From 2012, many significant changes will be made to the operation of the PAYE system. There are also changes from 2013 you may wish to consider.
The most significant imminent change to payroll is the introduction of Real Time Information (RTI). By October 2013, all employers should be using RTI. This allows the Government to operate the new social security benefit called universal credit which replaces several means-tested benefits.
Currently, the PAYE system provides details of employees' earnings, tax and national insurance once a year when the P35 annual return is submitted. Now this information is required to be reported every month (or every quarter for smaller payrolls).
In most cases, this will be done automatically for you by your payroll software. However, you need to be sure that your software can process this updating requirement.
In the meantime, you should make sure that your payroll is ‘clean'. That means that you have the correct name, address, date of birth, and national insurance number for all employees. According to PAYE annual returns submitted last year, the UK employs 507 people called "A N Other", 572 people with the surname "Dummy" and 40 employees who are apparently more than 200 years old! Over 80 per cent of all payroll errors relate to names, addresses and dates of birth.
As the deadline for RTI approaches, changes and further details are being made. For example, at the end of 2011, it was announced that P45s will be retained for a further two years.
From 6 April 2013, the 15p a day tax and national insurance-free limit for luncheon vouchers is finally repealed. If you provide vouchers after this date, the whole amount is subject to PAYE and NI. Luncheon vouchers were introduced in 1946 when food was rationed. The 15p limit was fixed in 1948 when three shillings could buy you a cooked lunch. It has never been increased.
Also going is the tax-free concession for cyclists' breakfasts. This allowed an employee to be provided with a breakfast on days when he or she cycled to work, without that being treated as a taxable benefit in kind. This relief is also abolished from 6 April 2012.
The Government, however, is not abolishing the tax relief for late night taxis for staff who occasionally work late. This relief is subject to strict conditions, please contact us for advice in this regard.
From 6 April 2012, an employee can no longer be contracted out of the state second pension by a money purchase occupational pension scheme. Such schemes are also known as defined contribution schemes.
This means that the employer and employee will pay the full rates of national insurance and not a reduced rate. It also means that the employee will earn an entitlement to state second pension from April 2012.
It is still possible to pay a rebated rate of national insurance for employees in final salary or defined benefit schemes. From 6 April 2012, the rate of rebate reduces from 3.7 per cent to 3.4 per cent for employers, and from 1.6 per cent to 1.4 per cent for employees. This means that such employees and their employers will pay a slightly higher rate of national insurance.
We can advise you whether your scheme is affected by either change and, if so, how to ensure that you make the change correctly.
The lifetime allowance for pensions reduces from £1.8 million to £1.5 million from April 2012.
The annual allowance was reduced to £50,000 last year. HMRC has announced a technical change as to how unused allowances may be brought forward from previous years.
There are three small changes to the rules for taxing employees for company cars.
- There are new thresholds for cars with very low emissions of carbon dioxide. In some cases, the car will not be taxed as a benefit at all. We can discuss with you how practical it may be to provide staff with such cars.
- If you provide a disabled employee with an automatic car because the disability makes using a manual gearbox car difficult, the employee is taxed as if the car had a manual gearbox. From 6 April 2013, this provision is restricted to employees who have a blue badge for disability.
- If the nature of the employment is such that a car needs security features, those features will not be regarded as a taxable benefit in kind.
An employee who uses his or her own car may be reimbursed by the employer. For most purposes, the reimbursement is 45p a mile.
Some employers prefer to pay a lower rate, such as 13p a mile plus a fixed monthly amount. This discourages unnecessary mileage. However the courts have ruled that the monthly figure is wholly subject to tax and national insurance. Although the issue is still not certain, it does seem possible to avoid this tax charge by reducing the monthly figure according to the number of business miles. We can explain how to approach this.
You should not forget that if the employee has someone else in the car for a business journey, you may reimburse another 5p a mile tax-free.
If the employee has a company car, the fuel benefit charged may be avoided by the employee reimbursing the employer for private mileage, or the employer reimbursing the employee for business mileage. The rate used is called the advisory rate. This rate is now reviewed four times a year on 1 March, 1 June, 1 September and 1 December.
The thresholds at which national insurance becomes payable increase from April 2012.
Employers start paying national insurance from £144 a week (up from £136), and employees start from £146 (up from £139). There is no change to the upper accruals point or upper earnings limit.
The lower earnings limit is £107 a week (up from £102). This is the threshold at which an employee is regarded as having made a contribution towards their state pension. It is also the threshold for such benefits as statutory sick pay and statutory maternity pay.
A person ceases to be liable for national insurance once they have reached state retirement age. This is still 65 for men. For women, the age is progressively increasing from 60. This means that a woman is likely to stop paying national insurance at a date other than her birthday. It is important that you know the exact date to stop deducting employee's national insurance from her pay. Please note that the employer continues paying employer's national insurance. We can provide the latest table of dates.
Some employers may be able to claim back class 1A national insurance if:
- they acquired an asset between 2003/04 and 2005/06 for both business and personal use, or
- they bought a holiday home before 6 April 2009 through a limited company.
We can advise if you believe that either of these situations applies to you.
Many women on reaching retirement age have found they are not entitled to the state pension they expected as they had forgotten they had made a married women's election before 1977. It is advisable for all employees, particularly married or widowed women, to check their state pension entitlement before retirement. They may be able to make up any missed years of contributions by paying class 3 national insurance.
The issue of whether an employee is UK-resident continues to cause problems. The Government had announced that it was introducing a statutory residence test from April 2012. This has now been put back by one year to April 2013.
In the meantime, residence is determined under the existing rules which have recently been clarified by the Supreme Court. We can assist you in determining residence status.
It should also be noted that an employee who cannot return from the UK to work in a country in the Middle East affected by political turmoil may still qualify as non-resident.
In most cases, it is obvious whether someone is an employee. However, there are still cases where the issue is not clear-cut. For example, a supervisor who takes weekly meetings of Weight Watchers is regarded as an employee rather than self-employed.
If you have any marginal cases, we can advise you. The consequences of wrongly treating someone as self-employed can be serious.
Although not a tax matter, some significant changes to employment law are expected in 2012.
Employers must collect repayments of student loans through the payroll. At present, the sum collected is 9 per cent of any amount above £15,000 a year.
The £15,000 threshold has remained unchanged since 2005. From 6 April 2012, it will be uprated each year by inflation. In September 2016, it will be increased to £21,000 to reflect increased tuition fees.
An employer may pay the fee for an employee under this scheme. This fee is not treated as a taxable benefit in kind.
HMRC continues to extend the scope for on-line filing of tax returns.
One new facility introduced in autumn 2011 is that any employee who also submits an on-line self-assessment tax return may see his or her tax code on-line.
PAYE penalties for lateness were introduced last year. Following criticisms from the tax tribunal, HMRC has promised to be more prompt in sending out reminders for late P35 annual returns.
From 16 December 2011, HMRC accepts payment under the Faster Payments Service offered by most banks. This guarantees payment by the end of the following working day, though payment is often made within hours.
We can advise on all these changes to make sure that you continue to comply with the law, and use opportunities for legal tax planning.
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Ross Porter, Managing Director at Draig Personnel