The Compact Payroll Reference Book 2008 - 2009 NOW AVAILABLE

News Items – at 15th May 2008

Introduction

Two announcements in Parliament feature in this week’s news.  The removal of the 10% tax band from the start of this tax year has been very controversial and created considerable negative press for the Government.  Instead of addressing the affected employee groups separately, as appeared to be the Government’s initial intention, a single blanket solution is to be applied – a one-off increase in the personal allowance, to be implemented in September but applied retrospectively for the whole tax year.  Do read the article and consider how the change will affect you.

The other announcement is a sneak preview, given by the PM in advance of the Queen’s Speech, of the Government’s forthcoming legislative programme.  More changes; more work.

You may not work in the Isle of Man, but just read this week’s item and see how simple car taxation in the UK could really be!

Charity Payroll Giving

HMRC guidance updated

The reduction in the basic rate of tax, from 22% to 20%, has prompted HMRC to review its guidance for employers and employees on the operation of Payroll Giving schemes.  Donations given by employees under payroll giving benefit from the “net pay arrangement”, whereby donations to charities are deducted from gross pay before tax (but not before NICs).  As a result, the actual cost to the employee, measured by the effect of the donation on the employee’s net pay, is less than the amount deducted from gross pay.

In the last tax year, a donation of £10 deducted from gross pay reduced the net pay of an employee paying tax at 22% by £7.80.  The reduction in the basic tax rate to 20% in the current tax year means that, for the same £10 deduction from gross pay, net pay reduces by £8.00.  The effect on employees paying tax at 40% is unchanged; the net pay reduction is £6 for a gross donation of £10.

Further information:
Payroll Giving Helpsheet  http://www.hmrc.gov.uk/charities/donors/payroll-giving.htm
Updated Guidance on Payroll Giving  http://www.hmrc.gov.uk/payrollgiving/index.htm

Personal Tax Allowance

Increases from September to reduce the impact of removing the 10% tax rate

On 13 May, the Chancellor announced to Parliament that, in order to reduce the impact of the removal of the 10% tax rate from April 2008,

• the personal allowance will be increased by £600, from £5,435 to £6,035, giving a new emergency tax code of 603L
• the basic rate limit, the amount of earnings on which 20% tax is due, will be reduced from £36,000 to £34,800, and, as a result,
• the higher rate threshold, the point from which 40% tax is due on earnings (i.e. the sum of the personal allowance and the basic rate limit), will be reduced from £41,435 to £40,835.

The overall effect is to reduce the taxable pay of 20% taxpayers by £600 during 2008/09, with a resulting fall of £120 in the amount of tax paid in the year.  Some 600,000 low-paid employees will stop paying tax altogether.
The changes will be introduced in September 2008 but will apply retrospectively (for employees with cumulative tax codes) from the start of the tax year.  The actual date in September has not yet been announced but, based on the Chancellor’s comment that monthly-paid employees would benefit from the change in their pay for September, the automatic increase in “L” suffix tax codes may occur for paydays on or after 7 or 14 September, i.e. tax week 23 or 24.

The effect will be that employees with the new 603L emergency tax code applied on a cumulative basis,

• will stop paying tax altogether if they have annual earnings that do not exceed £6,035
• will pay £120 less tax over the tax year (i.e. £600 @ 20%) if their annual earnings exceed £6,035
• will start to pay tax at 40% if their annual earnings exceed £40,835
• will pay tax at the same level if their annual earnings are £41440 or more.

The Chancellor did not claim that the increase in the personal allowance would remove altogether the effect of scrapping the 10% tax rate and, indeed, employees earnings between £6,035 and £10,510 will still pay more tax than they would have done if the 10% rate had remained in place. At the same time, employees earning between £16,000 and £40,000, who were already benefiting from the April 2008 changes, are gaining a further £120 a year in their net pay.

The following chart compares the effect of the changes that were introduced from April 2008 (i.e. personal allowance of £5,435 and basic rate limit of £36,000) with the further changes that are to be implemented in September 2008 (i.e. personal allowance of £6,035 and basic rate limit of £34,800).  The personal allowance used for 2007/08 is £5,225. 

There are no changes to the age 65 and 75 personal allowances.  These have already been increased substantially from April 2008.

From a payroll perspective, there are many, and as yet unanswered, questions and issues raised by this announcement.

The NICs earnings threshold has been set at the same level as the tax threshold since 2001.  The starting point for the payment of both income tax and NICs is currently set at £5,435 for both taxes.  The Chancellor made no mention of any corresponding increase to the NICs earnings threshold so it would appear that the two rates will diverge from September 2008.

If the lower thresholds for tax and NICs are going to be different in future, there must be a question mark over the Government’s intention, from April 2009, to align the higher rate tax threshold with the NICs upper earnings limit.  If the policy remains intact, the reduction in the higher rate threshold from September 2008 will result in a lower aligned figure from April 2009, down from an anticipated £44,000 to £43,300.

The changes introduce a major unplanned project into HMRC’s schedule and budget for the year, involving new technical specifications for developers, revised Helpbooks and Employer CD-ROM, communicating changes that will affect every employer’s payroll at an unprecedented time of the year, issuing new P2 coding notices to taxpayers and new P9 coding notices to employers for employees without L-suffix codes (as if it were the start of a new tax year), and considerable scope for errors!

All of the payroll software developers will have what is effectively an additional year-end update to build, test and issue for the September deadline.  The development will involve considerable structural changes to their systems as, in general, they have not been designed to handle three different sets of tax rules within the same tax year.  Like HMRC, they will also incur costs for which they have not budgeted and will be putting demands on development staff who will already either have planned holidays during the summer period or be committed to in-year filing and new P45 developments..  Depending on the terms of the licenses with their clients, the developers may not be able to pass on these additional costs.

Employers are also likely to have similar resource and financial issues to address.  Many of the staff in payroll departments and IT departments will be taking holiday after the end of the year-end reporting period, creating potential risks in successfully installing and testing the necessary new payroll updates.

Further information:
13 May 2008 Chancellor’s Announcement  http://www.hmrc.gov.uk/news/may13.htm
Statement by the Chancellor of the Exchequer, Rt Hon Alistair Darling MP on Income Tax  http://www.hm-treasury.gov.uk/newsroom_and_speeches/speeches/statement/
Speech_statement_130508.cfm
PAYE (Pay As You Earn): change to personal allowance  http://www.hmrc.gov.uk/employers/change-to-pa.htm

Draft Legislative Programme

PM announces plans for new legislation

On 14 May, the Prime Minister, Gordon Brown, gave a preview of the legislative programme for the next parliamentary session that is to be announced in the Queen’s Speech.  Several of the measures are of interest in the context of payroll and HR.  Legislation is planned that will

• provide a right for young persons to obtain an apprenticeship and see the number of apprenticeships increase to 210,000 by 2010
• provide a right for every worker to request time to train, supported by personal skills accounts to provide access to the training each worker needs
• extend the right to flexible working to parents of older children, from April 2009
• provide equal pay and benefits for agency workers after working for a period of time for an employer.

Further information:
Statement on the Draft Legislative Programme  http://www.number-10.gov.uk/output/Page15535.asp

Payroll deadlines during the next month

May 19 – For employers required to pay tax and NICs etc to the Accounts Office monthly, this is the deadline for payment to be received by the Accounts Office, unless made electronically.

May 19 – This is the deadline date for filing, in paper form or electronically,

• form P14 End of Year Summary
• form P35 Employer Annual Return
• form 38A Supplementary Return

May 22 – For employers required to pay tax and NICs to the Accounts Office monthly, this is the deadline for electronic payments to be cleared into the HMRC bank account.  Payments through BACS must be initiated by May 20 at the latest.

May 26 – The date after which non-receipt by the HMRC of year-end returns P14s, P35 and P38A will automatically result in late-filing penalties.

May 31 – This is the deadline for issuing P60s to qualifying employees.

June 5 – This is the final day of tax month 2.  Tax and NICs etc for payments made in the tax month to June 5 are due for payment to the Accounts Office by June 19, or by June 22 if paid electronically.

Payroll FAQ's

NICs Table Letter C

Should table letter C be used after state pension age if the employee is still contributing to a contracted-out pension scheme?

Contracted-out employment starts at age 16 and ends when the employee reaches the state pension age. The flowchart on page 3 of the CA41 NICs Tables (for Table Letters B and C) is very specific. If an employee is at or above the state pension age table letter C must be used.

The table letter must be changed to C from the first payday on or after the employee’s birthday. The employee is no longer required to pay any NICs at all, and the employer is required to pay NICs at the full not contracted-out rate (i.e. the same as Table Letter A), not at any contracted-out rate, even if the employee continues to make contributions to a contracted-out pension scheme.

The state pension age is currently 60 for women and 65 for men. Between April 2010 and April 2020, the state pension age for women will move in steps from 60 to 65, so great care will be needed to ensure that the change of table letter occurs at the correct time.

An employee’s table letter should not be changed to C unless the employer is convinced that the employee is actually at the state pension age. The employee must be asked to provide appropriate evidence. For example, the employee’s birth certificate or passport should be inspected and a copy retained. Alternatively, a CA4140 or CF384 Certificate of Age Exception, issued by the National Insurance Contributions Office, can be accepted and retained as evidence.
If Table Letter C is used before the employee reaches state pension age, or a contracted-out Table Letter continues to used after reaching that age, the employer is responsible for the shortfall in NICs deductions.

Employer FAQ – Directors’ National Insurance Contributions

How are NICs calculated for a director who is joining the company mid-year?

(The following FAQ was issued a few weeks ago but contained some inaccuracies. We are therefore reproducing this corrected version.)

The calculation of primary and secondary Class 1 NICs for company directors is the same as for employees in general, except that an annual earnings period is used. The effect on the director of applying an annual earnings period is that

• no primary NICs are due until the director’s earnings in the year to date reach the annual earnings threshold (£5,435 for 2008/09),
• primary NICs are then due at the appropriate rate on all earnings up to the annual upper earnings limits (£40,040 for 2008/09), and
• primary NICs are then due at 1% on earnings above the upper earnings limit.

The same kind of calculation is used where

• an employee is appointed as a director for the same company during a tax year, or
• a new director takes office in a company during a tax year.

However, instead of using an annual earnings period, a “pro-rata” annual earnings period is used to calculate NICs for the remainder of the tax year. This involves recalculating the annual values of the LEL and the UEL so that they relate to the number of tax weeks between the date on which the directorship starts and the end of the tax year.

When determining the number of tax weeks in the pro-rata period to the end of the tax year, the tax week in which the directorship began is counted as one of those weeks. If there are 53 weeks in a tax year, only 52 weeks are taken into account unless the director starts in week 53, in which case there is one week in the pro-rata period. (So if a director starts in week 52 or week 53, there is one week in the pro-rata period in each case.) A “ready-reckoner” is provided at the back of HMRC’s booklet CA44 National Insurance for Company Directors.

If an employee becomes a director with the same employer mid-year, the NICs that have been calculated before appointment to director are not included with the earnings paid subsequently. Only earnings paid after appointment are assessed under the pro-rata annual earnings period. Of course, the earlier NICs are merged with the NICs as a director when they are reported on the director’s P14 Summary at the year end.

Example: If the directorship begins on 8 September, in tax week 23, there are 30 tax weeks remaining in the year including the tax week in which 8 September falls. The ET is converted to a pro-rata annual amount by dividing the annual rate by 52, multiplying it by 30, and , if necessary, rounding up the next whole pound (i.e. £5,435 for 52 weeks becomes £3,136 for 30 weeks). The UEL is converted to a pro-rata annual amount by multiplying the weekly rate by 30 (i.e. £770 per week becomes £23,100 for 30 weeks). Therefore, this director will start to pay main primary NICs when total earnings since appointment as a director reach £3,136 and will stop when they reach £23,100. Additional primary NICs continue to be paid on earnings above £23,100.

There is no reason why the concessionary arrangement of calculating NICs using a weekly or monthly earnings period should not be used instead of the pro-rata annual earnings period if

• the director has consented to the employer using this method, and
• by the end of the year, the NICs collected are as least as much as they would have been if the pro-rata annual earnings period had been used.

The following Table compares the pro-rata annual earnings period method and the alternative method, showing the NICs payable for a director who is paid £3,000 per month for the first four months of the tax year, and £5,000 per month from month 5. The appointment to director was from 1 August. As that date falls in tax week 17, that week and the following weeks give a pro-rata annual earnings period of 36 weeks. (The calculations use NI category A, the NI rates for 2008/09, and the exact method of calculating NICs)

*NICs for Month 12 calculated using Pro-rata Annual Earnings Period

ISLE OF MAN

Taxation of Company Cars and Fuel

Proposals to update procedures on basis of environmental impact

The Income Tax Division, on 13 May, published a document outlining proposed changes to the taxation of company cars and fuel provided to employees by their employers. In line with the Treasury Minister’s announcement in his 2008 Budget speech, the proposals for a thoroughly updated system are based more on environmental impact and aligned with the new simplified annual vehicle duty bands used by the Department of Transport.

In order to allow businesses time to prepare for this change, the proposed new system is expected to become operational from 6 April 2009.

The current arrangements for calculating the car and fuel benefits relate principally to the vehicle’s original market value (OMV) and its cylinder capacity, although the car benefit can be increased for low mileage and reduced for high mileage.
The proposal document highlights the following problems with the current system of taxing company cars and fuel:

• it is cumbersome and time-consuming for employers to operate
• business mileage is regularly omitted, estimated or incorrect when details are submitted and this leads to further enquiries being made with the employer
• all vehicles with an OMV over £29,000 result in the same scale charge (a £90,000 car would be deemed to have the same benefit as one costing £30,000)
• higher business mileage reduces the charge - from an environmental viewpoint this may encourage additional car use
• the statutory tables do not reflect the current cost of cars and fuel.

As part of the review, the Income Tax Division considered mirroring the systems being operated in other jurisdictions. However, it became apparent that doing so would place even more of an administrative burden on local employers. For example, car benefit in the United Kingdom is calculated in a series of numbered steps, requiring employers to consider a number of factors such as price, accessories, CO2 emissions, availability, fuel type and employee contributions – each of which often has associated complex rules. The fuel benefit charge is calculated by multiplying a set figure for each year by the percentage for CO2 emissions for each particular vehicle that is used when calculating the car benefit charge.

In October 2007, new vehicle duty rates were introduced by the Department of Transport which reduced the annual vehicle duty for cars below 1,000 cc from £60 to £50. The duty for cars with engines between 1,000 cc and 1,200 cc remained at £60, for cars with engines between 1,200 cc and 5,000 cc the annual duty increases incrementally and a new band of £300 was introduced for cars with engines above 5,000 cc. This approach was considered to be a ‘Greener Vehicle Duty’ and was intended to encourage the use of smaller cars with better fuel economy and lower emissions.

Consequently, the proposed new system will have the same objective as the vehicle duty changes, namely to encourage the use of smaller vehicles with better fuel economy and lower CO2 emissions and therefore reduce the impact on the environment. It will be simple, easy to comply with and straightforward for employers to administer.

The proposed table of charges for the 2009/2010 tax year is as follows:

Further information:
Benefits in Kind - Taxation of Company Cars and Fuel - Proposal Document http://www.gov.im/treasury/incometax/ViewNews.gov?page=lib/news/t
reasury/incometax/benefitsinkindta.xml&menuid=11570

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