Tax year end date changes: Payroll implicationsby
Samantha Johnson assesses the impact a change in the tax year end would have on payroll calculations, statutory payments and more.
The Office of Tax Simplification's (OTS) announcement to review the tax year end date has been welcomed by some and criticised by others. The existing tax year has been in place for centuries with legislation and guidance built to reflect the 5 April.
The proposal to change this date to either the 31 March or 31 December will inevitably come with some challenges for payroll professionals.
In 2002, Ireland successfully made the move from 5 April to 31 December, showing that it is possible. Central to any change is the planning – specifically, in the transitional tax year. If the planning is done well, and solutions avoid complexity, the UK could adapt to this change with relative ease.
Many payroll calculations are centred around the thresholds which are set to apply to tax years and tax periods. The transitional year would need to set out pro-rated entitlement to those standard annual thresholds, such as the personal allowance, employment allowance and apprentice levy allowance.
On an individual basis, allowances that can affect tax-free pay such as the marriage allowance and working from home allowance must be adjusted to ensure entitlement is fairly reflected for individuals who are claiming these adjustments.
National insurance is calculated on an annual basis for directors, meaning that this will also require consideration. Moreover, the transition year would include a shorter month; therefore, those monthly national insurance thresholds may need to be adjusted to reflect that reduced period. There would need to be clear guidance to calculate the appropriate earnings levels for national insurance in these circumstances.
The new tax year is also linked to changes in statutory payments – including sick pay, maternity pay and paternity pay. These payments increase annually, and whilst the exact date at which they apply does vary depending on the type of payment, it would be expected that there would continue to be alignment between the increases and the new tax year.
A change to 31 March would not create a significant change to timings; however, a change to 31 December would certainly create a more substantial impact. Statutory increases not being aligned to the start of the tax year would not be a desirable consequence of this change.
Gender pay gap reporting
The snapshot date for gender pay gap reporting is currently 5 April in the private sector, the same date as the end of the existing tax year. A move to 31 March or 31 December would leave this date without any identifiable point of reference; therefore, any change to the existing tax year should consider the effect on this area too.
Payroll schedules and software implications
Existing payroll schedules in many teams are well established and have been tried and tested. In payroll bureaux, there is even more of an emphasis on payroll schedules, where multiple deadlines are in place to manage hundreds or possibly thousands of clients.
The deadline for the full payment summary would not need to be amended with a tax year end change. Payments for PAYE, however, would be liable to being brought forward if the tax month was to end in line with the calendar month. This change could create further implications for the employer payment summary deadline and ultimately, create significant changes in payroll schedules across the UK.
I’m certain that the preference from payroll will be to retain existing deadlines to prevent unpicking complex and well-established internal processes.
Payroll professionals work hand in hand with software providers to deliver their services, and any change must come with sufficient notice to software providers to develop, test and apply any changes within their products.
National insurance contributions are used to calculate entitlement to the state pension. The pro-rated transition year (particularly if the tax year is moved to 31 December) would mean that employees do not get an opportunity to contribute a full year. Government would need to take a clear stance on how, and if, this would reduce any state pension benefits and provide clear messaging to ensure that individuals can take action to address this if required.
The link between RTI and universal credit has been in place for a number of years now. Earnings data is used to calculate the amount of universal credit due to an individual. The transition year and pro-rated thresholds could alter the net amount an employee receives.
Universal credit uses net pay to calculate entitlement; therefore, the government must ensure individuals are protected from any adverse effects that the transition year may have on their net income and ultimately, benefit entitlement.
Although 2021 saw the Budget announcement arrive late in March, under normal circumstances, it would be expected in the autumn proceeding the new tax year. This gives payroll teams and payroll software providers the chance to prepare and to react to any upcoming changes. Whilst a tax year end change to 31 March would not warrant changes to the existing Budget schedule, a change to 31 December would mean that government would need to adjust their schedules quite significantly. This could mean that any transition year would see two Budget announcements within six to nine months of each other.
The OTS has set out a plan to review the tax year end. Any recommendation to move forward with this change should be comprehensive and ensure that clarity and transparency are at the centre of all communications, with a clear plan put in place for any transition year. This is not an impossible task, but the size of the impact will be greater if a move to 31 December is the preferred option. Overall, the success of this change will absolutely depend on good preparation – as the old saying goes, fail to prepare, prepare to fail.
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Sam has an unwavering passion for payroll and is an advocate of raising the industry’s profile across all organisations and sectors. The opportunity to join the CIPP is a self-confessed 'dream come true', an opportunity she intends use to help support payroll professionals to thrive in this challenging, complex and deadline-driven profession...