2013 Budget commentary
Written by Ray Coman
In his first Budget since the loss of Britain’s credit rating, the chancellor has put forward accelerated plans for encouraging growth, spending and employment in the economy. The personal allowance increase and the corporation tax rate cut will both occur a year sooner than previously announced. Tax savings will also come to smaller businesses in the form of an employment allowance.
The most significant announcement came in the form of a new tax break for employers. Starting from 6 April 2014, all businesses will be entitled to an Employment Allowance which will cover the first £2,000 of employers’ national insurance liability.
As an illustration, employers would pay no national insurance on a £22,400 salary paid to one of their employees. This results from a rate of employer’s national insurance equal to 13.8% on any payments over approximately £7,900. To provide another example, the effect of the allowance is the same as eradicating national insurance on the hiring of four staff at the minimum wage (of say £11,525 per year.)
The announcement will be particularly helpful to small business seeking to hire their first employee. The incentive is well designed to relieve unemployment which remains stubbornly high among jobseekers in the 18-24 age band.
There was good news for larger business as well. The full rate of corporation tax is now to reduce by a further 1% to 20% starting in April 2015. In previous announcements the full rate of corporation tax was set to be reduced to 23% in April 2013, to 22% in April 2014 and 21% in April 2015. Following the budget proposal of today, the rate will be further reduced to 20% in April 2015.
The overall rate has so far dropped 2% a year since the year starting in April 2010 when it was 28%. Eventually, the most recent scheduled tax cut will put Britain’s rate of corporation tax the lowest in the Western world; lower than Luxembourg at 21%.
The personal allowance will increase from 6 April 2014 to £10,000. As a result, the increase is now taking place one year sooner than previously announced.
From April 2015, parents will be able to have up to 20% of their childcare costs paid tax free, subject to a yearly maximum £1,200 per child.
With a triple dip looming in the economy, the further cuts announced today are hoped to re-spirit the economy over the remaining term of the coalition. Opportunities will arise among individuals, families and small business to take advantage of these tax cuts. Please contact us if you would like to discuss your tax plans in further detail.
Real Time Information
Written by Ray Coman
The real time information (RTI) reporting system for payroll will be introduced from April 2013. Under the RTI regulations, Pay-As-You-Earn (PAYE) information should be reported electronically to HMRC on or before any payment is made. This replaces the current system, in which PAYE information is submitted once a year. RTI represents the most significant change to the PAYE system since it was introduced in 1944.
With real time reporting, it will no longer be a requirement to electronically file an employer's annual return to HMRC, which is currently summarised on forms P35 and P14. All the information, otherwise on the P35, would be relayed to HMRC on the payment reports for that year. An individual should still be sent a P60 which contains information that they may need to complete a personal Tax return. Similarly, there will no longer be an obligation to send HMRC P45s and P46s which are used to notify about starters and leavers. This is because information about starters and leavers will be automatically related to HMRC on the next payment occasion. Unchanged, however is the requirement for employers to provide P45s to leavers and use the P45 provided by a starter to update their payroll records.
Under the new regulations, most employers will have to start using Real Time Information (RTI) from April 2013, although employers with over 5,000 employees will have until October 2013 to be fully compliant. HMRC have indicated that they will notify employers when to start using the new system.
What to report
A Full Payment Submission (FPS) is the name given to the report which is required to be electronically communicated to HMRC on or before a payment is made to an employee. The FPS will include:
- Full name, address, date of birth, national insurance number and gender of each employee.
- The amount paid to every employee, including wages, overtime and bonuses.
- Any deductions made for tax, national insurance and student loan repayments.
- Statutory sick pay and all statutory maternity, paternity and adoption pay.
Under the existing system of e-filing for employers' annual returns, the above information is already reported to HMRC, however there are two additional pieces of information to be included on the RTI
- Number of contracted hours (within certain bands) for each employee. This information is for the purpose of calculating entitlement to tax credits, in real time.
- An indication that an employee has had an irregular pattern of pay, for instance, due to unpaid leave. This would confirm to HMRC that the employee is still employed, but not being paid for a while.
The FPS would also indicate the final payment before 5 April, as the year-end returns are no longer reported. Similarly, the leaving date and starting date are indicated on the following FPS, as P45s are no longer separately reported to HMRC. Form P11d for benefits-in-kind are still reported to HMRC under the existing arrangement. Payment dates will remain as 22nd of each month (or each quarter where the employer makes quarterly payments.)
Preparing for payroll alignment
It is a requirement of RTI reporting for PAYE information conveyed by the employer to be aligned with that held with HMRC. Consequently, employers should review the accuracy of all staff information, and summarise hours worked in time for when the first FPS is to be sent to HMRC. The first FPS may include information which would not be included on future FPSs, such as employees who have worked since 5 April of that year, but have since left. For most employers this may not be a practical hurdle, since the initial submissions will probably be shortly after April 2013.
It is the responsibility of employees to let HMRC know about any relevant change in personal details, such as change of address. HMRC may not automatically accept change of details related by an employer for data protection purposes. Nevertheless, the employer would still be liable to HMRC for any errors in the RTI. In practice, incorrect information on the FPS could lead to it being rejected, and therefore eventually late, and subject to penalties. It may therefore be prudent to review contracts to oblige employees to notify their employer in addition to HMRC regarding any change in details. It may be appropriate to review and update a new starter checklist. Name and address details for new employees should be externally checked with an official source, such as a passport. HMRC offer a national insurance verification process.
Implication for director of own company
An FPS would include all payments including those below the lower earnings limit for national insurance. Where no monthly returns have been submitted, HMRC would estimate any PAYE due, and pursue the employer for the outstanding amount, even if there is no tax due. However, as before, there is no requirement to register as an employer if all payments made to employees in the year are below the national insurance limit. In practice, therefore, it would make sense not to register as an employer, unless a director was in a position to make a monthly FPS with showing no deductions. Coman & Co. do not offer a monthly 'nil return' service. Voluntary national insurance contributions may be a suitable alternative for directors of one person companies. This is because the social security benefits (including the state pension) would not accrue to a person who is not being paid above the lower earnings limit or is otherwise paying national insurance. For entitlement to the universal credit, a director, in the one-person-company-minimum-salary scenario should notify the Department of Work and Pensions (DWP.)
Employers can implement RTI reporting either through payroll software or via a payroll bureau. HMRC have published an approved list of software providers. HMRC also offer their own software, which by their own admission, has key limitations in dealing with many irregularities. The HMRC software does not produce payslips, P60s or P45s, or record any pay deduction which is not related to PAYE.
As the new RTI system will be heavily reliant on technology, employers should consider reviewing contingency arrangements, such as recourse to a separate payroll bureau. It is possible to send information to HMRC in advance of payday, where for instance computer system downtime is anticipated.
It is still the responsibility of the employer to submit a correct RTI, regardless of whether the service has been outsourced to a payroll bureau.
Most payroll software providers offer tax tables which automatically update, and a service which allows the pay information to be forwarded in real time.
The objective of RTI are to:
- Reduce the administrative burden for employer, by removing the requirement to file year end returns and P45s
- Improve the currency of information held by the government.
- To allow for the introduction of the Universal Credit, by providing real time information on working hours and pay. The government will be able to assess entitlement to social security benefits based on up-to-date information about income and hours worked.
- Reduce overpayments and underpayments of tax made to individuals, caused by misalignment of PAYE information.
Coman & Co. are able to assist with your tax and accounting requirements as an employer. We can help with accounting software selection and payroll advice. We can offer payroll assistance to clients for whom we already provide a range of services, although we do not offer payroll as a stand-alone service. Please contact us for a consultation.