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TAXGUIDE

TAXguide 04/23: Payroll and rewards update 2023 – Q&A

Technical release

Published: 03 Jul 2023 Update History

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ICAEW's Tax Faculty hosted a payroll and rewards webinar on 16 April 2023. This TAXguide shares to the answers raised at that webinar covering topics such as rates, thresholds, payroll, P11Ds, pension contributions and residence.

A recording of the webinar presented on 16 May 2023 by Ian Holloway and Peter Bickley is available to view on demand.

Rates, thresholds, etc

Q1: I am confused about this national insurance threshold at £25,000.

The £25,000 threshold is the investment zone upper secondary threshold (IZUST). See Appendix A of the government's Investment Zones Policy Offer document of March 2023, which describes the IZUST as:

"Zero-rate Employer NICs on salaries of any new employee working in the tax site for at least 60% of their time, on earnings up to £25,000 per year, with Employer NICs being charged at the usual rate above this level. This relief can be applied for 36 months per employee."

These are the same rules as the freeports upper secondary threshold (FUST), so it is a new threshold that copies an existing threshold's rules.

Q2: Can you provide the link please to the ICAEW Tax Rates and Allowances (all taxes) 2023/24 TAXguide?

Please see TAXguide 1/23: Payroll rates, allowances and thresholds in 2023/24.

Note that this is available online only to members of ICAEW and ICAEW's Tax Faculty. Non-member webinar delegates have been emailed a copy of this guidance note.

Payroll

The webinar explained that in Employer Bulletin February 2023, HMRC had set how to report advances of salary when paid on account of earnings.

Q3: What if the advance payment is partially made of the total salary?

It is these that HMRC regards as payment on account, (eg ,when an employee is given early access to their salary on, say, the 10th and 15th or the month, but is not normally paid until the 25th of the month). Under current law, because these payments are salary paid in advance, the PAYE RTI full payment submissions (FPS) should be submitted on or before each of those dates, (ie, the 10th, the 15th and then the 25th).

HMRC proposes to introduce legislation saying that the employer has to submit only one FPS, on or before the date that the employee is contractually entitled to be paid.

Q4: What about real loans as opposed to accessing pay early? We have lots of clients who give employees an "advance" which we currently then deduct when payroll is run?

See Employment Income Manual EIM42280. A loan advance (recovered in the next pay run) is not classed as a payment on account and these can carry on as now. HMRC is focusing on employees having early access to earned salary ahead of payday.

Q5: If a starter is missed from the payroll by our agent, we estimate their pay and pay it in the month it was due, and the agent puts it on the payslip as an advance next month and shows two amounts of payment on their next payslip. How does the FPS work as they are not on payroll?

So we have two months of salary paid in one payment with an advance. In the payroll, it is important that the payroll splits the payment between the two pay periods so that NIC can be correctly calculated – this is an existing requirement for mid-month starters. For the FPS, the agent must submit the starter declaration (stating A, B or C to determine the correct code number) with the actual start date so that the employee is 'registered' on HMRC's systems as an employee of your organisation. It does not matter that the FPS is sent in the month after the employee actually started so long as it is submitted on or before actual payday.

Q6: How do you correct contractual pay reporting if something changes between reporting and actual paying?

Please see HMRC's guidance Fix problems with running payroll – you made a mistake in your FPS or EPS which explains how to correct errors in the FPS or EPS.

We would note that HMRC's guidance about the payment date to be included in the FPS is incorrect – the payment date to be included in the FPS should be the date that someone is contractually entitled to be paid, not the date on which they were actually paid. One of the reasons for using contractual date rather than actual pay date, which can vary when contractual payday is on a weekend or public holiday, is to smooth out the dates of receipt of income when means-testing employees on universal credit – see CPAG commentary and SSWP v Johnson, Woods, Barrett & Stewart [2020] EWCA Civ788.

Q7: Employee on maternity leave: is pension based on normal pay or SMP?

It depends on what type of pension scheme you are in – see MoneyHelper – maternity leave & paternity leave and your pension. If, as is most common, the pension scheme is a money purchase one, the employee pays contributions based on pay received and the employer pays on the pay that would have been received had their employee not been on maternity leave (this also applies to other child-related leaves such as adoption and paternity).

Q8: We don't ignore student loan start notices but where an employee's earnings is insufficient to make any repayment we keep getting reminders – why?

We assume that HMRC's systems send the student loan notices and expect a loan deduction – they don't take into account the actual value of an employee's pay. The most important thing is that you are not ignoring these generic notification service (GNS) prompts.

Q9: I have an issue with the payroll ID transfer over to new payroll software where HMRC is not helping resolve the issues and instead closes the case and RTI on our payrolls is still not agreeing to what is on the HMRC portal.

We have long been in discussion with HMRC about differences between HMRC's liabilities and payments account and those of employers – please see Resolving HMRC employer liabilities and payments account errors, publicising our letter to HMRC dated 1 March 2023 ICAEW REP 21/23.

ICAEW cannot get involved in an ongoing dispute but as noted in our news item we can use your case as an example.

Transferring existing employees between payrolls is fraught with difficulty and routinely creates duplicate records in HMRC's database unless the payroll IDs and other employee information are identical. Best advice is to make such changes only in month 1 but this is not always commercially practical. You will need to ask HMRC's Employer Helpline to help resolve this and to transfer your case to the Charges Resolution Team.

Q10: Should HMRC modify the employer end of year summary to add the employer's corporation tax liability to simplify rebate claims by limited CIS companies? Currently the EOY summary contains only NIC, Tax and Other (CIS).

This is a laudable aspiration but in the world in which we live we feel on balance that keeping corporation tax separate from PAYE/CIS reduces scope for errors.

P11D

Q11A: Is there any registration process to file P11Ds electronically?

See HMRC's guidance PAYE Online for Employers – Using PAYE Online. There is no registration as such; however, to submit forms P11D and P11D(b) (assuming that the number of P11Ds is 500 or less), employers will need to sign in to HMRC's Online Service using their Government Gateway ID.

Q11B: If one hasn't registered a company for P11Ds in time, what is the way to prepare and file the return?

Employers who did not get a log in when they registered as an employer will need to obtain a Government Gateway ID – see HMRC's guidance PAYE Online for Employers – Enrol if you did not register online.

Pension contributions

Q12: Is it possible that someone who is 18 could be auto-enrolled in to a pension but if earnings are low, they may not get any tax relief?

Whether or not a non-taxpayer worker up to age 75 receives tax relief on their pension contributions depends on how contributions are made to the pension scheme.

In a net pay scheme, contributions are deducted from the gross salary (ie, before tax has been deducted). The worker then suffers tax only on salary 'net' of (ie, after deducting) the contributions. This means that the workers automatically receive tax relief on their contributions at their marginal rates of tax but workers who are non-taxpayers receive no tax relief.

In a relief at source scheme, contributions are deducted from the net salary (ie, after tax has been deducted) and the employer deducts only 80% of the total contribution from the net salary. The pension scheme claims an amount equal to basic rate tax relief from HMRC which it then adds to the pension scheme. The key point to note here is that the basic rate relief top-up is added to the pension scheme whether or not the worker earned enough to pay tax in the first place.

The government has laid legislation so that HMRC will from 2024/25 make 'top-up' payments directly to non-taxpayer employees who are members of net pay schemes to put them in the same position as employees who are members of relief at source schemes – see clause 25 of Spring 2023 Finance Bill.

Q13: Can you pay £10k into a money purchase pension plan even if your earned income is less than £10k?

See HMRC's guidance Pension schemes rates – Member contributions. This says that there is no maximum level of contributions; however, tax relief is only received on the greater of 100% of UK taxable earnings or £3,600.

Q14: Once the pension lifetime limit is abolished, do employers have to re-enrol affected employees?

We will have to wait and see what the legislation says 'in a future Finance Bill' plus guidance from the Pensions Regulator.

However, HMRC has issued guidance indicating that the timing of an application for enhanced or fixed protection is key.

Q15: When will the Pensions Bill go through

The Bill to allow the Secretary of State to make changes to auto-enrolment will go through in 2023, (ie, before the end of the current Parliamentary term in November). The Bill being enacted does not necessarily mean that the Secretary of State will use the powers immediately. However, the current UK Government has previously committed to making these changes by the 'mid-2020s'.

Residence

Q16: What makes a taxpayer Scottish? Is it their usual home address?

Place of residence is key. For an individual to be a Scottish taxpayer, they must be UK resident for tax purposes – an individual who is not UK tax resident cannot be a Scottish taxpayer.

If for a tax year an individual is UK resident for tax purposes, they will be a Scottish taxpayer for that tax year if they satisfy any of three tests:

  1. they are a Scottish Parliamentarian; or
  2. they have a 'close connection' to Scotland through either:
    • a. having only a single 'place of residence', which is in Scotland, or
    • b. where they have more than one 'place of residence', having their 'main place of residence' in Scotland for at least as much of the tax year as it has been in any one other part of the UK; or
  3. where no 'close connection' to Scotland or any other part of the UK exists (either through it not being possible to identify any place of residence or a main residence), by day counting.

See HMRC's Scottish Taxpayer Technical Guidance, specifically the definition of a Scottish taxpayer in STTG2000.

Tax Faculty

This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.

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