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PAYE - a shifting landscape - Changes to be aware of from the start of 2016/17

There are a number of changes coming for the 2016/17 tax year for PAYE. Below are some of things to look out for …

  • Changes to the Employment Allowance
  • Auto Enrolment – more staging dates are reached
  • National Living Wage
  • Payrolling benefits in kind
  • Removal of Dispensations for expense reporting
  • Security changes to BACS payments
  • New National Insurance category for apprentices
  • Statutory exemption for trivial benefits
  • New Student Loan type – Plan 2
  • Scottish Rate of Income Tax

Changes to the Employment Allowance

Most companies in the UK are currently eligible to claim an allowance of up to £2,000 per year against their Employer’s Class 1 National Insurance liability – for the 2016/17 tax year this is set to increase to £3,000.

However, if there is only one employee on the PAYE scheme, who is also a director, then the scheme will no longer be eligible for this relief.  There are currently no restrictions on companies only employing 2 or more directors. As in previous years, restrictions apply when the same person has majority control over more than one PAYE scheme. In this situation, only one Employment Allowance is available across these schemes.  If this has been claimed on one company and it would be better claimed on the other, this change must be made in the first pay period of the new tax year.

Tax planning opportunities remain in this area, but care should be taken to ensure that a salary level is set such that this allowance is utilised as effectively as possible. There are many interacting factors to be considered, most notably the age of the director and level of any other income.

Auto Enrolment – more staging dates are reached

Over 600,000 small to medium companies are expected to reach their staging date in the 2016/17 tax year – if you haven’t already staged you will need to know when this date is.  If you have not received a letter from the Pensions Regulator with this date, you can find it on http://thepensionsregulator.gov.uk/employers/staging-date.aspx, using your PAYE reference number.

You will need to have a pension scheme in place, and be ready to assess your employees, keep accurate records and send the correct correspondence to your employees.  Some employers may find it more convenient to sign up with a pension scheme administrator to take care of these duties. 

If you are a sole director company, or if you have more than one director but only one has a contract of employment you may be exempt from the auto-enrolment requirements, however you will still need to make a declaration to this effect at the link below:

https://automation.thepensionsregulator.gov.uk/notanemployer

If you need any advice on pensions our sister company, Inspire Financial Services Ltd, will be happy to help.  Please email howard@inspire.uk.net or call him on 01202 717867.

National Living Wage

From the 1st of April 2016 all employees over the age of 25 will be entitled to earn the new National Living Wage of £7.20 per hour.

Any employees under 25 will still be subject to the existing National Minimum Wage rates as shown below:

Age 21 to 24                                                                                                       £6.70

Age 18 to 20                                                                                                       £5.30

Under 18 (but above compulsory school leaving age)                              £3.87

Apprentices under 19, or first-year apprentices 19 or over                       £3.30

Payrolling benefits in kind

From 6 April 2016 there is now an option to process employees’ benefits through the payroll instead of on form P11D.  The cash equivalent of the benefit must be calculated at the beginning of the year and split evenly according to your payroll frequency. This is currently available for all but the following benefits:

Vouchers and credit cards
Living accommodation
Beneficial loans

Items not processed in this way, as well as the above 3 items will still need to be reported in the usual way on form P11D; and the system for reporting and collecting Class 1A National Insurance is also currently unchanged and as such is reportable on form P11D(b) by 6 July 2016 and payable by 19 July 2016 (22 July 2016 for online payments)

If it is your intention to payroll benefits, you as the employer must sign up for this service online by 5 April 2016. Agents are not able to register on your behalf, so access will be needed to the PAYE service on the Government Gateway.

Removal of dispensations for expense reporting

Dispensations will be repealed from 6 April 2016 and will be replaced with a system incorporating legislation covering payment of tax-allowable expenses; a requirement for an expense checking system and new HMRC Approval Notices which will be issued in specific circumstances.

The new exemptions will not cover expenses/allowances/benefits provided in conjunction with salary sacrifice arrangements and it will not be possible to cover these in an Approval Notice either.  Another important point to note is that HMRC Approval Notices cannot be applied for retrospectively, so will only be effective from the date they are agreed. This means that if an employer is paying rates and allowances under a dispensation agreement, and these are not covered under the new legislation covering tax-allowable expenses, these will become taxable and possibly subject to National Insurance unless an Approval Notice is granted to cover these from 6 April 2016.

Security changes to BACS payments

From the 13th of June 2016 tightened internet security procedures will be put into place by BACS, and they will be withdrawing support for the older protocols to provide protection for these new systems.  If you use BACS to make any payments it is vital that you check your IT support systems and software providers to endure that your operating systems, browsers and software are up to date and compliant with these changes.  If your systems are not up to date you may experience delays in paying your employees, settling invoices or collecting any direct debits.

Please note that if you use an independent bureau to make BACS payments you will still need to ensure your systems are up to date in order to download the relevant reports.

New National Insurance category for apprentices

In the new tax year you will not need to make employer’s National Insurance Contributions for any apprentices under the age of 25, up to the new Apprentices’ Upper Secondary Threshold of £43,000 per annum. 

If any of your employees under 25 are employed as apprentices, their pay should be processed using National Insurance category H to ensure that this change takes effect.

Statutory exemption for trivial benefits

Legislation is to be introduced in Finance Bill 2016 as issues raised over the potential abuse of this limit have now been resolved. The limit will be £50 per individual benefit and there will be a cap of £300 per year where a benefit is provided to a director or other office holder of a close company. Where the director’s or office holder’s family or household member is also an employee of the company, there will be a separate cap of £300 as well.

New Student Loan type – Plan 2

A new loan repayment plan (Plan 2) will apply from the 2016/17 tax year for any employees who took out a student loan on or after the 1st of September 2012.  A different earnings threshold is used to trigger repayments for this plan and it will run alongside the current Plan 1 Loans.

Earnings threshold for Plan 1                      £17,495 per annum
Earnings threshold for Plan 2                      £21,000 per annum
Student loan deduction rate                       9%

Any start notices received directly from HMRC will now specify the plan type, and the HMRC starter checklist will be redesigned to include this question.  If a new starter provides a P45 which indicates that they have a loan, it is important to check which Plan it is. If the employee is unable to confirm this, the default to use is Plan 1, this should then continue to be used unless a notification from HMRC is received altering this to Plan 2.

Scottish Rate of Income Tax

As of the 6th of April 2016 Scottish residents will be issued with a new tax code prefix of ‘S’ to ensure that their PAYE is collected correctly – for example a tax code of 1100L would now be S1100L.

If you have any employees who have moved to or from Scotland please note that it is the employee’s responsibility to keep HMRC up to date with their change of address.  They can make this update on the Employee Helpline 0300 200 3300, or using the form at https://online.hmrc.gov.uk/shortforms/form/PAYENICoC

Summary

The whole area of employment tax is moving towards a much stronger reliance on the employer. It is unclear how HMRC are intending to police these changes, other than conduct more compliance checks. There is also very little guidance on how penalties will be charged, but it goes without saying that these changes can only represent increased risk to the employer.

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