Pay and Benefits

When the clock strikes midnight on 31 December and we begin to count in the New Year, many of us will be making our resolutions. Whether we will have kept any or all of them by the end of January remains to be seen. However, one resolution we should all be making and sticking to, if we are in any way involved in the payroll, is to start to prepare early for some of the big changes coming in this year and next.

 

Normally at this time of the year, I would recommend that you start to prepare for year end to ensure that everything goes smoothly – this year is no exception.

 

First of all, do you have a valid National Insurance number (NINO) for every employee on the payroll? The NINO consists of two letters within a specified range, six figures and a letter between A and D, or a space is acceptable. The specified range of prefix letters is listed in the HM Revenue & Customs (HMRC) Payroll Quality Standard which can be found on its website.

 

Do you know if your software automatically verifies the NINO format when it is entered onto the payroll? If your software does not run this check, and many do not, then you need to check the prefix letters are correct to avoid problems at year end.

 

To reduce costs, the Department for Work and Pensions (DWP) is no longer sending out plastic cards confirming an individual’s NINO, instead a letter is sent. The NINO plays such a fundamental part in payroll, HMRC and DWP processes that it may end up being a mistake to downgrade confirmation of this information to a simple letter. The number will, in fact, play a crucial role in the
matching of data under Real-Time Information (RTI).

 

Furthermore, if an employee has not provided you with their NINO, and they may, for a number of reasons, not be entitled to one, then you must hold on file their date of birth and gender, otherwise their end-of-year return will be rejected by HMRC. The easiest way to obtain this information is to make it part of your recruitment process and obtain this information when they join the company. Even if your employees have supplied you with their NINO, their date of birth would also be useful to record on file. This is because it helps HMRC to match an employee’s details against information they hold on their database, NPS (National Insurance and Pay As You Earn Service). So if your HR department or frontline managers are not aware of the importance of this information, then now is the time to start educating them.

 

For a number of years HMRC has allowed employers who do not have an employee’s date of birth on file to use a default date at year end of 01011901. However, this was causing problems, so the default can no longer be used.

 

Furthermore, a temporary NINO based on the employee’s date of birth and gender for example TN220680F is also no longer acceptable.

 

According to HMRC’s CWG2 (paragraph 1 page 6) “Your employees are required by law to give their NINO to you, although they can start work before providing the number.”

 

When RTI is implemented HMRC will be offering employers a National Insurance Verification service which will enable them to check and confirm an employee’s correct NINO.

For many years, entering the employee’s surname and initials – if you did not know their full name – had been accepted on their P14. HMRC is now asking employers to obtain the full name where possible. There is an article in next month’s issue by HMRC which will explain in more detail the importance of data quality. However, in the meantime why not consider confirming with your employee their full name and correct spelling. You might think that we need only worry about the correct spelling of any foreign or unusual names, but let us take my name as an example: is it Lin, Lyn, Lynne, Lynda, Lydia or Linda? As for my surname, I have been addressed as the following: Pullman, Pullen, Pullan, Pollen and Woollen.

 

We are all aware that the pilot scheme for RTI begins on 6 April 2012 for approximately 300 volunteer employers. If all goes as planned HMRC will be looking for more volunteers for autumn 2012 or perhaps even earlier, providing their software is compliant. However, there is a far more important and fundamental change which will affect a large number of employers from 6 April 2012 if they are operating a Contracted-Out Money Purchase Pension or COMP scheme, as they will no longer be contracted out. The DWP has been contacting pension providers to warn them of this change. However, although this information may have been sent to your pensions department, has this filtered through to the team responsible for operating the payroll?

 

If you are operating a stakeholder pension, it is possible for these to be COMP schemes, although most are not contracted-out, but please check.

 

With around 90 per cent or more of final salary pensions closed to new entrants, more and more employers in recent years have opted for COMP pension schemes. The fundamental change is that from 6 April 2012 COMP pensions will no longer be contracted out and must revert to the not contracted-out NI category letters. This change will mean that anyone who is a member of an employer’s COMP pension scheme, on the standard rate NI, will be paying 1.6 per cent more NI on earnings from the Primary Threshold (PT) up to the Upper Accrual Point (UAP) from April (based on current percentage rates), regardless of any changes to thresholds.

 

Employees affected by this change will be on the following NI category letters: F, G and S. These staff will need to be identified and their NI category changed to A, B and J respectively. Now this may involve a lot of work, so the first thing to do is to find out if your payroll software will be automatically switching the NI category over for period one?

 

If it is, then I would recommend that you spot check that it has been done correctly and also run a report showing employees’ NI categories just to make sure.

 

We know that when April’s salary is paid, employees will always compare March’s net pay with April’s. Of course, they may take into account some basic changes to tax, such as the allowances increasing, and possibly the tax bands changing. However, they all tend to overlook any changes to NI.

 

Let us look at some examples based on the current year’s rates. Joe earns £1,500 per month, he is a member of the company’s COMP pension scheme and pays NI category F. Currently his earnings above the Primary Threshold (PT) equal £898. Under NI Category F he pays 10.4 per cent on his earnings above PT to the UAP, amounting to £93.39, less his NI contribution rebate on earnings between the Lower Earnings Limit to the PT, which amounts to £2.56. His NI contribution will be £90.83.

 

However, when Joe switches to category A NI (based on this year’s thresholds etc) he will pay 12 per cent on his earnings above the PT to the UAP. His NI contribution under the new arrangement will be £107.76. Therefore, based on current rates and thresholds, Joe will pay an additional £16.93 per month in NI.

 

Joe’s manager, Tony, is also in the COMP pension and he earns £3,200 per month. His NI on category F is normally £267.46 including the NIC rebate. However, on category A, Tony will be paying £311.76, an additional £44.30 per month.

 

As you can see from the NI tables above, employees paying reduced rate NI must have a valid reduced-rate certificate, for example CA 4139 – or those with a deferment certificate CA2700, the amount of NI they pay under COMP and not-contracted out rates will not increase. However, for all three categories the employer will pay extra NI on earnings from the Secondary Threshold (ST) to the UAP and this should be taken into consideration when the employer’s budget is put together for the new tax year.

 

Employee's Contracted-Out Money Purchase scheme NI rates 2011/12
Category	COMP	Earnings above PT to UAP	UAP to UEL	Above UEL	NIC rebate LEL to PT
Standard	F	10.4%	12%	2%	1.6%
Reduced	G	5.85%	5.85%	2%	0%
Deferment	S	2%	2%	2%	1.6%

 

Employee's Not Contracted-Out scheme NI rates 2011/12
Category	COMP	Earnings above PT to UAP	UAP to UEL	Above UEL	NIC rebate LEL to PT
Standard	A	12%	12%	2%	n/a
Reduced	B	5.85%	5.85%	2%	n/a
Deferment	J	2%	2%	2%	n/a

 

Impact on employer NI rates 2011/12 (Contracted-Out Money Purchase scheme)
Category	COMP	Earnings above ST to UAP	Above UAP up to UEL	Above UEL	NIC rebate on earnings above LEL to ST
Standard	F	12.4%	13.8%	13.8%	1.4%
Reduced	G	12.4%	13.8%	13.8%	1.4%
Deferment	S	12.4%	13.8%	13.8%	1.4%

 

Impact on employer NI rates 2011/12 (Not Contracted-Out scheme)
Category	Not Cont Out	Earnings above ST to UAP	Above UAP up to UEL	Above UEL	NIC rebate on earnings above LEL to ST
Standard	A	13.8%	13.8%	13.8%	n/a
Reduced	B	13.8%	13.8%	13.8%	n/a
Deferment	J	13.8%	13.8%	13.8%	n/a

 

Linda Pullan is Head of Payroll Alliance