The changing payroll landscape

It would be easier to name the regulations that the government are not reviewing as most legislation seems to be coming under close scrutiny to in hope of easing the administrative burden for employers in the long run and of course save the public purse some money.  
However, in the short term anyone dealing with payroll has a lot of legislative changes to take on board. To name but a few, from April 2011:
•    D1 code for additional rate (50 per cent) tax payers
•    0T instead of BR code being used in certain P46 circumstances
•    all three rates of tax payers to receive the same rate of tax and National Insurance Contributions (NICs) relief on childcare vouchers
•    introduction of Additional Statutory Paternity Leave
•    changes in tax and NICs rates and thresholds.
From 2012:
•    phasing-in begins on real time information;
•    phasing-in begins on automatic enrolment into a workplace occupational pension scheme
•    the abolishment of contracting out on a defined contribution basis.

There are too many changes to go into detail in one article so to follow is a look at some of the changes to the tax and NI rates and thresholds and the underlying considerations for employers.

Rates and Allowances

You will no doubt be aware of the £1,000 increase in the main personal allowance for those aged under 65 to £7,475. The basic rate 20 per cent tax threshold has dropped by £2,400 to £35,000, so this coupled with the increase in personal allowance takes about half a million people out of paying tax altogether.
The 40 per cent tax threshold has also dropped to £35,000 so employers should give consideration to any potential pay rises, promotions or benefits which could push employees into the higher-rate tax bracket. This is of particular importance to those with families who may also be faced with cuts in child tax credits.
The 50 per cent tax threshold came into force last April but it is only this year that tax codes will be adjusted for anyone with two or more incomes through self assessment.  
HMRC is currently undertaking an exercise to identify those individuals who might be affected by this and they will be given as much notice as possible in writing to enable them to arrange their finances to cover any underpaid tax that will be due on 31 January 2012. So although no direct action is required by payroll, employees may still come to you to query their tax deductions.
From 2011/12, tax codes will be issued to fully reflect the 50 per cent rate, ensuring that the correct rate of tax will be collected from all jobs or pensions for an individual regardless of how many sources of income that person has. HMRC have now confirmed that they will now issue a new D1 tax code for use where a tax payer has an additional source of employment income liable to tax at 50 per cent so for the 2011/2012 tax year a new D1 tax code will be issued for all those individuals affected.  

Changes in Coding
There will be a general uplift of tax codes with suffix ‘L’. Full instructions will be issued to employers on form P9X (2011). As a general rule unless an amended code notification has been received on a form P9(T) (or an Internet or Electronic Data Interchange equivalent) employers should amend 2011/12 codes as follows:
•    ‘L’ suffix codes – increase by 100;     
    code 647L becomes 747L
•    the PAYE threshold with effect
    from 6 April 2011 is raised to £144 per week (£623 per month)
•    the code for emergency use with effect from 6 April 2011 is 747L.

Thresholds for National Insurance NI thresholds have been changed so that there is no longer one Earnings Threshold for both employees and employers. There are two new thresholds – the secondary being the employer threshold and the primary being the employee threshold.
The reason this is changing is to ensure that the employer does not take the hit on the one per cent increase in NI rates. The government has been very clever with this though; the employer will still be impacted by the increase on the rate for benefits at 13.8 per cent, with no threshold.  
Although originally opposed to labour’s one per cent increase, the coalition government have still introduced the rise of one per cent in the main rates of NICs which will take affect from April 2011. However the contracted-out rebates remain as they are.

Small employer’s compensation rate
A knock on affect to the change in NI rates and thresholds is a change in the small employer’s compensation rate.
Where those that qualify can currently recover 100 per cent of statutory payments plus 4.5 per cent compensation for the employer’s share of NICs due on these payments, this will drop to three per cent from April 2011 so employers will be claiming 103 per cent of the SMP, OSPP, ASPP and SAP that they pay out.
The reason this has changed is due to the NICs threshold increasing from £110 to £136 for the 2011/12 tax year, meaning employers will pay less NI on the statutory payments (standard rate increasing to £128.73 from April 2011) so the change to three per cent balances this out.  The qualifying threshold of total gross Class 1 NICs remains the same at an annual £45,000.
As a last point on NICs, it is worth noting that from 6 April 2012 contracting out of the additional state pension on a Defined Contribution (DC) basis will no longer be possible. HMRC records will show these contracted-out scheme memberships as closed from 5 April 2012.
For employers operating COMP schemes the 2011/12 tax year will be the last tax year NI category letters F, G, H, K, V and S should be used. From the 2012/13 tax year, these category letters and the NI rates they represent will be invalid and should not be entered on forms P11 and P14 for tax years after 2011/12. The relevant not contracted-out rate and corresponding NI category letters should be used instead. As part of the abolition process HMRC will also be removing the Scheme Contracted-out Number (SCON) field from the P14.
A fact sheet for employers on the contracting out changes is available on the Department for Work and Pensions website.

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