Payroll – negotiating the legislative landscape

When Chancellor George Osborne delivered his spending review on October 20, 2010 it contained a mixed bag of pending changes. In keeping with its commitment to providing up-to-date news for employers’ payroll departments, the IPP Policy team has extracted the key points from the review that will likely affect those working in this sector.    

The review identified that 490,000 jobs in the public sector will go over the next four years. In the June Budget, the government announced a two year pay freeze from 2011-12 for public sector workers earning over £21,000, with those earning less than this receiving at least £250 in each year.

Pay scale disparity
In addition, the government asked Will Hutton to lead a Review of Fair Pay in the Public Sector, making recommendations on tackling disparities between the lowest and highest paid in public sector organisations. The Review published its interim findings earlier this month.   

The Independent Public Service Pensions Commission (IPSPC) led by John Hutton published an interim report on October 7. The report highlights the importance of providing good quality pensions to public servants and concludes that there is a clear rationale for public servants to make a greater contribution if their pensions are to remain fair to taxpayers and employees, and affordable for the country.    

In response to the Commission’s interim recommendations, the government will:
• Commit to continue with a form of defined benefit pension
•    Await Lord Hutton’s final recommendation before determining the nature of that benefit and the precise level of progressive contribution required
•    Carry out a public consultation on the discount rate used to set contribution rates in the public service pension schemes
•    Implement progressive changes to the level of employee contributions that lead to an additional saving of £1.8 billion a year by      2014-15, equivalent to three percentage points on average, to be phased in from April 2012;
•    Exempt the armed forces from this  increase in employee contributions
•    Seek engagement with all stakeholders including trade unions.

Education
Regarding education, changes proposed in the Spending Review include significantly lowering the overall cost of the further education system by abolishing Train to Gain and by reducing spending on budgets which do not directly support learners.    

Building on the recommendations of Lord Browne’s Review of higher education funding and student finance, from the 2012/13 academic year, universities will be able to increase graduate contributions. There will be loan support from government for full and, for the first time, part time students, with an offsetting reduction in the teaching grant.   

The government will bring forward wide ranging reforms in order to support a world class higher education sector. This will place the funding system on a more sustainable financial footing and provide support to individuals from low income backgrounds.   

Meanwhile, a new system of graduate contributions will ensure that students will only pay once they have graduated and can afford to do so. The graduate contribution system will be progressive and protect the lowest earning graduates.   

There will also be increases in adult apprenticeship funding by £250 million a year by 2014-15 relative to the level inherited from the previous government.
    
Early years and the disadvantaged
There will be an extension from 2012-13 to 15 hours per week of free early education and care to all disadvantaged two year old children, as the cornerstone of a new focus on the foundation years before school.   

A substantial new premium worth £2.5 billion targeted on the educational development of disadvantaged pupils will be established. The premium will sit within a generous overall settlement for schools, with the 5 to 16s schools budget, rising by 0.1 per cent in real terms each year.   

There will be further increases in participation for 16 to 19 learning, while moving towards raising the participation age to 18 by 2015.

Protection for those on the lowest incomes in higher education through a National Scholarship fund of £150 million a year by 2014/15 will also be established.

The government will bring forward legislation as soon as Parliamentary time allows and publish a White Paper during the winter.

Automatic Enrolment
The government has confirmed that it will provide funding for the introduction of auto enrolment from 2012 and the establishment of the National Employment Savings Trust (NEST), to help individuals save for their retirement and encourage high quality pension provision by employers.

State Pension
Increasing longevity and demographic change pose challenges over the longer term. In response, the government will speed up the pace of State Pension Age equalisation for women from April 2016 so that Women’s State Pension Age reaches 65 in November 2018. The State Pension Age will then increase to 66 for both men and women from December 2018 to April 2020, six years earlier than planned. Following the faster increase to 66, the government is also considering future increases to the State Pension Age and will bring forward proposals in due course.    

The Basic State Pension will be uprated by a triple guarantee of earnings, prices or 2.5 per cent, whichever is highest. Bringing forward the date at which the State Pension Age will start to rise to 66 to 2018 will ensure this is fiscally sustainable.

Welfare Reforms
Over the next two parliaments the current complex system of means-tested working age benefits and tax credits will gradually be replaced with the Universal Credit – an integrated payment that will ensure work always pays, with less scope for fraud and error. £2 billion has been set aside in DWP’s DEL settlement over the next four years to fund the implementation of the Universal Credit. Further details will be set out in DWP’s forthcoming White Paper.   

To provide a fair and affordable platform for the introduction of the Universal Credit the Spending Review also announces a package of reforms to the existing welfare system which will deliver net AME savings of £7 billion a year by 2014-15.    

Changes include capping household benefit payments from 2013 at around £500 per week for couple and lone parent households and around £350 per week for single adult households, so that no family can receive more in welfare than median after tax earnings for working households. All disability living allowance claimants, war widows, and working families claiming the working tax credits will be exempt from the cap.   

Changes also include withdrawing child benefit from families with a higher rate taxpayer from January 2013 so that people on lower incomes are not subsidising those who are better off, saving £2.5 billion a year by 2014-15.   

The costs of tax credits will be controlled by reducing the percentage of childcare costs that parents can claim through the childcare element of the Working Tax Credit (WTC) from 80 per cent to its previous 70 per cent level in April 2011, saving £385 million a year by 2014-15;   

Eligibility rules will be changed so that couples with children must work 24 hours a week between them, with one partner working at least 16 hours a week in order to qualify for the WTC, saving £390 million a year by 2014-15;   

The basic and 30 hour elements of the WTC will be freezed for three years from 2011/12, saving £625 million a year by 2014-15.   

Lastly changes include increasing the child element above indexation by a further £30 in 2011-12 and £50 in 2012-13, in addition to the £150 and £60 increases provided at the June Budget. This will ensure that the overall outcome of the Spending Review will have no measurable impact on child poverty in the next two years.

HMRC
In order to focus resources on frontline tax collection, HMRC will invest in new technology to improve risk assessment capability, better join up taxpayer information and streamline internal processes. Savings will be maximised from IT and other procurement contracts and administration costs will be reduced by a third with reductions in the size of corporate services and back office support functions.   

MRC will modernise tax administration and will improve and tailor services for taxpayers. £100 million has been budgeted to improve the operation of Pay As You Earn (PAYE) for both employers and individuals. All businesses will be filing their tax returns online by 2012 with at least 80 per cent of self assessments to be filed online by 2014-15. The Department will also modernise PAYE, moving towards more real time information so that people can be reassured that they have paid the right amount of tax throughout the year.

Other points of interest
The government is committed to the implementation of the devolution of Scottish income tax as laid out in the Calman Commission Report, and will introduce a Scotland Bill in the current Parliamentary session.   

HMRC has published new guidance and a Q&A for employers (and also one for employees) on the forthcoming changes to Employer Supported Childcare. It includes details of the basic earnings assessment which employers will need to carry out on any employee who joins a childcare voucher scheme on or after April 6, 2011.   

HMRC has also published further guidance for employers on Additional Statutory Paternity Pay. It explains who is eligible, how much you must pay and how to calculate before April 2011.   

Full details of the qualifying conditions for Additional Statutory Paternity Leave and Pay can be found on the Business Link website.    

Business Link has also published new guidance leaflets for employers and employees on maternity and paternity rights which includes new guidance on Additional Statutory Paternity Leave and Pay.

Web: www.payrollprofession.org