Budgeting on Payroll: How the recent emergency budget announcement affects payroll

Whilst at first glance the recent emergency budget changes seemed only to impact on Payroll in the areas of Income Tax and National Insurance, it does now seem that there are a number of other issues that could potentially affect Payroll departments. Read our helpful summary below which will guide you through the changes and how they will affect you.

National Insurance

The headline changes will significantly increase an employer’s cost with regards to National Insurance at a time when budgets are very tight, and everyone is already looking for savings particularly in the Public Sector.

• The standard rate of National Insurance will increase by 1% from April 2011 for both the employee and employer, although the additional increase proposed by the previous Government was dropped.
• Employees earning in excess of the Upper Earnings Limit (UEL) will also see an increase in contributions of 1% on all earnings in excess of the UEL.
• The cost to both the employee and employer will be partially offset by an increase in the starting point for paying National Insurance (£21 a week above inflation for the employer and £24 a week above inflation for the employee).
• Additionally, the Class 1A National Insurance rate (payable on benefits in kind, e.g. Lease Cars) will increase by 1%.

 The overall effect will be a significant increase to an employer’s on-cost charge. An additional complication will result from the different starting thresholds being introduced for paying National Insurance. These thresholds will now be referred to as the Primary Threshold for employees and Secondary Threshold for employers.
 

NI relief for start up of a new business

• For the next three years any new business set up outside London, the South East or East will be exempt from up to £5,000 of employer NI payments for each of the first 10 employees for the first 12 months of employment.
• The scheme is intended to start in September 2010 but any new business set up from 22^nd June 2010 that meet the criteria will benefit from the scheme.
• This will cause an administration challenge and the Payroll professionals will be consulted on how this will work.

Income Tax

The main change in the budget relating to Income tax was an increase in the Personal Allowance from £6,475 to £7,475 p.a. from April 2011 with a long term aim, by April 2014, to increase this figure to £10,000 p.a. The main effect of this initial increase will be to remove approximately 800,000 employees from paying tax altogether and decreasing the tax burden for approximately 23 million tax payers. However, the basic rate limit is being reduced so that higher rate tax payers do not benefit from the increase in the Personal Allowance and this measure will push approximately 700,000 employees into the 40% tax bracket. At this point in time the new 40% and 50% starting points have not been announced.

Whilst the above will obviously have an affect on Payroll, requiring re-programming of software and testing to ensure compliance, there were a number of other measures announced that will affect employers to a greater or lesser extent.

In the Budget it was announced that a PAYE review would be implemented with the aim of providing the Government with more accurate and up to date information from the employer. Whilst the details of this have not yet been finalised we can speculate that this may involve employers supplying information more regularly than the current annual return. This will obviously add to an employer’s workload. At the same time the Government are also looking to tighten up the penalty regime and enforce penalties more rigidly than they do currently. For example, employers have been historically given some leeway on the date for the submission of year end returns but going forward the 19^th May will be non-negotiable.
 

VAT

Although the increase in the VAT rate from 17.5% to 20% from 4 January 2011 would, on the face of it, not affect Payroll there may be implications on such items as Childcare Vouchers where an administration fee is being paid to a third party operating the scheme on an employer’s behalf.
 

Public sector pay

It was also announced there would be a Public Sector pay freeze for two years for staff earning in excess of £21k per annum and those below this figure would receive a minimum increase of £250 per year. This could lead to staff unrest, ultimately resulting in union action against the pay freeze. There is also to be a review on equal pay in the Public Sector, with a suggestion that the highest paid employee cannot earn more than twenty times that of the lowest paid employee.
 

Paternity leave

Additional Paternity leave was introduced for partners that extends the leave up to 26 weeks, a maximum of 19 weeks is paid and a further 7 weeks unpaid. This will apply to parents with babies due on or after the 3^rd April 2011. The obvious consequence of this is more time away from the workplace for parents with children.
 

Pensions

There were a number of Pension changes announced that will directly affect Payroll. The Government has planned to restrict pensions tax relief on those earning more than £150,000 per year, but critics say it would be complex to administer. Added to this there is the possibility that the amount an employee can contribute tax free will be significantly reduced, although at this time no figures have been confirmed.
 

State retirement age

The Government have also proposed to accelerate the increase to the State Retirement age and looking into the possibility of an employee working beyond their official retirement age. From a Payroll perspective there is a need to record the date when an employee is due to retire, but will carry on working, as this is the point at which they will become exempt from National Insurance contributions.

The emergency budget changes, coupled with those announced in the regular annual Budget e.g. new 50% tax banding and changes to tax free allowances for staff earning in excess of £100k, represent a significant set of challenges for Payroll departments. Therefore, it will be very important that all staff are fully briefed on the new proposals and extensive testing is carried out on Payroll systems prior to changes being implemented.

Please complete the following enquiry form if you wish to discuss further how Capita HR Solutions can help with your HR or Payroll services.

 

Disclaimer: Capita HR Solutions do not accept responsibility for any incorrect applications or use of the information contained herein.