at the same employer.

Why is it an issue?

Because at this point everything is still automated, HMRC will then assume that the employee is employed twice at the same company, and will issue tax codes such as BR or D0, removing an employee’s tax free allowance.  You can also have 0T or seemingly random tax codes issued.

If the tax code changes are not spotted in time then employees may have a dramatically reduced net pay.  This will cause problems in the workplace.

What is the solution?

Once the duplication has occurred then the best way to resolve it seems to be for the employees to call HMRC individually.  HMRC may look for a better solution in the future but for now that is the best option.

If there are more than 50 BR or D0 tax codes issued then the Finance Director should promptly contact HMRC to trigger an investigation, HMRC should then be able to fix the error en masse.  If there are less than 50 BR or D0 tax codes issued then the employee has to phone the HMRC helpline on their own behalf.

When does it occur?

The usual time is when there is a change in payroll software.  It can occur at any time but it is usually triggered by a change in employee personal details or how they are reported to HMRC.

How can duplication be prevented?

This used to be fairly straightforward but there has been some unannounced changes in April that mean more employees will have been affected this tax year.  There is an indicator in the FPS (Full Payment Submission) to say that the PayId is changing.  The PayId is the unique number used for the employee in RTI (Real Time Information) submissions to HMRC, and is not necessarily the same as the employee reference number or works number.

HMRC have changed slightly how they deal with the PayId change indicator values in April.  They suggest they are still using National Insurance numbers, names and addresses to try and prevent duplication but this appears to be very unreliable.

If you do change payroll software or provider you should always provide the previous PayId.  The previous PayId must match exactly with what was previously submitted.  If you do not have the previous PayId, or are unsure, it is still possible to indicate a new reference.

Unfortunately, even if the submission is perfect, it is still possible for errors to occur.

HMRC helpline for employers  0300 200 3200

HMRC helpline for employees 0300 200 3300

Apprenticeship Levy

The Apprenticeship Levy came into force this April, and will effect companies or groups with a wage bill of £3 million or higher.  We have had many enquiries around the Levy as it is not particularly straightforward, and there has not been as much publicity as might have been expected.  Where it is a single company affected it is not too difficult, but things become more interesting where there is a group of companies.

The wage bill for the purposes of the Levy is all pay subject to secondary class 1 National Insurance Contributions, such as wages, bonuses and commissions.  The Levy is an additional 0.5% charge which will be reported through Real Time Reporting and paid to HMRC in the usual way.

In payroll we are concerned with the Apprenticeship Levy and how money is deducted through the payroll, but there have also been changes with the Apprenticeship Service and how employers source funding for their training needs.

With the Apprenticeship Levy there is a £15 000 per year allowance available per company or per group, this is where the wage bill of £3 million or higher comes in (0.5% of £3 million is £15 000).  The Levy is calculated per month on a cumulative basis, as is the allowance.  The allowance can be divided between companies within a group, or one company could take it all and the others have zero.

Some examples from our understanding of the Apprenticeship Levy –

Example 1

Company has £500 000 annual wage bill and is not part of a group.

Liability would be 0.5%, so £2 500, but the allowance is £15 000 so this company does not have to pay the Levy

Example 2

Company has £500 000 annual wage bill but is part of a group

Liability would be 0.5%, so £2 500, and the allowance has been set to zero, so this company has to pay the additional £2 500 across the year.

Example 3

Company has £2 000 000 annual wage bill but is part of group

Liability would be 0.5%, so £10 000, but they have £5 000 of allowance allocated to them, so this company would pay an additional £5 000.

Example 4

It is month 3, the year to date wage bill is £800 000.

Liability is 0.5%, so £4 000, and the company is not part of the group so has the full allowance.

The allowance available is 3/12 of £15 000, so £3 750, therefore the company has a Levy to pay of £250 to date.

 

In Example 4 if the company’s wage bill reduced and ultimately was lower than £3 million across the year, any overpaid Levy would have been credited back to the company via a reduction in their payments to HMRC.

For more information and the official site see here or see the ACAS site for a little more information on Apprentices.