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Statutory Sick Pay (SSP)
As a temporary measure, the government has passed emergency legislation that SSP will be payable to eligible individuals from day one of sickness absence, as opposed to from day four under normal SSP rules. This will be applicable where somebody has either been diagnosed with Covid-19 or if they are following government guidance to self-isolate. This measure only applies to sickness related to Covid-19 and not any other sickness.
Individuals may need to self-isolate because:
The SSP rate is £94.25 per week for the 2019/20 tax year and £95.85 per week for the 2020/21 tax year.
For businesses employing less than 250 staff (as at 28 February 2020), the cost of providing a maximum of 14 days of statutory sick pay per employee will be refunded by the government in full, as part of the emergency measure.
The mechanism for claiming payroll related deductions from HMRC is usually via an Employer Payment Summary (EPS) which is part of the RTI submission regime. However, existing payroll software and HMRC systems are not designed to facilitate employer refunds for SSP and therefore the government will work with employers over the coming months to set up the repayment mechanism as soon as possible.
By law, medical evidence is not required for the first 7 days of sickness, and individuals can self-certify up until that point. Ordinarily, beyond day seven of absence, the employer would require some form of “fit note” issued by a GP/Doctor to cover any further period of absence. Employers are being strongly advised to use their discretion around the need for medical evidence in relation to employees who are advised to self-isolate, or who become unwell as a result of Covid-19. During the recent Budget announcement, the Chancellor confirmed that people who are advised to self-isolate will be able to obtain an alternative to the “fit note” by calling NHS 111 without the need for them to attend an appointment with a Doctor.
If a member of staff requires time off to care for a child who has been asked to self-isolate, the usual “time off for dependants rules” apply. There is no statutory right to pay for this time off but some employers might offer pay depending on the employment contract or workplace policy. An employee may also decide to use some of their holiday entitlement for this time off.
The amount of time off an employee takes to look after someone must be reasonable for the situation.
If an employee is not sick but the employer tells them not to come to work, this is called a lay-off. An employer may also use short-time working whereby hours are cut. Please note that there is no automatic right to impose lay-offs or short-time working, so if your employment contracts/employee handbook do not have a contractual term permitting such situations, it will be necessary to negotiate the change with the affected employees.
Employees should get full pay unless the employment contract/employee handbook allows unpaid or reduced pay lay-offs. If unpaid, employees are entitled to statutory guarantee pay. The statutory maximum employees can get is £29 a day for 5 days in any 3-month period (i.e. a maximum of £145). Employees who earn less than £29 a day should get their normal daily rate. Employees who work part-time should have their entitlement worked out proportionally.
What if an employee does not want to come into the workplace?
If you need help with drafting a policy for dealing with absence and pay related to coronavirus in the workplace then please email firstname.lastname@example.org for a free template.
Why is National Insurance for Directors calculated in a different way?
The reason Directors’ salary is subject to a different method of calculating National Insurance is because of the possibility that by structuring their remuneration package in a certain way (e.g. uneven salary/bonus amounts with some months having higher amounts than others), it would be possible for Directors to manipulate the system to defer or even avoid National Insurance contributions.
How is National Insurance for Directors calculated?
There are 2 methods that can be used to calculate National Insurance contributions for Directors:
The normal method: Using this method, the Director will not start paying National Insurance contributions until their total earnings to date have exceeded the total annual National Insurance threshold. This can be confusing for some new Directors especially those where the salary is such that it takes a couple of months to exceed the threshold. In this case, for the first few months of the tax year, there will be no National Insurance contributions to pay but then eventually the NI kicks in. To help our clients plan ahead, we give them a heads up when the NI is due to kick in along with an explanation/breakdown.
The alternative method: Using this method, the Director pays National Insurance in each pay period in the same way that a normal employee would i.e. contributions are based on the pay in that period and not the total earnings to date, and the threshold in each pay period is the equivalent amount per pay period and not the total annual threshold. However, for the final payment in the tax year, an adjusting calculation is made to work out whether based on the total earnings to date, the Director owes more or less in National Insurance contributions and an adjustment to the NI due is made accordingly. Although the alternative method can seem more straightforward because it is similar in calculation to the way that normal employees pay NI, it can catch payroll practitioners and Directors off guard when the status of the Director changes e.g. when the Director leaves employment during the tax year.
I am a Director whose annual salary is £12500 per annum (i.e. tax free allowance for 2019/20) and have noticed that I have not paid any National Insurance contributions to date. When do the National Insurance contributions kick in?
If using the normal method, the Director gets all their National Insurance allowance up front and will not pay contributions until the earnings for the year reach the NI threshold, which for the tax year ending 5th April 2020 is £8632. Therefore, since the monthly salary in this case would be £1041.67, the threshold amount would be exceeded in: £8632 (annual threshold amount) divided by £1041.67 per month = 8.3 i.e. after month 8 (November 2019). Therefore, the Director can expect National Insurance contributions to start in December 2019 and continue up to March 2020.
What happens to National Insurance contributions when an employee is promoted to a Director or ceases to be a Director during the tax year?
Once an employee has been processed using Directors National Insurance rules (i.e. National Insurance contributions calculated on a cumulative basis) the calculation cannot be changed back to the normal employee one until the start of the following tax year. In other words, even if the employee is no longer a Director, their National Insurance contribution calculation will be based on total earnings to date and the necessary adjustment calculation will be made when the final payment for the tax year is made.
How much is SMP?
SMP is paid as a weekly rate for a maximum of 39 weeks. The rates are as follows:
What is the eligibility criteria for SMP?
To qualify for SMP an employee must:
Can an employer reclaim SMP from HMRC?
All employers can reclaim SMP from HMRC. This is done by offsetting the SMP amount against the PAYE bill. If the PAYE bill is less than the SMP amount, the employer’s PAYE account will be in credit. If an employer’s total gross Class 1 National Insurance bill is £45,000 or less in the last tax year, they are entitled to reclaim 100% of the SMP amount plus 3% compensation. Otherwise, the rate is 92% of the SMP amount.
What can an employer do if they cannot afford to pay SMP?
For some small employers, having a key employee go on maternity leave and getting someone for maternity cover can prove to be a strain on cash flow. An employer can apply to HMRC to receive SMP funding in advance of payments being made to the employee. For detailed guidance on how this works, please get in touch.
Can an employer make deductions from SMP payments?
An employer is entitled to make authorised deductions from SMP (e.g. pension contributions, trade union membership). However, an employer cannot deduct the value of childcare vouchers from SMP. This was established in the Peninsula Business Services Ltd v Donaldson case whereby the Employment Appeal Tribunal ruled that it is not discriminatory for an employer to discontinue childcare vouchers during maternity leave. The Employment Appeal Tribunal decided that as childcare vouchers are normally provided by salary-sacrifice they form part of an employee’s pay and an employee is not entitled to them during maternity leave.
Does an employer have to pay pension contributions during maternity leave?
During the first 26 weeks of maternity leave (also called Ordinary Maternity Leave “OML”) an employer must continue to pay full pension contributions based on normal pay, whether or not the employee plans to return to work afterwards. This applies whether the employee is being paid maternity pay (SMP or Contractual) or Maternity Allowance or neither. Employee contributions however will be based on the payment actually received.
Practical Note: It is also worth checking with your pension provider what they expect with regards to employer contributions during the paid maternity leave period. Some pension providers expect payment of contributions to be based on the amount actually being paid to the employee.
What happens to salary sacrifice schemes during maternity leave?
If an employee is in a scheme where she gives up part of her salary for non-cash benefits, an employer should seek legal advice if unsure on what should happen to those benefits while the employee is on maternity leave. Please get in touch if you would like specific guidance in this area.
What happens to allowances which are paid as part of remuneration (e.g. car allowance)?
An employee is not entitled to ‘remuneration’ during maternity leave. The law defines ‘remuneration’ as including payments of wages or salary. This means that since an employee is not entitled to basic pay, potentially they are not entitled to any other financial payments that they regularly receive from their employer as part of a salary package. The law is not clear about what other financial payments an employee can expect to receive. Therefore, it is advisable to seek advice if you are unsure whether a particular payment is part of an employee’s normal salary, or whether it is an extra payment.
What happens to bonuses and commission during maternity leave?
There have been many tribunal cases on the issue of bonuses and commissions highlighting the fact that this is a complicated area. At present the general position is that bonus or commission payments that are part of salary or regular earnings or performance-related pay are likely to be regarded as remuneration and therefore are not payable during maternity leave. To avoid any ambiguity, employers should make sure that their maternity policy include details about payments during maternity leave.
What happens to contractual benefits during maternity leave?
Benefits such as a company car, mobile phone, lunch vouchers, club membership, health and other insurance continue as normal during maternity leave. An employee is entitled to keep a company car or mobile phone provided for personal use by the employer throughout the maternity leave period. Also, participation in share schemes, professional subscriptions, free or subsidised travel, and subsidised childcare should continue during maternity leave.
It has now been more than a year since HMRC introduced a change to the way that termination payments are taxed. Last month, we conducted a survey amongst HR practitioners to assess the level of awareness of the change. Out of a total of 33 respondents, 79% were aware of the change. However, 55% were not aware of the Post Employment Notice Pay (PENP) formula which is a key part of the change. This lack of awareness of the PENP formula is not surprising. Although the change itself is fairly straightforward in principle, the formula is a rather cumbersome calculation and can produce some odd results.
So what has changed? Prior to 6th April 2018, an employer could include a payment in lieu of notice (PILON) as a tax free amount (subject to the maximum amount of £30,000) to be paid as part of a termination award, if the employment contract had no provision for such a payment to be made. However, from 6th April 2018, if an employer makes a relevant termination award (i.e. any payment or benefit which compensates an employee for the termination of employment, excluding statutory redundancy pay) and the employee does not work any of their notice period or only works part of it, it is necessary to apply the PENP formula to calculate the amount due for the unworked notice. The amount calculated by the PENP formula becomes subject to tax and NI.
The PENP formula is as follows:
((BP × D) ÷ P) – T
‘BP’ is the employee’s basic pay in respect of the last pay period of the employment ending before the “trigger date” (i.e. the day notice is given or where no notice is given, the last day of the employment).
‘D’ is the number of calendar days in the post-employment notice period (i.e. unworked notice period).
‘P’ is the number of calendar days in the employee’s last pay period.
‘T’ is any payment or benefit received in connection with the termination of an individual’s employment which is already subject to income tax but specifically excluding holiday pay and bonuses payable for termination of the employment.
If the amount given by the formula is negative then the amount of PENP is taken to be nil.
If the amount given by the formula exceeds the total amount of the relevant termination award then PENP is capped at the total amount of the relevant termination award (i.e. the whole termination award will be subject to tax and NI).
You can find HMRC’s worked example here: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim14000
For employers, the issue is that often, the correct label is not applied to the various elements that make up a settlement sum. When an employment is terminated, an employee might be entitled to different payments such as unpaid salary, statutory redundancy pay, damages, payment in lieu of notice, payment for a restrictive covenant, compensation for loss of office etc. An employer might decide to use a settlement agreement to protect themselves from a future claim from the employee. It is important to remember that a settlement agreement is simply a legal agreement between the parties that the employee will not seek to challenge the termination in the courts; it has nothing to do with the tax calculations required with regards to the settlement sum agreed by the parties. Whether payments agreed under a settlement agreement are taxable or not is a matter of tax law. Therefore, failure to label the various elements that make up a settlement sum properly can lead to an unpleasant surprise for the employee who might be expecting a tax-free payment of the entire sum.
Another question that we asked respondents in our survey was if they would expect an outsourced payroll provider to make them aware of how to structure a relevant termination award in line with the new legislation. 76% said yes, they would. Over the last few months, we have had a number of cases where a client was not aware of the change to the taxation of termination payments and upon notifying us of a termination situation, we were able to advise them accordingly and help them avoid a potentially costly mistake.
Following the recent decision by the Court of Appeal to dismiss the appeal brought by The Harpur Trust (employer) in favour of Brazel (employee) regarding the calculation of holiday pay entitlement, employers may be asking themselves, should they stop using the 12.07% method to calculate holiday pay? In case you are not familiar with this case, you can find a summary of the details here: https://www.employmentcasesupdate.co.uk/site.aspx?i=ed39807
If you are an employer that engages *part year workers then the answer is a resounding yes. Using the 12.07% method has been ruled as not being compliant with the Working Time Regulations 1998.
Although much has been made about the fact that using the 12.07% method results in lower holiday pay for part year employees, it is also possible that using the 12 week average pay method could result in a lower holiday pay amount, particularly for employees on variable hours.
To demonstrate this, let’s take the example of an employee engaged on a casual working arrangement who starts on Monday 1st April 2019 and leaves on Sunday 30th June 2019. The employee is paid the following amounts (one week in arrears).
Week 1 (paid Friday 12th April 2019) £300.00
Week 2 (paid Friday 19th April 2019) £350.00
Week 3 (paid Friday 26th April 2019) £350.00
Week 4 (paid Friday 3rd May 2019) £350.00
Week 5 (paid Friday 10th May 2019) £350.00
Week 6 (unpaid) £0.00
Week 7 (paid Friday 24th May 2019) £10.00
Week 8 (paid Friday 31st May 2019) £100.00
Week 9 (paid Friday 7th June 2019) £100.00
Week 10 (paid Friday 14th June 2019) £100.00
Week 11 (paid Friday 21st June 2019) £100.00
Week 12 (paid Friday 28th June 2019) £150.00
Week 13 (paid Friday 5th July 2019) £400.00
Total Pay £2660.00
Since the employee has worked for 3 months (13 weeks), their holiday entitlement using the 12 week average pay method would be as follows:
Pro rata holiday entitlement = 3 months/12 months x 5.6 weeks = 1.4 weeks
12 week average weekly pay = £2660.00 (as above, not counting the week not worked)/12 weeks = £221.67
Therefore, holiday pay owed on leaving = 1.4 weeks x £221.67 = £310.34
Using the 12.07% method however, the holiday pay owed on leaving would be higher:
£2660.00 (i.e. total pay for all weeks worked) x 12.07% = £321.06
Therefore, if you are an employer that does not employ part year workers but uses casual/zero hours workers and has been using the 12.07% method, it might not necessarily be the case that you will find yourself facing claims for underpaid holiday.
*part year worker: a term coined by Lord Justice Nicholas Underhill in The Harpur Trust v Brazel appeal case to describe somebody on a permanent employment contract who only works for part of the week for part of the year.
For payroll practitioners, the period April to July can seem like you are on a hamster wheel. There is a list of year end tasks that need to be completed (reporting final RTI submissions, issuing P60s, checking client eligibility for things like Employment Allowance and Small Employer Relief in the new tax year, issuing P11Ds etc). All these tasks need to be managed alongside managing the usual payroll runs. With experience, these tasks can get easier with each year and can be completed fairly quickly.
However, in recent years, the pace of change in payroll legislation has increased, meaning that in addition to the usual/routine tasks, there is the added burden of legislative changes to deal with. Some changes, such as changing pension contribution rates for example, have a one-off impact on workflow and affect the majority of employers in a similar way. Others however, require a bit more attention and a bespoke solution. For example, from 6th April 2019, employers are required to show hours on payslips for employees whose pay varies according to hours worked. That sounds straightforward if an employee is paid an hourly rate. However, we currently have a few clients that pay some of their employees on a net pay basis (i.e. the client specifies the net pay to be paid and this is grossed up to work out the tax, NI and pension due). These employees’ pay also varies according to the hours worked. Therefore, with effect from the first pay period after 6th April 2019, we had to make sure that
a) we made the affected employers aware of the changes and
b) we had a system in place that showed the hours worked on the payslip as required by legislation at no extra cost or administrative burden to the employer.
When it comes to implementing global changes that affect all employers in the same way, any average payroll practitioner can do that. However, when it comes to changes that require a bespoke solution, only the most capable practitioners will take the time and effort to provide a solution that meets the compliance requirements. I pride myself in making sure that Questfp always falls in the latter category.
HMRC update the standard tax-free personal allowance every tax year. For the 2019/20 tax year, the standard tax-free personal allowance is £12,500 so most employees will end up with a tax code of 1250L. If you are puzzled by the numbers and letters in your tax code, below is a brief and simple guide to help you understand what your tax code means.
Broadly speaking, there are 2 types of tax code: cumulative and non-cumulative.
An example of a cumulative tax code is 1250L.
An example of a non-cumulative tax code is 1250L W1 or 1250L M1 or 1250L W1/M1 or 1250L X.
Cumulative tax codes calculate the tax due in the current pay period as the difference between the total tax due to date and the total tax paid up to the last pay period. As you will note from this, it is possible to get a negative difference if the total tax due to date is less than the total tax deducted up to the last pay period. This could be the case for example where an employee has received a bonus in the last pay period which results in more tax being deducted in that pay period than normal, or if an employee has had a gap in their employment. In this situation, the employee would receive a tax refund via payroll.
Non-cumulative tax codes are also known as Emergency Tax Codes. Non-cumulative tax codes calculate the tax to be deducted in each pay period by taking into account only the taxable earnings for that pay period.
The amount that an employee gets as their tax-free personal allowance is determined by the numbers that make up the tax code and also the letter that precedes or supersedes those numbers. If the tax code is made up of numbers followed by the letters L, M, N or T, multiplying the number by 10 will give you the total tax-free personal allowance for the tax year. Multiplying the tax code number by 10 and then dividing that by the number of pay periods (52 for weekly, 12 for monthly) will give you the tax-free personal allowance per pay period. HMRC will adjust the tax code to collect more tax by reducing the value of the tax-free personal allowance. If HMRC need to collect tax on things like Benefits in Kind and the value of these is such that they are more than the value of the tax-free personal allowance, they will issue a K tax code (tax code with a K prefix). This tax code has a negative tax-free personal allowance which means that tax is calculated on all earnings (no tax-free personal allowance) as well as an additional amount determined by the value shown after the letter K. Other common tax codes are BR (no tax free allowance and all income taxed at 20%), D0 (no tax free allowance and all income taxed at 40%) and 0T (no tax free allowance and all income taxed at 20% and 40% respectively in accordance with the relevant tax brackets).
What to do if you think your tax code is wrong
It is always a good idea to regularly check the tax code shown on your payslip. Remember, the lower the number shown before the letter in your tax code, the more tax you will pay. HMRC will issue revised tax codes from time to time and they are supposed to write to the employee to let them know that their tax code has been revised. At the same time, they will also issue a coding notice to the employer instructing them of the change. The coding notice that is issued to the employer will never tell the employer how the tax code has been worked out. If you think that your tax code is incorrect, you can use the HMRC Personal Tax Account service (https://www.gov.uk/check-income-tax-current-year). You will need to create an account first if this is your first time using the service. Alternatively, you can also contact HMRC on 0300 200 3300, making sure that you have your National Insurance number to hand.
Pension tax relief is a way that the government uses the tax system to encourage employees to save for the future. With minimum auto enrolment pension contribution rates set to increase again from 6th April 2019, here is a useful guide for employees and employers to understand how tax relief works on pension contributions paid via payroll. There are 2 ways in which this works:
Pension contributions = £2,000.00 x 2.4% (i.e. 80% of 3%) = £48.00. HMRC top up the employee’s pension pot with the remaining 20% which is £12.00 (i.e. £2,000.00 x 0.6%). The employee ends up with £60.00 in their pension pot.
Tax at 20% = £2,000.00 x 20% = £400.00
Therefore, take home pay = £2,000.00 - £400.00 (tax) - £48.00 (pension) = £1,552.00
Pension contributions = £2,000.00 x 3% = £60.00
Tax at 20% = £1,940.00 (i.e. £2,000.00 gross earnings less £60.00 pension contribution) x 20% = £388.00
Therefore, take home pay = £2,000.00 - £60.00 (pension) - £388.00 (tax) = £1,552.00
Comparing the two, we see that both employees end up with the same amount in their respective pension pots and the same take home pay: Employee A pays £48.00 via payroll and gets a top up of £12.00 from HMRC while Employee B pays £60 into the pension and pays £12.00 less tax as a result.
On the face of it, it might look like it doesn’t make a difference to employees if a pension scheme uses “relief at source” or “net pay arrangement”. However, for low earners who earn above the auto enrolment trigger (£10,000.00 per annum or £833.33 per month) but at or below the normal tax threshold (£11,850.00 per annum or £987.50 per month for 2018/19), a “relief at source” pension scheme is a better option than a “net pay arrangement” one.
As an example, let’s take 2 employees on £950.00 per month and same tax code of 1185L M1 (tax-free allowance of £987.50 per month). Again, we will assume that pension contributions are paid on all gross earnings.
For Employee A who is in a “relief at source” pension scheme, pension contributions via payroll would be £22.80 i.e. £950.00 x 2.4% (i.e. 80% of 3%) and £5.70 would be topped up by HMRC. Total amount in the employee’s pension pot would therefore be £28.50 (i.e. £22.80 plus £5.70). Because the earnings of £950 are below the tax-free allowance, the employee pays no tax and their take home pay is £927.20 (i.e. £950.00 - £22.80).
For Employee B who is in a “net pay arrangement” pension scheme, pension contributions would be £28.50 i.e. £950.00 x 3%. Since the earnings are below the tax-free allowance threshold anyway, there is no tax to pay. The take home pay however is £921.50 (i.e. £950.00 - £28.50), which is lower than that for Employee A.
Because of this anomaly between the 2 types of tax relief for low income earners, there are growing calls on the government to change the rules to make it fair for everyone.