Are student loan deductions taken from gratuities?

Xero calculations say one thing, notifications from HMRC say another?

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Hi

We currently operate a TRONC system for Tips & Optional Service Charges - and as such this pay item isn't subject to NI, but is subject to PAYE.

One of my employees became liable for Student Loan deductions on 6th April, falling slightly under the threshold for contributions on Salary, but not including the TRONC. Xero has therefore not deducted any SL contributions. I assume as earnings for student loan purposes are calculated in the same way as they are for National Insurance contributions (NIC). 

However, I have received a notification from HMRC via Gov Gateway, Our records show you need to deduct student loan repayments for the following employees but did not report any student loan deductions in your latest payroll submission.

Do I need to call HMRC, I am trying to avoid the long phone waits by addressing this without contacting them!

Any advice would be appreciated!

 

Simon

Replies (17)

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By FactChecker
14th Apr 2024 14:33

If you have a read of a recent thread on here ... https://www.accountingweb.co.uk/any-answers/operating-a-tronc-scheme ... you will see that a TRONC system is meant to be operated under a different PAYE scheme.
And you've encountered one of the reasons for this!

From HMRC's perspective you've reported the 'total earnings' for this employee as including the TRONC-derived tips - and this has automatically triggered their software to issue the notice you've received (because the combined total presumably takes earnings above the SL deduction threshold).

Whereas if the earnings and the 'tips' were reported under separate PAYE schemes, then (just the same as if that person had two unrelated employers) each set of earnings will be subject separately to a SL deduction threshold.

Thanks (4)
Replying to FactChecker:
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By simonhatfield
14th Apr 2024 15:25

Thanks for the reply, I did read the thread and have contacted Troncmaster & WMT accounting. We are a small bar business, 4 employees including myself - I don't imagine these companies would be interested in servicing a business of our size.

It may be that I need to suffer a call to HMRC to discuss in more detail, in terms of complying with the legislation, one of my employees acts as Troncmaster, and they have a constituted committee of which I have very little involvement.

It seems asking my employee to setup, and become liable for a PAYE scheme is excessive, and unfair - creating an administrative burden.

The employee has no issue paying Student Loan contributions, Xero just won't deduct them!

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Replying to simonhatfield:
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By FactChecker
14th Apr 2024 16:35

"The employee has no issue paying Student Loan contributions, Xero just won't deduct them!"

Ever so slightly tongue in cheek (and of absolutely no assistance to your core question) ... but if the EE wishes to pay contributions to the SLC then they will be delighted to accept them (as payments don't *have* to be made via deductions under PAYE)"!

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By richard thomas
14th Apr 2024 14:56

Before researching, I made a bet with myself that Xero were right and HMRC were wrong, but the best odds I could give myself were 50-1 on.

So my mental winnings are paltry.

Earnings for SL = Earnings for NI Class 1

If it is a properly constituted tronc with no involvement by the employer in eg allocating, there is no NI and it is not counted for SL. See the disregard in Sch 3 SSCRegs 2001.

It is arguable whether for NI and hence SL the troncmaster is an employer. For PAYE the troncmaster is an employer - reg 100 PAYE Regs. I am assuming PAYE on the tips was operated in accordance with Reg 100(2).

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Replying to richard thomas:
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By simonhatfield
14th Apr 2024 15:31

I haven't notified HMRC, as details in the Reg 100 (2) so I will look to do that this week, and can ask for guidance in terms of the SL.

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Replying to richard thomas:
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By FactChecker
14th Apr 2024 16:14

Could have done with you officiating in the disagreement on that previous thread to which I referred!

The gaps between HMRC practice and their guidance (let alone between anything emanating from them and the legislation) grow more frequent - or are we (well you really) just getting better at drawing attention to them?

However, if 'employment earnings' and TRONC-pay are reported under one PAYE scheme, there isn't an 'easy' way for HMRC to identify the TRONC component via what is reported in the FPS.
There are many 'total' data items reported - such as for:
* Taxable pay in this pay period including payrolled BiKs
* Value of payments not subject to tax or NICs in pay period
* Value of deductions from net pay in pay period
* Items subject to Class 1 NIC but not taxed under PAYE regs
... and several more (all of which could be thought of as in the 'PAYE section'), but none that I can see for 'not subject to Class 1 NIC but taxed under PAYE regs'.

However the NI section does (not surprisingly) start with:
* Gross earnings for NICs in this period
- with the instruction that this means "enter employee's total gross earnings subject to NICs in this pay period, include pay below LEL and above UEL".

So back to OP's scenario (IF they are processing/reporting both employment earnings and TRONC payments within one PAYE scheme), it sounds as though:
- either Xero is including the TRONC pay within the 'gross earnings subject to NICs' data item (despite not going on to take SL deductions);
- or HMRC's system trigger (regarding SL deductions being due) isn't based on the correct data item (79B) reported in the FPS?

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Replying to FactChecker:
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By simonhatfield
15th Apr 2024 14:51

I tried to post the XML data but it didn't work

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Replying to FactChecker:
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By rmillaree
15th Apr 2024 15:18

looking at Xero it looks like xero may have a Tips Direct and Tips non Direct option - so one may need to know what the difference between those 2 options is - if that may make a difference?

It would seem odd to me if the student loan is following anything other than going off taxable earnings route ? can anyone confirm if earnings for NI purposes is an irrelevance?

Note i would also worry that any pay element line on any payroll package could have been setup in a manner that is not correct - eg if one manually adds generic salary addition line calls it tips and doesnt correctly flag up the tax and ni consequences - or flag up that its tips in the correct manner could that make xero go off in the wrong direction?

My thoughts probably only add to the confusion here i suspect ??

the only thing i do know is the is it a tronc or not a tronc? and does it need to be setup as separate scheme? questions are not addressed then there may be no hope . complaining about complexity here though is preumably not an acceptable excuse for doing it all wrong by getting fundamentals setup in a manner that does not meet hmrc approval.

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Replying to rmillaree:
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By lionofludesch
15th Apr 2024 15:23

rmillaree wrote:

It would seem odd to me if the student loan is following anything other than going off taxable earnings route ? can anyone confirm if earnings for NI purposes is an irrelevance?

Student loans have always been more similar to NI rules than tax rules. They're not cumulative, for instance.

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Replying to lionofludesch:
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By rmillaree
15th Apr 2024 15:44

"They're not cumulative, for instance."

I think thats for convenience and thats only for those outside self assessment.

Ie sole trader with employment and self employmnet completing tax return does have student loan repayments calculated on cumulative basis do they not ? even if in year deductions are per pay period.

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By taxdigital
14th Apr 2024 15:07

I can see that ‘earnings’ for the purpose of The Education (Student Loans) (Repayment) Regulations 2009 are aggregated or not aggregated the same way as they are done for the purpose of NI contributions (Reg 45(1).

‘Earnings’ for the purposes of NI contributions do not include ‘any payment of, or in respect of, a gratuity or offering’ provided they are not made to the employee directly or indirectly by the employer and does not comprise or represent sums previously received by the employer from their customers. (Para 5, Part X, Sch 3 - The Social Security (Contributions) Regulations 2001).

So, if all the conditions are met, Xero - 1, HMRC- 0!

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Replying to taxdigital:
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By simonhatfield
14th Apr 2024 15:30

The part which confuses me here, is 'provided they are not made to the employee directly or indirectly by the employer' - there are various opinions online as to what this constitutes. The Troncmaster tells me, as the principal employer the amount each should be paid via the TRONC. As the employer I have collected that money from customers, I then distribute this, as instructed by the Troncmaster on a seperate line via the company payroll. Is this still indirectly?

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Replying to simonhatfield:
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By FactChecker
14th Apr 2024 16:26

As you say, for such a binary question there are a lot of opposing opinions.

I'm in the camp that would say 'no that's not indirect' - but there are some who will tell you what you'd prefer to hear (not surprisingly mostly from those who provide TroncMaster services of one type or another).
It's obviously cleaner (as in easier to track/audit) if the payments go via different PAYE schemes (which is why HMRC 'guidance' points you in that direction), but equally obviously it's more effort (which is why Troncmaster service providers will say you don't need to).

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By taxdigital
14th Apr 2024 19:51

simonhatfield wrote:

The part which confuses me here, is 'provided they are not made to the employee directly or indirectly by the employer' - there are various opinions online as to what this constitutes. The Troncmaster tells me, as the principal employer the amount each should be paid via the TRONC. As the employer I have collected that money from customers, I then distribute this, as instructed by the Troncmaster on a seperate line via the company payroll. Is this still indirectly?


Your adviser is the one best placed to answer this as they'll have all the facts in front of them. That said, in my view, in employees receiving it direct from the employer the first condition will not have been met, and consequently the payment is NI-able. As for Xero, or for any software for that matter, I presume ticking a box is all it should take to make a payment NI-able.
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By lionofludesch
15th Apr 2024 07:35

Why are we writing tronc in capitals?

But troncmaster in lower case?

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Replying to lionofludesch:
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By rmillaree
15th Apr 2024 09:31

Why are we writing tronc in capitals?

because its a FAB word perhaps?

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Replying to lionofludesch:
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By JB101
15th Apr 2024 17:56

Annoyingly, my scrabble type game on my phone doesn't allow tronc as a valid word :(
I've never tried troncmaster, though!

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