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FAQ

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.

Scottish Rate of Income Tax

Scottish rate of income tax

The Scotland Act 2012 gives the Scottish Parliament the power to set income tax rates – The Scottish Rate of Income Tax (SRIT).  This new tax rate will come into force in April 2016, and will continue to be administered by HMRC.

Scottish tax payers will still pay UK income tax, but the rates will be reduced by 10%, and the Scottish Parliament can set the SRIT annually starting from 0.  The initial SRIT will be 10%, meaning a basic rate tax payer will still pay an overall rate of 20% on taxable earnings, the same as the rest of the UK.  This was announced on the 16th December in the Draft Budget for 2016/17.

What this means for the 2016/17 tax year:

UK Income Tax Rate UK Reduced Rate SRIT  Overall Income Tax Rate for Scotland
Basic Rate 20% 10% 10% 20%
Higher Rate 40% 30% 10% 40%
Additional Rate 45% 35% 10% 45%

This may change before April, as it is only in the draft budget, but this would seem unlikely for the first year.

How will it be applied?

SRIT will only be paid by Scottish taxpayers, and HMRC will make this assessment based upon an employee’s main residence.  HMRC started sending letters to confirm addresses on the 2nd December 2015.

HMRC will issue tax codes for April 2016 that start with the letter ‘S’, which will flag the employee as a Scottish taxpayer.

Employers should not decide who is, and is not, eligible for SRIT, there is guidance available for employees that believe their tax code is incorrect.

What about Pensions?

For pensions with tax relief deducted at source, so the deduction is made from net pay, the pension companies have until April 2018 to have the IT systems in place to reclaim the tax at the correct rate, until then claims will continue to be at UK basic rate.

What will happen for Payroll Options Client?

This will have minimal impact on our clients; although there may be an increase in P6 & P9 tax notifications in the 2016/17 tax year.  Outsourcing your payroll solution to Payroll Options means that we will look after applying the codes, and as HMRC have taken responsibility for determining a taxpayer’s status, there should be very little additional work for employers.

HMRC warns of Phishing Scam

HMRC have released another warning about ‘phishing scams’.  The current scam is centred around the subject of complaints, and contains a malware attachment.

Phishing

This is the when fraudsters pretend to be somebody else in an attempt to gain access to personal information. Usually this is in the form of emails but can be in other ways such as social media posts. For more information see here.

Malware

This is malicious software that will attempt to be installed on your computer. Some malware could merely track your online activity but some could, for instance, gain your online bank details for criminals. There is a whole range of malware threats, and more can be seen here.

Self-Assessment Filing

The HMRC warning has been produced in the run up to the Self-Assessment Filing deadline. HMRC staff undertake mandatory training to identify potentially threatening emails, and they suggest individual business should look at their own systems and staff as well.

Tax Refunds

The email claiming to be notifying of a tax refund, with a link to click on, has been around for a while. Employees receiving a refund of tax, usually due to a tax code change, will generally receive this through the payroll, without any additional forms.

If an employee receives one of these emails they should forward it to the HMRC fraud department – phishing@hmrc.gsi.gov.uk.

Employers can always contact us for more information on what to do if an employee believes they have the wrong tax code, and what the likely consequences are.

National Minimum Wage 1st October 2015

From Thursday 1st October 2015 the Minimum Wage rates are set to rise.  These rates apply to pay reference periods beginning on or after that date, and are increases on bands that are already in place.  The biggest rise, of just under 21%, is the apprentice rate.

From April 2016 things are set to change with the introduction of The National Living Wage, which applies to working people over the age of 25.  For those workers below the age of 25 the current National Minimum Wage will continue to apply, although the rates may change.

The National Living Wage should not be confused with the Living Wage, set independently by the Living Wage Foundation.  The Living Wage is calculated based upon the cost of living in the UK.  The National Living Wage, and National Minimum Wage, are set by the Government based upon recommendations from the Low Pay Commission.

National Minimum Wage 1st October 2015

£6.70 for Workers 21 and over
£5.30 for 18 – 20 year olds
£3.87 for 16 – 17 year olds
£3.30 apprentice rate

The Apprentice Rate is for apprentices under the age of 19, or 19 or over but in their first year.

The rates were first announced in March by the coalition government and more information can be found here.  There are some exemptions to the minimum wage, such as self-employed workers, and further details can be found here.

 

 

False, or Bogus, Self-Employment

False, or bogus, self-employment is the process where a worker is treated and paid as self-employed, but in reality are actually treated as an employee.  So their employment status is incorrect.

What are the attractions?

For an employer the attraction is that they do not have to pay employers National insurance or provide employee benefits such as sick or holiday pay, or even pay the minimum wage.  This means they potentially gain access to a cheaper workforce, and thus a competitive advantage.

For the genuinely self-employed worker the advantage is the freedom, flexibility and opportunity to build up a business for themselves.  The Citizen Advice Bureau cites 75% of their clients as happy with their employment status.

What are the issues?

For the employee they will pay more in National insurance and will not receive any employee benefits such as sick or holiday pay.  Being self-employed may also bring additional costs such as insurance or accountancy.

For the employer they could have to prove the status of the worker, and if they fail will be liable for all tax and National insurance as if the worker had been employed for that period, and probably unable to claim anything back from the employee.

Is there a problem with getting it wrong?

The two main issues are with employees losing their employment rights and the cost to the Exchequer of lost revenue – the recent report from the Citizens Advice Bureau estimated as much as £314 million annually.  So there is a human cost and a financial one.

What is happening now?

HMRC are tackling this, and have openly targeted umbrella companies.  There is a tool available on the HMRC website that can be used to try and establish whether a worker should be classed as employed or self-employed.

Recently there has been more attention both with the CAB investigation and the Office of Tax Simplification report.  The OTS describe employment status as a complex and wide-ranging subject, and acknowledge it will be difficult to solve.

The OTS published their consultation report in July and it is likely there will be changes, as well as an increase in HMRC enforcement actions.  In their earlier March report they do refer to the French system, with a minor fine for a mistake in the region of €1500, and for a deliberate false classification in the region of €45 000 possibly including imprisonment.

It is important to get this right, both for the employee and for the employer.  The Government wants to encourage people to start businesses for themselves, but is also actively targeting employers they believe may be falsely classifying workers.

Tax & National Insurance

Tax & National Insurance for the 2015/16 Tax Year

We have picked out some of the headline Tax and National Insurance rates for the year ending April 2016:

PAYE Tax

Allowances April  2015 – March 2016
Personal Allowance £10,600
Tax Rates Taxable Income
20% Up to £31,785  Basic Rate
40% over £31,785 up to £150,000 Higher Rate
45% over £150,001  Additional

 

National Insurance

Employees
Lower Earnings Limit Primary Threshold
(12% contributions)
Upper Earnings Limit
(2% contributions)
Weekly £112 £155 £815
Monthly £486 £672 £3532
Yearly £5824 £8060 £42385
NI Category A Most employees not in a contracted out pension scheme
NI Category C Employees over the state pension age
NI Category M Employees under 21 not in a contracted out pension scheme
NI Category X Employees don’t have to pay National Insurance

These are the commonly used categories, for more information visit the HMRC website

Employer
Lower Earnings Limit Secondary Threshold
(13.8%)
Upper Secondary Threshold* Upper Earnings Limit
(13.8%)
Weekly £112 £156 £815 £815
Monthly £486 £676 £3532 £3532
Yearly £5824 £8112 £42385 £42385

*Point where 13.8% contributions commence for NI category M

NI Category A Employers contribute 13.8% above the Secondary Threshold
NI Category C Employers contribute 13.8% above the Secondary Threshold
NI Category M No Employer contributions until the Upper Secondary Threshold
NI Category X No Contributions

If you want manual tax calculation tables please see here, and for manual National Insurance calculations see here

 

Payroll Options have put this very simple guide together to give an indication of bands and contribution rates.  This should not be relied upon for calculations and for further guidance please contact us.

National Minimum Wage to October 2015

From 1st October 2014

Age Rate / Hour Comments
21 years and over £6.50
18 – 20 years £5.13 also for those aged 22 years and over on accredited training course
16 – 17 years £3.79
Apprentices under 19 £2.73 also apprentices over 19, but in the first year of their apprenticeship

 

 

Visit HMRC for the most up to date information