Payroll

The tax treatment of termination payments has changed significantly over recent years. The changes have aligned the rules for tax and secondary National Insurance contributions (employer (NICs)) by making an employer liable to pay NICs on termination payments they make to their employees. 

HMRC has announced that it is aligning its approach to providing advance assurance on certain termination payment enquiries. 

HMRC guidance had previously committed HMRC to giving a binding answer if you made enquiries on termination cases involving:  

• the disability and injury compensation exception;
• the foreign service exception;
• how the £30,000 threshold applies to payments made by the third party and by the employer; and
• non-cash provisions.

HMRC will no longer give a binding answer on these cases outside the normal Non-Statutory Clearance process, for example, where there is a genuine point of uncertainty on the correct treatment.

This means that any future enquiries from taxpayers and employers on termination payments should be dealt with through the existing Non-Statutory Clearance procedure. HMRC will no longer provide clearance outside of the Non-Statutory Clearance route.

The letters in an employee’s tax code signify their entitlement (or not) to the annual tax free personal allowance. The tax codes are updated annually and help employer’s work out how much tax to deduct from an employee’s pay packet. 

The basic personal allowance for the tax year starting 6 April 2024 is £12,570 and the tax code for an employee entitled to the standard tax-free Personal Allowance is 1257L. This is the most common tax code and is used for most people with one job and no untaxed income, unpaid tax or taxable benefits (for example a company car).

Emergency tax codes can be used if HMRC does not receive a taxpayer’s income details in time after a change in circumstances such as:

• a new job
• working for an employer after being self-employed
• receiving company benefits or the State Pension

Employees on an emergency tax code will see one of the following codes on their payslip:

• 1257L W1
• 1257L M1
• 1257L X

These codes mean that an employee’s tax calculation is based only on what they are paid in the current pay period. The emergency tax codes are temporary and will usually be updated once the necessary details about previous income or pension payments are sent to HMRC. Taxpayers will remain on an emergency tax code until they have paid the correct tax for the year.

A reminder for our readers that the National Living Wage (NLW) and the National Minimum Wage (NMW) rates will increase with effect from 1 April 2024.

The increase will see the NLW rate increased to £11.44 per hour, an increase of over £1 over the current rate of £10.42. This means the annual earnings of a full-time worker on the NLW will see an increase of up to £1,800 next year. 

It was also confirmed, as part of the Autumn Statement announcements, that for the first time, eligibility for the NLW will be extended to 21 and 22 year olds. Currently, the NLW is only available to those aged 23 and over.

The NMW rates will be as follows from, 1 April 2024:

• 18 to 20 year-old rate will be £8.60 per hour – an increase of £1.11 per hour
• 16 to 17 year-old rate will be £6.40 per hour – an increase of £1.12 per hour
• The apprentice rate will also be £6.40 per hour – an increase of £1.12 per hour

Employers generally use payroll software or other payroll services to record employees pay, deductions and National Insurance contributions on or before each payday. They also need to consider other deductions such as pension contributions and student loan payments.

These payments are reported to HMRC in real time using a Full Payment Submission (FPS). This submission contains all relevant information for each employee.

If you have made a mistake with an employee’s pay or deductions this can usually be corrected by updating the year-to-date figures in your next regular FPS.

HMRC’s guidance also states that you can correct mistakes by submitting an additional FPS before your next regular FPS is due. You would need to:

• update the ‘this pay period’ figures with the difference between what you originally reported and the correct figures;
• correct the year-to-date figures;
• insert the same payment date as the original FPS;
• insert the same pay frequency as the original FPS; and
• insert ‘H – Correction to earlier submission’ in the ‘Late reporting reason’ field.

If you need to correct an employee’s National Insurance deductions the action required will depend on whether the mistake occurred in this tax year or earlier tax years. There are also different actions that may be required to fix a mistake with an employee’s student loan repayments, again depending which tax year the mistake relates to.

If you have any payroll concerns, we would be happy to help.

Assets such as computers, televisions and bicycles that are made available to employees can create certain tax, National Insurance and reporting obligations. There is no requirement to report anything to HMRC if the asset is office equipment only used for business use. Assets that are made available as part of a salary sacrifice arrangement will usually need to be reported to HMRC.

If the assets are for personal and business use, then they must be reported on a P11D form and Class 1A National Insurance will be due on the value of the benefit. A P11D form is a form used by employers to list certain ‘benefits in kind’ provided to directors or employees.

Working out the value of an asset made available to an employee can be quite complex and there are various steps that need to be followed depending on the circumstances at hand.

It is not that long until the current 2023-24 tax year comes to an end and there are a number of year end payroll chores that must be completed. This includes sending a final PAYE submission for the tax year. The last Full Payment Submission (FPS) needs to be submitted no later than the last payday for your employees of the 2023-24 tax year.

It is also important that employers remember to provide employees with a copy of their P60 form by 31 May 2024. A P60 must be given to all employees that are on the payroll on the last day of the tax year – 5 April 2024.

The P60 is a statement issued to employees after the end of each tax year that shows the amount of tax they have paid on their salary. Employers can provide the P60 form on paper or electronically. Employees should ensure they keep their P60s in a safe place as it is an important record of the amount of their earnings and tax paid.

In addition, a P60 is required in order that an employee can prove how much tax they have paid on their salary. For example:

• to claim back overpaid tax;
• to apply for tax credits; and
• as proof of your income if you apply for a loan or a mortgage.

Employees who have left their employment during the tax year do not receive a P60 from their employer, as the same information will be on their P45.

The deadline for reporting any Class 1A National Insurance contributions and submitting P11D and P11FD(b) forms to HMRC for the tax year ending 5 April 2024 is 6 July 2024.

There is a permanent easement in place for employers to report PAYE information in real time over the Christmas period. This can be for a number of reasons, for example, during the Christmas period the business may close meaning workers need to be paid earlier than normal.

Employers that pay wages early over the Christmas period should report their normal or contractual payday as the payment date on their Full Payment Submission (FPS) and ensure that the FPS is submitted on or before this date. Doing this will help to protect employees’ eligibility for Universal Credit, as reporting the payday as the payment date may affect current and future entitlements.

HMRC provides the following illustrative example:

If you pay on Friday 15 December 2023 but the normal or contractual payment date is Friday 29 December 2023, you will need to report the payment date on the FPS as 29 December 2023 and ensure the submission is sent on or before 29 December 2023.

The overriding PAYE reporting obligation for employers is unaffected by this exception and remains that you must report payments on or before the date the employee is paid.

The Chancellor of the Exchequer, Jeremy Hunt, confirmed that the government has committed to the proposals of the Low Pay Commission for increasing minimum wage rates from 1 April 2024. The actual wage rate recommendations of the Low Pay Commission are expected to be announced next month.

The latest forecasts show that this would create a pay boost next year worth over £1,000 for two million low-paid workers. A full-time worker on the National Living Wage (NLW) will be over £9,000 better off than they would have been in 2010.

These increases are expected to see the NLW increase to over £11 an hour. The NLW is the minimum hourly rate that must be paid to those aged 23 or over. The threshold is expected to further reduce to age 21 by 2024. These changes are based on the remit from the Low Pay Commission which sets a target for the NLW to reach two-thirds of median earnings by 2024 for workers aged 21 and over.

The current minimum wage rates for the period from 1 April 2023 – 31 March 2024 are as follows:

National Living Wage

• Aged 23 & over – £10.42

National Minimum Wage

• Aged 21 to 22 – £10.18
• Aged 18 to 20 – £7.49
• Aged 16 and 17 – £5.28
• Apprentice rate – £5.28

New National Minimum Wage (NMW) and National Living Wage (NLW) rates come into effect on 1 April 2023.

The new rate for the NLW will be £10.42 which will represent a 92p increase over the current rate. The NLW is the minimum hourly rate that must be paid to those aged 23 or over. The hourly rate of the NMW (for 21-22 year olds) will increase to £10.18 (a rise of £1). The rates for 18-20-year-olds will increase to £7.49 (a rise of 66p) and the rate for workers above the school leaving age but under 18 will increase to £5.28 (a rise of 47p). The NMW rate for apprentices will increase by 47p to £5.28. The accommodation offset will rise to £9.10 per hour (an increase of 40p).

It is important that employers update their systems, by 1 April 2023, to reflect the new rates as there are significant penalties for employers who are found to have paid workers less than the above rates. 

If you have underpaid an employee, you must pay any arrears immediately. There are penalties for non-payment of up to 200% of the amount owed unless the arrears are paid within 14-days. The maximum fine for non-payment can be up to £20,000 per employee and employers who fail to pay face a possible 15-year ban from being a company director as well as being publicly named and shamed.

A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit. The tax and NIC advantages of certain benefits provided as part of a salary sacrifice arrangement were removed from 6 April 2017. The change removed the Income Tax and employer NIC advantages of certain benefits provided as part of salary sacrifice arrangements such as mobile phones and workplace parking. There was a transitional plan in place for certain benefits that ended on 6 April 2021.

An employer can set up a salary sacrifice arrangement by changing the terms of an employee’s employment contract. The employee needs to agree to this change. The employee’s contract must be clear on what their cash and non-cash entitlements are at any given time.

A salary sacrifice arrangement cannot reduce an employee’s cash earnings below the National Minimum Wage rates. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.

It may also be necessary to change the terms of a salary sacrifice arrangement where a lifestyle change significantly alters an employee’s financial circumstances. This may include marriage, divorce and a partner becoming redundant or pregnant. Salary sacrifice arrangements can allow opting in or out in the event of lifestyle changes like these.