Year end tax matters for employers

Business people

In this briefing we outline the key reporting deadlines for employers in 2019 and some recent employment tax changes.

Key dates for employers

31 March:

  • 2017-18 end of year National Insurance returns for modified payrolls (Appendix 7A/7B agreements).

19 April:

  • Latest date for filing last Full Payment Submission (FPS)/Employer Payment Summary (EPS)of 2018-19.
  • FPS returns must be made on or before the time of payment. However, benefits subject to Class 1 NICs and notional payments may be returned within 14 days following the month end, or the time when the employer operates NICs/PAYE on the payment concerned.
  • Outstanding PAYE tax and Class 1 NICs postal payments to reach HMRC’s accounts office.
  • Deadline for reporting under PAYE special arrangement for STBVs and paying tax if payment not being made electronically.

22 April:

  • Outstanding PAYE tax and Class 1 NICs cleared electronic payments to reach HMRC’s bank account.

19 May:

  • An in-year adjustment to a prior FPS must be made on an FPS by 19 of the following month. Adjustments made after 19 April relating to prior tax year should be made on an Earlier Year Update (EYU). Where possible, we recommend observing the same deadline for the EYU as for in-year corrections via FPS.

31 May:

  • Forms P60 to employees.
  • Short-Term Business Visitor Arrangement return reporting deadline.

5 July:

  • PAYE Settlement Agreement (PSA).
  • Last date for agreeing PSA, where the employer wishes to settle the tax and National Insurance due on a grossed up basis.
  • Employee making good deadline to avoid Section 222 ITEPA 2003 charge where employer has operated PAYE on shares received.

6 July:

  • File forms P11D, P9D and P11D(b) with HMRC and provide copies to employees (other than those on modified payroll arrangements).
  • Employee making good deadline to avoid tax and NICs charge on most benefits.
  • File share scheme forms (Form 42 or EMI 40) online.
  • Return of non-cash elements of termination payments where £30,000 exemption fully utilised.

19 July:

  • Class 1A NICs postal payments to reach HMRC’s accounts office.
  • Deadline for paying any amounts due under taxed award schemes.

22 July:

  • Class 1A cleared electronic payments must reach HMRC’s bank account.

19 October:

  • Postal payment of tax and Class 1B NICs due under PSA.

22 October:

  • Electronic payment of tax and Class 1B NICs due under PSA.

31 January:

  • File forms P11D, P9D and P11D(b) with HMRC and provide copies to employees who are on a modified payroll for expatriate employees.

Real Time Information late filing penalties

All employers are now within the regime for Real Time Information (RTI) late filing penalties. Only one late filing penalty will be due for a particular month (even, for example, where employees are paid weekly). No penalty will be charged for the first tax month in the year in which an RTI return is late. This exception does not apply to annual schemes. The penalty bands are shown in the PDF below.

If a return is outstanding for three months or more a further penalty may be charged at the rate of 5% of the tax and National Insurance that should have been shown on the late return.

Reporting requirements for transactions in ‘employment related securities’

If, during the year, there have been any transactions in shares (or other ‘securities’) involving employees or directors, or any events relating to tax advantaged schemes (ie EMI, CSOP, SAYE or SIP), these may need to be reported online to HM Revenue & Customs (HMRC) by 6 July following the end of the tax year.

Tax advantaged schemes such as EMIs should be registered on the online system even if there were no reportable events in the year.

Termination payment changes

All Payments in Lieu of Notice (PILONs) paid on or after 6 April 2018 and which relate to employments terminated on or after that date are chargeable to income tax and National Insurance, whether or not they are contractual payments. Where no specific PILON is paid and the employee does not work their notice period, part of the overall termination payment will be treated as a deemed PILON and subject to tax and National Insurance accordingly.

The previous reduction/exemption for foreign service was removed in April 2018. From that date, unless the employee is not UK tax resident at the date of the termination of employment, the full payment will be within the scope of UK tax even if part of the payment relates to a period when the employee was working outside the UK. These rules apply for those who have had their contract terminated on or after 6 April 2018.

Optional Remuneration Arrangements

Since April 2017, unless specifically exempted, all new salary sacrifice arrangements, whereby employees agree to a salary reduction in favour of non-cash benefits, have been caught by the Optional Remuneration Arrangements (OpRA) legislation. The benefit received is subject to tax and employer’s National Insurance contributions (NICs) at the higher of the taxable value under standard (non-salary sacrifice) rules or the amount of salary sacrificed. Specific exemptions relate to pension contributions, pension advice, employer provided childcare, cycle to work schemes and qualifying low emission company cars.

Any salary sacrifice arrangements that were entered into before 6 April 2017 and were not altered after that date were covered by transition rules that excluded them from the scope of OpRA. This transition period ended on 5 April 2018 for all benefits other than company cars, school fees for parents employed by fee-paying schools and employer provided accommodation. Other benefits will be caught by OpRA from that date (unless they fall within one of the main exemptions). Employers that have not opted to payroll these benefits for the 2018-19 tax year will need to report the value of the benefits on P11Ds at the end of the year.

Voluntary payrolling of benefits

Employers can apply to voluntary payroll certain benefits in kind, reducing year end P11D reporting obligations. The last registration date for payrolling benefits for 2019-20 is 5 April 2019.

Off payroll working

At Autumn Budget 2018, changes to the intermediaries rules (commonly known as IR35) were confirmed –extending the previous “public sector only” rules to cover the private sector.

Currently, where a private sector business/organisation engages a contractor through a personal service company (PSC) the legislation requires that the PSC consider whether the contract falls within IR35 (that is, in broad terms, whether the contractor would have been an employee of the business if engaged directly rather than via the PSC). Where IR35 does apply, the PSC is required to deduct income tax and NICs via PAYE, removing the potential tax advantage of operating through the company.

From April 2020, medium and large businesses, agencies or third parties engaging contractors through PSCs will need to determine whether or not a contract falls within the IR35 rules. Where a contract does fall within IR35, the contracting entity will need to deduct tax and NICs. These businesses will need to ensure ahead of time that they are able to determine whether a contract falls within IR35 – which can be a challenge – but also that they are prepared to make the correct deductions from payments.

The government has now published a consultation, which contains further details on the operation of the rules. The government has also indicated that it will provide detailed guidance and support for businesses in the run-up to the changes, but will also be looking at potential sanctions for any businesses failing to take reasonable care when arriving at a decision.

Short-term business visitors

Short-term business visitors (STBVs) to the UK can lead to a payroll obligation for a UK host employer. Strictly, PAYE should be operated in respect of the first day a STBV works in the UK. However, there are two arrangements a UK company can enter into with HMRC which ease this administrative burden.

Under the Short-Term Business Visitor Arrangement (STBVA) a UK company agrees to track and report its STBVs annually to HMRC. The STBVA applies to visitors who are expected to be exempt from UK tax under a double tax treaty between the UK and their country of residence. Where a visitor meets the conditions to be included under an STBVA the UK company does not need to operate PAYE.

Employees from overseas branches of UK companies or countries with which the UK does not have a competent double tax treaty, are not eligible for inclusion under a STBVA, but may be eligible for a PAYE special arrangement for STBVs. The special arrangement can apply where the employee has 30 or fewer UK workdays in a tax year and allows the UK company to operate an annual PAYE scheme rather than reporting payments to HMRC in real time. Where the STBV exceeds 30 days in the UK, then the employer must operate RTI reporting, and the individual must file a self-assessment tax return.

At Budget 2018, two key improvements were announced to the PAYE special arrangements for STBVs. Firstly, the UK workday limit will be increased to 60 days or fewer per tax year, to allow overseas STBVs to spend more time in the UK without the need to operate PAYE or file a UK self-assessment tax return. Secondly, the current annual PAYE reporting and payment deadlines of 19 April and 22 April will be extended to 31 May (in line with the STBVA), to allow employers more time to gather the relevant data on UK workdays and remuneration and perform PAYE calculations.

These changes to the PAYE special arrangement for STBVs will be introduced from 6 April 2020.

Pension auto enrolment

With effect from 6 April 2019 the minimum contributions on qualifying earnings will increase from 5% to 8% of which employers must pay at least 3%. Employers making the minimum required contributions will mean that employees’ minimum contributions will increase from 3% to 5%.

Employees can consider opting-out as a result of the increase, although this must be a free choice. The employee will be free to opt back in and must in any event be re-enrolled back into the pension scheme every three years.

Apprenticeship Levy

Since April 2017, employers with a total annual pay bill of at least £3 million have been required to pay the Apprenticeship Levy at 0.5% on the total employer’s pay bill after offsetting an annual allowance of £15,000. The pay bill is the total employee earnings that are subject to Class 1 employer’s NICs. The levy is collected by HMRC as part of the normal payroll process using RTI.

Employers that operate multiple payrolls and connected charities or companies, including for this purpose limited liability partnerships, can only claim one allowance. Connected entities can choose how they wish to allocate the £15,000 allowance amongst themselves, although allocation must take place before the start of the tax year and that allocation generally cannot change. Unused allowances from prior pay periods within the same tax year are carried forward but do not roll into the next tax year.

Funds paid under the levy can be used to fund qualifying apprenticeships and in England those funds must be spent within 24 months of paying the levy. Employers should review their payments against expected apprenticeship funding. The apprenticeship framework and funding in the rest of the UK remains unchanged.

The government has announced reforms to the levy, including giving employers greater flexibility in transferring their levy funds. With effect from 6 April 2019 employers will be able to transfer up to 25% of their funds to other employers in their supply chain, rather than 10% as at present. The government also plans to consult on the operation of the levy after 2020.

For small businesses that do not pay the levy, the government announced at Budget 2018 that the co-investment rate for apprenticeship training – currently 10% – will be reduced to 5%.

Employers’ National Insurance exemptions

Employers’ Class 1 National Insurance is not payable on earnings below the Upper Earnings Limit (£962 per week for 2019-20) for employees under 21 or for apprentices under 25. Even where no NICs are payable in respect of employees under 21 or apprentices under 25, their earnings still form part of the total pay bill for Apprenticeship Levy purposes.

Employment Allowance

Every business, charity and community amateur sports club is entitled to an annual Employment Allowance (£3,000 since April 2016) to reduce Class 1 secondary NICs. In April 2015 this was extended to individuals employing certain care and support workers. To ensure the Employment Allowance is focused on businesses and charities that support employment, it is not available to companies where the director is the sole employee.

Employers that have not already claimed the allowance can apply for a repayment from HMRC within four years of the end of the tax year concerned.

From 2020, the Employment Allowance will only be available to employers with an employers’ NIC liability below £100,000 in the previous tax year. Where employers are connected, this limit will apply to their aggregated liability.

Transferable allowance for (some) married couples

Individuals not liable to income tax above the basic rate are able to transfer part of their tax free personal allowance to their spouse or civil partner, as long as their spouse or civil partner do not pay income tax or their income is below the personal allowance. For the 2019-2020 tax year £1,250 will be transferable, representing a saving of up to £250 per year for eligible couples. Two tax code suffixes reflect this election (an N suffix for the transferor and an M for the recipient) in order to facilitate the transferable allowance for those employees currently on an L suffix code.

Collecting tax debts through PAYE

HMRC can recover tax owed through an employee’s PAYE tax code – referred to as ‘coding out’ – to a maximum of £17,000, except for employees with earnings of less than £30,000 (whose maximum is £3,000). The maximum is reached by reference to a graduated income-based scale if an employee has a main source of PAYE income of £30,000 or more.

Since April 2017, HMRC has been able to code out both current and prior year tax owed. This ‘dynamic coding’ approach is gradually being extended to cover bank and building society interest reported by financial institutions, initially on a prior year basis. To ensure a consistent approach, and to safeguard employees from excessive deductions from their pay, employers cannot deduct more than 50% of an employee’s relevant pay. As data reported by third parties, such as interest income, is included in tax codes, employers are likely to continue to see both an increase in changes to coding notices and in employee queries about their tax position.

Scottish and Welsh income tax

Since 6 April 2018 there have been different income tax rates applicable in Scotland than for the rest of the UK. From 6 April 2019, there is a starter rate of 19% for the first £2,049 of earnings above the Personal Allowance (£12,500 as per the rest of the UK), basic rate at 20% on the next £10,395, an intermediate rate of 21% up to the higher rate threshold (£43,430), a higher rate of 41% up to £150,000 and a top rate of 46% for income over £150,000.

HMRC issues S prefixes to tax codes to indicate which employees are Scottish taxpayers. Employers should ensure that any such taxpayers are correctly categorised for payroll purposes and their payroll systems can manage the divergence of rates and bandings between Scottish and rest of the UK employees.

While Wales gains devolved powers over non-savings income taxation from 6 April 2019, for the 2019-20 tax year the Welsh government has stated its intentions to keep the income tax rate for Welsh taxpayers in line with the UK rates. HMRC will issue C prefixes to tax codes to indicate which employees are Welsh taxpayers.

National Living Wage/National Minimum Wage

The National Living Wage (NLW) and National Minimum Wage (NMW) rates are due to rise in April 2019 (see PDF below for rates). HMRC has continued to focus resources on NLW/NMW enforcement, with some high profile employers being ‘named and shamed’ for non-compliance. All employers should, therefore, ensure that they have taken steps to be fully compliant with the rules in this area.

This factsheet is based on law and HMRC practice at 1 March 2019.