From April 2011 many significant changes will be made to the operation of the PAYE system. There are also changes from 2012 that you should be considering now.
From 6 April 2011, ‘small employers’ may reclaim 103% of statutory maternity pay. The rate had been 104.5% since 2002. A small employer is broadly one whose total national insurance payable in a year does not exceed £45,000. Other employers may only reclaim 92%, which remains unchanged.
New tax code
At present, there are some circumstances where an employee can be liable for a BR tax code. These include:
payments made after an employment has finished and a P45 issued
a new employee starts and cannot provide a P45 and cannot tick box A or B on the P46.
From 6 April 2011, tax code 0T must be used instead, and be applied on a week 1/month 1 basis.
The affect is that the employee may now pay tax at the higher rates. Previously only tax at the basic rate was collected, meaning that some employees could find that they still owe tax.
Even with the new system, it is possible that the whole amount will not be collected as the 0T code can allow for a slice of income to be taxed at 20% when that band has already been fully used elsewhere. However, the new tax code system will reduce the difference between the amount of tax payable and the amount collected at source under PAYE.
Tax code D1
A completely new tax code is introduced from 6 April 2011, this is the D1 code. It means that a person must pay tax at the 50% on all their income. It matches the existing D0 code that collects tax at the 40% rate.
The D1 code only applies where someone has a second income that is very high.
As the 50% band was introduced in 2010 without the D1 code, it is possible that some employees could find themselves paying two years’ worth of additional tax at higher rates in one year.
Real time information (RTI)
Next year, there is a radical change being made to the PAYE system. This is known as real time information (RTI). It means that every time you make a payment to HMRC, you must provide a full breakdown of each payment to each person on the payroll.
This system is being trialled in 2011, and will be progressively introduced during 2012.
This is a radical change for which you must make plans now. We can advise you on making sure that your systems and software are ready so you don’t get caught out.
National insurance changes
The thresholds at which national insurance becomes payable increase significantly from April 2011. For 2010/11, class 1 national insurance became payable once earnings exceed £110 a week. This rate applies for both employer and employee.
From 6 April 2011, the threshold increases significantly to £139 a week for the employee and £136 for the employer.
The rates also increase from 11.0% for employees and 12.8% for employers by 1%, to 12.0% and 13.8% respectively.
On earnings above the upper earnings limit, the employee’s rate doubles from 1% to 2%. The upper earnings limit reduces from £844 a week to £817.
These changes, with the reduction in the threshold for higher rate income tax, mean that 750,000 people will become liable to pay higher rate income tax and more national insurance. We can explain the implications, and advise on any changes that can mitigate their effect.
The lower earnings limit increases from £97 to £102 a week. This can mean that some low-paid and part-time workers lose their entitlements to statutory sick pay and similar, and are no longer earning entitlement to the state retirement pension.
Sometimes payroll departments may not know about a payment of expenses or benefits until some time later.
Strictly speaking, the payroll for that person should be recalculated for that pay period. In practice this can be time-consuming, particularly for national insurance. From 6 April 2011, it is acceptable to calculate tax and national insurance in a later period when…