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Exploding new tax year myths

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7th Mar 2018
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Kate Upcraft lays to rest ten myths around some of the key tax and benefit changes which come into effect for the 2018/19 tax year.

1: Employer pension contributions

Myth: All employees have to pay 2% pension contributions from 6 April 2018 under the auto enrolment rules.

Not necessarily. Auto enrolment pension contributions only have to increase if the employer is not already making the required employer minimum contribution of 2%, and the total contribution from employer and employee is less than 5% in April 2018. For example, an employer currently contributing 8% of qualifying earnings with the employee contributing 1% does not need to increase their contributions in either April 2018 or 2019.

From 6 April 2019, the minimum employer contribution will be 3%, with the total required to be 8%. There has never been a minimum employee contribution. There are many non-contributory pension schemes since the advent of auto enrolment, as all schemes operating pension salary sacrifice will have no employee contributions.

2. Student Loans

Myth: The student loan repayment thresholds are always in round pounds

No. The student loan repayment threshold for Plan 1 students rises from £17,775 to £18,330 on 6 April 2018. For Plan 2 students the repayment threshold will rise from £21,000 to £25,000.

These thresholds are divided down into pounds and pence within the payroll software to accommodate the varying pay frequencies so that the treatment is equitable. However, the loan deductions themselves must only ever be in round pounds.

3. National minimum wage

Myth: Wages must be increased for higher NMW rates from 1 April 2018.

No. The increase in national minimum wage comes into effect on the first pay period that begins on or after 1 April. There is no requirement to pro-rate the old and new NMW rates where the rate change falls in the middle of the pay period. If the employee’s pay period starts on 31 March, the increase in NMW wage does not have to be implemented until the pay period which begins on 7 April.

4. Salary sacrifice

Myth: Any benefits in kind which have been payrolled for 2017/18, and provided via salary sacrifice, still require a P11D to be provided.

Law says ‘yes’, but HMRC says ‘no’. HMRC acknowledged that the PAYE regulations hadn’t been amended to accommodate the ‘relevant amount’ which is the new taxable value for certain benefits provided under an optional remuneration arrangement (salary sacrifice). So strictly speaking, employers are operating outside the PAYE regulations having payrolled such benefits. As the failure to define the ‘relevant amount’ in the PAYE regulations means that the registration process to become an authorised employer is null and void.   

HMRC has softened its stance on this and agreed that it won’t require a P11D to be provided for 2017/18 in such instances, as long as the employer has payrolled the correct relevant amount.

5. Payrolling 

Myth: If an employer starts payrolling benefits the employees will pay double tax in year 1.

No. When an employer registers for payrolling, the relevant benefits in kind to be payrolled are removed from employees’ tax codes. This ensures that employees only suffer tax on the benefit in kind through the payroll from the start of the tax year.

When the P11D is submitted for 2017/18 in July 2018, if any tax needs to be collected on a new or amended benefit, a coding change can be raised. This may not be necessary if the employee has already notified HMRC of the benefit in kind, as it will have been coded out using the dynamic coding procedure, and there will be no tax to collect in arrears.

6. Payrolling company cars

Myth: Employers have to payroll company car benefits from 6 April 2018

No. It’s not mandatory to payroll company cars from April 2018. However, if you have chosen to payroll company cars there are new data fields which must be completed in the full payment submission (FPS) and sent to HMRC.

7. Scottish tax codes

Myth: The new Scottish tax codes in 2018 require employer intervention

No, but… there are new tax codes to reflect the Scottish income tax rates and bands from 6 April 2018:

  • SD0 which will take tax at 21% with no allowances
  • SD1 which will take tax at 41% with no allowances
  • SD2 which will take tax at 46% with no allowances

Tax code SD0 already exists, as in 2017/18 it takes tax at 40% with no allowances. The expectation is that HMRC will issue new codes to all those who currently have code SD0 to amend this to SD1, to ensure those taxpayers do not drop from 40% tax 21% tax, which would happen if the code was left as SD0 for 2018/19. The employer should not have to amend the codes without HMRC intervention.

8. Post-employment notice pay where there is no contractual PILON

Myth: The new definition of what must be taxable as pay in lieu of notice (PILON) if the contract is silent on the option of such a payment uses the contractual basic pay in force immediately prior to the date of termination.

No. It doesn’t if the employee had participated in a salary sacrifice in that pay period. The salary sacrifice value must be added back in, and the pre-sacrifice pay used to calculate the post-employment notice pay.

 9. Childcare vouchers

Myth: You can be a member of employer-provided childcare voucher or directly contracted childcare scheme, if you join in April 2018.

No (for new entrants). Employer-provided childcare voucher schemes should close to new entrants from 6 April 2018.  However, an employee may be able to join an employer’s scheme just before April 2018 and make a salary sacrifice to do so.

In order to be a member of a salary sacrifice childcare voucher scheme by 6 April 2018, the employee must have had their first reduction in salary by 5 April 2018.  Say an employee is paid for the calendar month of April 2018, a sacrifice agreement must be in place before the start of the pay period when the employee becomes entitled to the salary. In that case, the contract change to enter the scheme and sacrifice pay would have to be dated 31 March at the latest.

10.Tax-free childcare

Myth: HMRC will be able to establish from the FPS if an employee is still receiving childcare vouchers and has also opened a tax-free childcare account.

Not likely. Employees should tell their employer within 90 days if they open a tax free childcare account, so the employer can stop providing childcare vouchers to that employee.

If the salary sacrifice for childcare has been implemented correctly, HMRC won’t know that the employee continues to receive childcare vouchers. All HMRC will receive is the reduced taxable pay post-sacrifice on the FPS. If the employee is receiving childcare support from both the government directly via tax-free childcare account, as well as employer-provided vouchers, or directly contracted childcare, this is not a matter for the employer, but for HMRC.

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