How much is SMP?
SMP is paid as a weekly rate for a maximum of 39 weeks. The rates are as follows:

• 90% of an employee’s average weekly earnings (before tax) for the first 6 weeks.
• The rate for the remaining 33 weeks is set by HMRC each tax year. For the 2019/20 tax year, the weekly rate is £148.68. If however, 90% of the employee’s average weekly earnings is lower than this then the rate will be the lower amount.

What is the eligibility criteria for SMP?
To qualify for SMP an employee must:

• Earn on average at least £118 a week (for 2019/20 tax year).
• Give the correct notice: at least 15 weeks before the due date, tell the employer when the baby is due and when they want to start maternity leave.
• Give proof that they’re pregnant (MATB1 certificate) within 21 days of your SMP start date.
• Have worked for the employer continuously for at least 26 weeks continuing into the 15th week before the expected week of childbirth. This is known as the “qualifying week”

If an employee is not eligible for SMP, the employer must give the employee form SMP1 explaining why the employee cannot get SMP. This must be done within 7 days of making the decision. The employee may be eligible for Maternity Allowance instead.

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
where
‘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:

• By giving employees a top up on pension contributions that they make. This is called “relief at source”. NEST is one example of a pension scheme that uses this method. “Relief at source” works by applying only 80% of the full pension contribution rate to the amount to be deducted from the employee’s pay. For example, if the employee’s pension contribution rate is 3%, the rate that is actually applied to the payroll pension calculation is 2.4% (i.e. 80% of 3%). The remaining 20% of the employee’s pension contribution is topped up by HMRC who pay this direct to the pension scheme provider, to be added to the employee’s pension pot.
• By reducing the amount of tax that the employee pays via payroll. This is called “net pay arrangement”. Creative Pension Trust is one example of a pension scheme that uses this method. With a “net pay arrangement”, the employee pays the full pension contribution rate amount. For example, if the employee pension contribution rate is 3% then the rate that is actually applied is 3%. However, before tax is calculated in payroll, the pension contribution amount is first deducted from earnings thereby reducing the amount of taxable earnings and therefore the tax that the employee pays is less.

To show how these 2 methods work, let’s take the example of 2 employees working for 2 different employers. Both employees have the same tax code BR (i.e. all earnings taxed at 20%). Employee A’s employer uses a “relief at source” pension scheme and Employee B’s employer uses a “net pay arrangement” pension scheme. For a particular month, both employees have gross earnings of £2,000.00 and they are both set to make pension contributions at 3%. For the sake of simplicity, we will assume that pension contributions are made on total gross earnings.

Employee A
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

Employee B
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.

Whether you have one employee or several, managing employee holidays can prove to be an admin hassle. Here are a few tips that might help ease the admin burden.

1. Set a holiday calendar year: It might sound obvious but having a set holiday calendar year means that you and your employees know when all the holiday entitlement has to be taken by. When it comes to choosing when the holiday calendar year should start, there is no right or wrong answer. Each choice has its own pros and cons. For example, choosing a holiday calendar year that coincides with your financial reporting year means that it is easier to manage the reporting requirements under FRS 102 while choosing a holiday calendar year that coincides with the tax year means that it is easier to manage within payroll software. Other common choices for holiday calendar year include the calendar year (January to December), and using the employee’s start date.
2. Work out what the holiday entitlement will be: An employee’s paid holiday entitlement starts from the first day of their employment. An employer can provide holiday entitlement which is more than the statutory minimum entitlement (28 days). For salaried employees working 5 days a week with no overtime, bonuses or commission, it is fairly easy to work out the entitlement. Things can get a bit complicated where there is overtime involved or there are bonuses/commission that are affected by holiday. If you are unsure about if and how these elements should be taken into account in your holiday entitlement calculation, please seek advice. We regularly help employers in this area.
   
3. Make sure that employment contracts include holiday entitlement details and keep these details up to date: One of the questions that we get asked frequently by employers when an employee leaves is “how much holiday is the employee owed”. In order to work this out, we have to ask the employer to confirm when the holiday calendar year starts and what the contract says about holiday entitlement. If a contract does have a holiday entitlement clause, make sure that it is appropriate for the employment arrangement. For example, if the employee is hourly paid and the hours are variable, does the holiday entitlement clause specify how holiday will be accrued? These are the types of issues that we routinely help employers with.
4. Have a system for keeping track of holidays taken: When it comes to having a system for managing holidays, you want a system that makes the admin hassle free. We come across employers that use Excel spreadsheets, Outlook calendars, and online HR systems to manage their employee holidays. There are a number of advantages that online HR systems like breatheHR have compared to Excel spreadsheets or Outlook calendars. These include: centralised holiday information which can be accessed from anywhere by managers and employees, no messing about with Excel formulas (especially as your team grows), and built in calculators to help work out things like pro rata entitlement.
5. Ask your payroll provider if they have the capacity to assist: There are many advantages for an employer in having their holidays managed by their payroll provider. Payroll has access to information that is relevant for calculating holiday entitlement, including hours worked, average pay, overtime, and bonuses/commission. At Questfp, we provide a number of solutions for managing holidays for those employers that need assistance. We can provide Excel spreadsheet templates (for the Excel lovers), we can track and accrue holiday entitlement within the payroll software and provide holiday reports as and when required, or we can provide access to an online HR system (breatheHR) that employees can also access to view their entitlement and book holidays.

If you are interested in finding out how we can help you manage your employee holidays, please do not hesitate to contact us on 01483 338 070 or email info@questfp.co.uk.

One of the areas that we frequently get asked about by our clients is in relation to tax codes and how tax has been calculated for a particular employee. Providing a clear and concise breakdown of the tax calculation is something that we do on a regular basis. 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 1185L.
An example of a non-cumulative tax code is 1185L W1 or 1185L M1 or 1185L W1/M1 or 1185L 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 those 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. Each tax year, HMRC will update the standard tax-free personal allowance. For the 2018/19 tax year, the standard tax-free personal allowance is £11,850 so most employees will end up with a tax code of 1185L. 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.

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.