Tag Archives: payroll

Auto Enrolment Earnings

I have been asked what the levels of auto enrolment earnings are that mean an employer has to set up a qualifying auto enrolment pension scheme.

Auto Enrolment Earnings

Although an employer does not have to automatically enrol employees earning less than the earning trigger for auto enrolment, an employee can choose to opt in.

Typically, a pub or café may have no employees earning above the auto enrolment earnings trigger of £10,000 per year.

However, they can choose to opt in and the small employer is burdened by additional employee costs and professional fees processing their payroll and auto enrolment obligations. See my post Auto Enrolment Burden on Small Businesses

Auto Enrolment Earnings and Employee Ages for Eligibility

The Three Employee Categories

Entitled Worker

  • Aged 16 to 74
  • Earn less than the qualifying lower earnings threshold of £5,824 a year (£486 per month or £112 per week)
  • An employer does not have to automatically enrol ‘entitled workers’. If the employee decides to opt in, the employer does not have to contribute to their pension fund.

Non-Eligible Jobholder

  • Aged 16 to 74
  • Earns more than £5,824 a year (£486 per month or £112 per week) but no more than £10,000 a year (£833 per month or £192 per week)

Other non-eligible jobholders:

  • Aged 16 to 21 or between State Pension age and 74
  • Earn more than £10,000 per year (£833 per month or £192 per week)

The employer does not have to automatically enrol ‘non-eligible’ jobholders. If the employee decides to opt in, the employer must contribute to their pension fund.

Eligible Jobholder

  • Aged between 22 and State Pension age
  • Earns more than £10,000 per year (£833 per month or £192 per week)

The employer must automatically enrol ‘eligible’ jobholders and contribute to their pension fund unless the employee decides to opt out.

Disclaimer

The above is not exhaustive and is for guidance only and you should consult your accountant or other professional adviser before taking action on any of the above. See the Disclaimer

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Salary and Dividend Mix – What Your Left With

Salary and Dividend Mix

Let’s look at different director/shareholder salary and dividend mix and see what you would be left with after tax.

The truth is, it will be less than last year due to the changes to the tax on dividends and Employment Allowance but what we want is to be left with as much as possible after the new rules come into force after 6 April, 2016.

Let’s assume you want to have a gross income up to the 40{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} higher rate band and you are a sole director/shareholder with no other employees (typical of many consultants and freelancers):

Option One (annual salary to NI threshold)

Gross salary £8,060 (no NI or tax to pay)

Dividends £7,940 (£5,000 plus balance of personal allowance tax free)

Dividends £27,000 (taxed at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214})

Total gross income £43,000

Less tax on £27,000 of dividends at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} = £2,025

What you are left with is £40,975

Company gets 20{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} tax relief on £8,060 salary = £1,612

Overall net remuneration and tax saved by the company is £42,587

Option Two (salary to tax threshold)

Gross salary £11,000 (no tax to pay)

Dividends £5,000 (tax free)

Dividends £27,000 (taxed at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214})

Total gross income £43,000

Less tax on £27,000 of dividends at 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} = £2,025

less employees NI at 12{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} on £2,940 = £353

What you are left with £40,622

If you cannot claim the Employment Allowance then the company has to pay 13.8{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} Employers NI on £2,888 = £398.54

Company gets 20{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} tax relief on £11,000 salary plus the £399 Employers NI = £2,280

Overall net remuneration and tax saved (after deducting Employers NI) by the company is £42,503

Option One is marginally better and benefits from less administration paying National Insurance Contributions to HMRC.

If, however, you have other employees and qualify for the Employment allowance, then Option Two is marginally better as the company will not have to pay Employers NI contributions.

Option One is likely to be more beneficial for many consultants and freelancers who only employ themselves as directors.

Again, another affect would be if you have other employees that use up the Employment Allowance and then option one is better again.

Remember: Please get advice from your accountant or payroll bureau before taking action on the above

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Sole Directors Optimum Salary and Dividend 2016/17

Salary and Dividend

Many consultants, freelancers and other small limited companies operate as a one person/director company with no other employees.

For these business owners we look at the optimum salary and dividend mix each year. unfortunately, with changes to the Employers Allowance together with changes to the taxation of dividends from 6 April, 2016 more tax will have to be paid.

 

Optimum Salary and Dividend

If you have no employees other than yourself as the sole director (and therefore cannot claim the £3,000 Employment Allowance) then it may be better to take a salary up to the National Insurance Primary threshold (PT) and the balance in dividend.

You have to earn above the National Insurance Lower Earnings Limit (2016/17 £112 per week £486 per month) to keep your entitlement to future state benefits and pension. There is no National Insurance to pay at this level until you exceed the National Insurance Primary Threshold (2016/17 £155 per week or £671.66).

Due to the changes coming in from the 6 April, 2016, if you are the sole director/employee of your business, I suggest a monthly gross salary of £670 which is just below the threshold for paying Employee and Employer National Insurance contributions and take the balance in dividend.

From 6 April, you will have to pay some tax on the dividend but this can still show a small saving on going through the payroll. See Dividends Tax Shocker.

There are different optimum salary and dividend mixes for other circumstances such as if you have other employees or directors. contact your accountant or payroll bureau for advice.

Remember to get advice from your accountant or payroll bureau before taking action based on the above

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National Living Wage

National Living Wage

National Living Wage

The Government’s National Living Wage is due to be introduced on 1st April 2016 for all working people aged 25 and over, and will be set at £7.20 per hour. The current National Minimum Wage for those under the age of 25 will continue to apply.

Employees who have been covered by the National Minimum Wage, and are 25 years old and over, will be covered by the National Living Wage.

The new National Living Wage is different from the Living Wage. The National Living Wage, as with the National Minimum Wage, is a legal minimum hourly rate of pay and is updated by the Government annually. Remember, the National Minimum Wage still applies to employees aged 24 and under. 

The Living Wage is set independently of HMRC by the Living Wage Foundation and this is calculated according to the basic cost of living in the UK. Employers are not legally obliged to pay this higher Living Wage.

As much as I feel that employees should be fairly remunerated, many small businesses just can’t afford to pay a further 50 pence an hour just six months after the last statutory increase. The National Living Wage is a 7.5{8ee99a90b51e2217d12101096daf2ee9e40c43b9c2fa413e32f91dd0a196a214} increase on the previous £6.70 National Minimum Wage set in October last year!

The increase in the Employment Allowance will help reduce the impact for small employers that have full time employees. It may not help employers that have part-time workers that do not reach the National Insurance threshold of £156 per week.

Pubs, restaurants, cafés and small hotels are likely to be badly affected financially as they tend to employ a lot of part time staff earning less than £155 per week – we may have to pay more as customers!

There are penalties for non compliance and you should get advice from your accountant or payroll bureau who you should consult before taking action on the above.

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Changes to Employment Allowance

Employment Allowance

There is good news and bad news from 6 April, 2016 when important changes to the Employment Allowance come into place.

Since 6 April, 2014 employers have been able to reduce the amount of Employers’ National Insurance contributions (NICs) they pay for their employees by up to £2,000. This is called the ‘Employment Allowance’.

At the moment, businesses don’t have to pay any employer National Insurance contributions at all if they usually pay less than £2,000 a year.

The good news, from 6 April 2016, is that the relief the employer receive’s will go up from £2,000 to £3,000. This means that small businesses will not have to pay the first £3,000 of Employers’ National Insurance contributions for the PAYE tax year.

Note: This allowance is an annual allowance for the whole business – not per employee!

Now for the bad news: sole director employee businesses – i.e. a limited company with just one employee who is also the owner director, will no longer be able to claim the Employment Allowance.

This will affect a lot of consultants and freelancers.

The bad news gets worse!

HMRC today advised me:

If the sole owner director is employed as an employee and pays Class 1 National Insurance, the Employment Allowance can only be claimed if at least one other person is employed in the business and is paid above the Class 1 National Insurance Secondary Threshold (£156.00 per week).

Basically this means that the £3,000 Employment Allowance for Employers Class 1 National Insurance contributions can only be claimed if at least two or more directors or employees are paid above £8,112.00 per annum.

I will look at other scenarios that may put a spanner in the works and prevent employers claiming the Employment Allowance such as:

  • What if the second employee leaves, thus leaving a sole director employee?
  • Can sole traders and partnerships claim the Employment allowance if they employ one person?

Remember, consult your accountant or payroll bureau before taking action based on the above 

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Employee Accommodation – Accommodation Offset

National Minimum Wage and Accommodation Offset
(This post is based on rules as at 1 October, 2015)

Accommodation provided by an employer can be taken into account when calculating the minimum wage.

The offset rate for accommodation charges from 1 October, 2015 is £5.35 a day or £37.45 a week. If an employer charges more than this, the difference is taken off the worker’s pay which counts for the minimum wage.

This means the higher the accommodation charge, the lower a worker’s pay when calculating minimum wage.

If the accommodation charge is at or below the offset rate, it doesn’t have an effect on the worker’s pay.

If the accommodation is free, the offset rate is added to the worker’s pay.

No other kind of benefit (eg food, a car, childcare vouchers) counts towards the minimum wage.

Use the National Minimum Wage calculator to check if the minimum wage has been paid.

What counts as accommodation charges

Include these costs as part of your overall accommodation charges:

  • rent
  • charges for gas, electricity, furniture, etc
  • laundry

Working out if the employer provides the accommodation

The employer is providing accommodation if any of these apply:

  • the accommodation comes with the job
  • the employer (or a connected person or company) owns or rents the property the worker lives in, even if there’s no direct link between the job and the accommodation
  • the employer (or an owner, business partner, shareholder or director) gets a payment or benefit from the worker’s landlord or a member of the landlord’s family

Accommodation costs count towards the minimum wage even if the worker doesn’t have to use the accommodation to do the job. If the accommodation is optional, it only counts as a cost if the worker uses it.

Accommodation charges: effect on the minimum wage

This depends on how much an employer charges for accommodation.

It’s calculated by ‘pay period’, the intervals at which someone is being paid. This can be weekly, monthly or in irregular intervals like every 10 days.

If the accommodation is free, it still affects the minimum wage. There is an offset rate of £5.35 per day for this.

It doesn’t matter if the cost of the accommodation is taken from the worker’s wages beforehand or if the worker pays the cost after they get their wages.

Example 1: accommodation is free

John is 27 and gets £5.50 an hour. This is below minimum wage.

He works 30 hours a week.

He gets paid every 7 days (his pay period).

His employer provides free accommodation 7 days a week.

This brings John’s pay up to £6.75 an hour which is above the minimum wage rate of £6.70.

Calculation:

  1. £5.35 (offset rate used when accommodation is free) × 7 (days accommodation provided in pay period) = £37.45
  2. £37.45 + (£5.50 × 30 – the total pay in reference period) = £202.45
  3. £202.45 ÷ 30 (total hours in pay period) = £6.75

Example 2: accommodation is charged below the maximum rate

Lisa is 30 and gets £6.71 an hour. This is above minimum wage.

Her employer charges £3.75 per day for accommodation which is below the threshold of £5.35. No offset rate is applied.

The accommodation charge doesn’t affect Lisa’s pay of £6.71 an hour.

Example 3: accommodation is charged above the maximum rate

Sam is 35 and gets £6.75 an hour. This is above minimum wage.

He works 45 hours a week.

He gets paid every 3 weeks (his pay period).

His employer charges £7.00 per day for accommodation.

Sam lives in the accommodation full time which is 21 days for his pay period.

This brings Sam’s pay down to £6.49 an hour which is below the minimum wage.

Calculation:

  1. £7.00 (accommodation rate) × 21 (days accommodation provided in pay period) = £147.00
  2. (£6.75 × 135 – hourly rate × total hours in pay period) – £147.00 = £764.25 + (£5.35 × 21 – offset rate × days in pay period) = £876.60
  3. £876.60 ÷ 135 = £6.49

Please get advice from your accountant or payroll bureau before taking action based on the above content.

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Minimum Wage Going Up

The minimum wage goes up in two weeks on Thursday 1 October, 2015.

  • For adult rate for employees aged 21 years and over it increases by 20 pence from £6.50 to £6.70 per hour
  • The rate for 18 to 20 year old’s will increase by 17 pence from £5.13 to £5.30 per hour
  • The rate for 16 to 17 year old’s will increase by 8 pence from £3.79 to £3.87
  • The apprentice rate will increase by 57 pence from £2.73 to £3.30 per hour
  • The accommodation offset increases from the current £5.08 to £5.35

What is the Accommodation Offset?

This is the largest real-terms increase in the National Minimum Wage since 2007, and more than 1.4 million of Britain’s lowest-paid workers are set to benefit.

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