Payroll: What we know for 2020/21
The 2020 Budget is still five weeks away, but the NIC rates and thresholds have now been announced along with key details for other payroll deductions, as Kate Upcraft explains.
It’s been a tense few weeks for payroll software developers and tax agents who are trying to prepare employers for the new tax year. The software development cycle for the last 18 years has worked on the basis of having key pieces of tax information announced as part of an autumn statement, rather than being left to a spring budget.
This year was very different. When parliament was dissolved in November 2019, the civil service went into a period of election purdah until mid-December which prevented any discussions about next tax year taking place with policymakers.
If we’d had an early February budget, the timetable for revising software would’ve been tight, but just about deliverable. However, a Budget on the 11 March presents a problem.
Some payrolls that pay on 6 April are run at the end of February. Without an announcement of the national insurance rates and thresholds, it wouldn’t be possible to pay people correctly on that first payday for 2020/21. The national insurance liability is not calculated cumulatively unless you are a director.
It was a huge relief when an email arrived on 31 January 2020 announcing the 2020/21 national insurance thresholds.
New NIC thresholds
It is now clear that employees will benefit from a primary class 1 threshold of £9,500, as promised in the Conservative party manifesto. But employers will start paying NIC sooner at £8,788 (a small increase in last year’s threshold of £8,632).
The primary and secondary thresholds for class 1 NIC have been aligned since 2017, which was a recommendation of the Office of Tax Simplification. Now we are back to more complexity as the two NIC thresholds split apart again.
The NIC thresholds for the most common pay frequencies are shown in table 1:
Income tax thresholds
The tax bands have not been announced. However, as the upper earnings limit for NIC has not increased, I presume this means that the 40% income tax threshold remains at this level too.
The expectation is that the personal allowance will remain at £12,500 as the announcement in Budget 2018 was to cover two years. The Conservatives also committed not to increase the rate of income tax during this parliament.
The introduction of Class 1A (employer only) NI on termination payments over £30,000 from 6 April 2020 is not handled via a table letter. The payment of a such a termination award requires the employer to complete a manual calculation and enter that in the Full Payment Submission (FPS).
The Employment Allowance will be withdrawn for employers (and connected employers) who have an employer national insurance liability of £100,000 or more for 2019/20.
No action is required to end claims for the employment allowance, as all claims will fall away at the end of this tax year.
Small employers who are still eligible to claim will have to answer numerous additional questions on the Employer Payment Summary (EPS). Restricting the allowance in this way has turned it into de minimus state aid, so the central government have to have a record to prove that the claimants have sufficient headroom in their sectoral de minimis state aid threshold over the two preceding years ahead of the year of claim to allow for the £3,000 of employment allowance.
As the state aid thresholds are quoted in euros (we have adopted the EU state aid regulations into UK law) employers have to convert any de minimis state aid received in sterling into euros using the exchange rate for March that HMRC will publish here.
The final piece in the national insurance jigsaw is in respect to auto enrolment thresholds as the qualifying earnings for the and lower bands of pension contributions are currently aligned to the upper and lower earnings NIC limits. I hope that DWP will be able to confirm these thresholds quickly too.
We already have the statutory payment values for 2020/21:
|SMP, SAP, SPP, ShPP, SPBP*||£151.20 p.w. from 5.4.20|
|SSP||£95.85 p.w. from 6.4.20|
Student loan thresholds
|Loan type||Threshold for payments||Rate of deduction|
|Postgraduate||£21,000 (no change)||6%|
As no announcement has been made in respect of the apprenticeship levy, we assume that the rate will remain at 0.5% and the levy allowance will remain at £15,000 a year.
We are waiting for Scotland’s budget which takes place on 6 February, although the Scottish government has warned that it may need to make changes to reflect any announcements in the Westminster budget that impact Scotland’s finances.
Wales has already published its draft budget with no changes for rates to thresholds from 2019/20 as currently drafted.