Payroll

The Chancellor of the Exchequer, Rachel Reeves announced significant increases to the Minimum Wage rates on the eve of the Budget. The Chancellor confirmed that the government has accepted in full the proposals of the Low Pay Commission (LPC) for increasing minimum wage rates from 1 April 2025. The LPC’s advisory remit was overhauled by ministers in July to consider the cost of living.

The National Living Wage (NLW) rate will increase from £11.44 to £12.21 on 1 April 2025 and represents an increase of 77p or 6.7%. The NLW is the minimum hourly rate that must be paid to those aged 21 or over. The increase represents a pay rise of over £1,400 a year for someone working full-time and earning the NLW.

It was also announced that the National Minimum Wage (for 18-20 year olds) will increase from £8.60 to £10.00 an hour. This is largest increase ever in the NMW (an impressive 16.3% increase) that will see younger workers having their pay boosted by up to £2,500 next year. This increase is part of a move to narrow the gap in wage rates for 18-20 years olds and the NLW and ultimately create a single adult wage rate for all those aged 18 and over.

The NMW rates for 16 to 17 years old will increase from £6.40 to £7.55 – an increase of £1.15 or 18% per hour – from next April. The Apprentice Rate will mirror this increase in line with earlier recommendations by the LPC.

When hiring a new employee, employers must determine the appropriate tax code and starter declaration for their payroll software. Using incorrect tax codes can result in the new employee over or underpaying their taxes. To ensure the correct information is entered, employers need certain details from the new employee, most of which are usually provided on the employee's P45. It's important to remind new employees to bring their P45 on their first day.

If the employee does not have a P45, the required information can be gathered by asking them to complete HMRC’s online PAYE starter checklist. If they cannot use the online version, a paper version is also available. Employers must keep this information in their payroll records for the current tax year and the following three tax years. Once the information is collected, employers can use HMRC’s online tool to determine the employee’s tax code.

The starter checklist should be completed by new employees in the following cases:

• They have a student or postgraduate loan
• Their personal details differ from those on their P45
• They do not have a P45
• They have been sent to work temporarily in the UK by their overseas employer

Once the checklist is completed, the employee can submit it to their employer via email, post, or in person. There is no need to send the checklist to HMRC.

When a new employee is added to the payroll it is the employers' responsibility to ensure they meet the employees’ rights and deduct the correct amount of tax from their salary. This includes any employees who are family members.

It is possible to employ young people if they are 13 or over but there are special rules regarding how long they can work and what jobs they can undertake. Children younger than 13 can work in certain areas such as television, theatre and modelling but their employer will need to apply for a child performance licence. There is no National Insurance liability for children under 16 and they would only need to be included on an employer’s payroll if their total income is over their Personal Allowance.

Young workers (aged 16 to 17) are subject to different National Minimum Wage rates. The current minimum hourly rate for this age group is £6.40. Any payments to young workers need to be handled through the payroll. If the workers earn more than £123 a week, then the employer will also need to do undertake regular PAYE tasks like making deductions.

There are different rules if you take on volunteers or voluntary staff, but the employer is still responsible for health and safety and must give inductions and training in the tasks they are going to do.

If you have been in the same job for two years or more and are made redundant you will usually be entitled to redundancy money. The legal minimum that you are entitled to receive is known as ‘statutory redundancy pay’. There are exceptions where you are not entitled to statutory redundancy pay, for example, if your employer offers to keep you on or offers you suitable alternative work which you refuse without good reason.

The amount of statutory redundancy pay you are entitled to is dependent on your age and your length of service.

The payment is calculated based on the following calculations:

• Under 22 – half a week’s pay for each full year of service.
• Aged 22 to 40 – one week’s pay for each full year of service.
• Over 41 – one and half week’s pay for each full year of service.

Weekly pay is capped at £700, and the maximum length of service is capped at 20 years. In addition, the maximum statutory redundancy pay you can receive is capped at £21,000 in 2024-25. There are slightly higher maximums in Northern Ireland.

An employer can decide to make a higher payment, or you may be entitled to one as a result of your employment contract.

There is an overall £30,000 limit for redundancy pay which is tax free, regardless of whether this is your statutory redundancy pay or a higher pay-out from your employer.

There are a number of rules and regulations that you must be aware of when you employ staff for the first time.

HMRC’s guidance sets out some important issues to be aware of when becoming an employer.

1. Decide how much to pay someone – you must pay your employee at least the National Minimum Wage.
2. Check if someone has the legal right to work in the UK. You may have to do other employment checks as well.
3. Check if you need to apply for a DBS check (formerly known as a CRB check) if you work in a field that requires one, e.g. with vulnerable people or security.
4. Take out employment insurance – you will need employers’ liability insurance as soon as you become an employer.
5. Send details of the job (including terms and conditions) in writing to your employee. You need to give your employee a written statement of employment if you are employing someone for more than 1 month.
6. Ensure that you register as an employer with HMRC. You can do this up to 4 weeks before you pay your new staff. This process must also be completed by directors of a limited company who employ themselves to work in the company.
7. Check if you need to automatically enrol your staff into a workplace pension scheme.

When it comes to paying staff, you can use a payroll provider or process your payroll in-house. If you decide to run your own payroll you must choose suitable payroll software. Setting up payroll for the first time can be an onerous and complex task.

We can help you complete this set-up process and look after the payroll for you. Call if you need more information.

The tax treatment of termination payments has changed significantly over recent years. The changes have aligned the rules for tax and secondary National Insurance contributions (employer (NICs)) by making an employer liable to pay NICs on termination payments they make to their employees. 

HMRC has announced that it is aligning its approach to providing advance assurance on certain termination payment enquiries. 

HMRC guidance had previously committed HMRC to giving a binding answer if you made enquiries on termination cases involving:  

• the disability and injury compensation exception;
• the foreign service exception;
• how the £30,000 threshold applies to payments made by the third party and by the employer; and
• non-cash provisions.

HMRC will no longer give a binding answer on these cases outside the normal Non-Statutory Clearance process, for example, where there is a genuine point of uncertainty on the correct treatment.

This means that any future enquiries from taxpayers and employers on termination payments should be dealt with through the existing Non-Statutory Clearance procedure. HMRC will no longer provide clearance outside of the Non-Statutory Clearance route.

The letters in an employee’s tax code signify their entitlement (or not) to the annual tax free personal allowance. The tax codes are updated annually and help employer’s work out how much tax to deduct from an employee’s pay packet. 

The basic personal allowance for the tax year starting 6 April 2024 is £12,570 and the tax code for an employee entitled to the standard tax-free Personal Allowance is 1257L. This is the most common tax code and is used for most people with one job and no untaxed income, unpaid tax or taxable benefits (for example a company car).

Emergency tax codes can be used if HMRC does not receive a taxpayer’s income details in time after a change in circumstances such as:

• a new job
• working for an employer after being self-employed
• receiving company benefits or the State Pension

Employees on an emergency tax code will see one of the following codes on their payslip:

• 1257L W1
• 1257L M1
• 1257L X

These codes mean that an employee’s tax calculation is based only on what they are paid in the current pay period. The emergency tax codes are temporary and will usually be updated once the necessary details about previous income or pension payments are sent to HMRC. Taxpayers will remain on an emergency tax code until they have paid the correct tax for the year.

A reminder for our readers that the National Living Wage (NLW) and the National Minimum Wage (NMW) rates will increase with effect from 1 April 2024.

The increase will see the NLW rate increased to £11.44 per hour, an increase of over £1 over the current rate of £10.42. This means the annual earnings of a full-time worker on the NLW will see an increase of up to £1,800 next year. 

It was also confirmed, as part of the Autumn Statement announcements, that for the first time, eligibility for the NLW will be extended to 21 and 22 year olds. Currently, the NLW is only available to those aged 23 and over.

The NMW rates will be as follows from, 1 April 2024:

• 18 to 20 year-old rate will be £8.60 per hour – an increase of £1.11 per hour
• 16 to 17 year-old rate will be £6.40 per hour – an increase of £1.12 per hour
• The apprentice rate will also be £6.40 per hour – an increase of £1.12 per hour

Employers generally use payroll software or other payroll services to record employees pay, deductions and National Insurance contributions on or before each payday. They also need to consider other deductions such as pension contributions and student loan payments.

These payments are reported to HMRC in real time using a Full Payment Submission (FPS). This submission contains all relevant information for each employee.

If you have made a mistake with an employee’s pay or deductions this can usually be corrected by updating the year-to-date figures in your next regular FPS.

HMRC’s guidance also states that you can correct mistakes by submitting an additional FPS before your next regular FPS is due. You would need to:

• update the ‘this pay period’ figures with the difference between what you originally reported and the correct figures;
• correct the year-to-date figures;
• insert the same payment date as the original FPS;
• insert the same pay frequency as the original FPS; and
• insert ‘H – Correction to earlier submission’ in the ‘Late reporting reason’ field.

If you need to correct an employee’s National Insurance deductions the action required will depend on whether the mistake occurred in this tax year or earlier tax years. There are also different actions that may be required to fix a mistake with an employee’s student loan repayments, again depending which tax year the mistake relates to.

If you have any payroll concerns, we would be happy to help.

Assets such as computers, televisions and bicycles that are made available to employees can create certain tax, National Insurance and reporting obligations. There is no requirement to report anything to HMRC if the asset is office equipment only used for business use. Assets that are made available as part of a salary sacrifice arrangement will usually need to be reported to HMRC.

If the assets are for personal and business use, then they must be reported on a P11D form and Class 1A National Insurance will be due on the value of the benefit. A P11D form is a form used by employers to list certain ‘benefits in kind’ provided to directors or employees.

Working out the value of an asset made available to an employee can be quite complex and there are various steps that need to be followed depending on the circumstances at hand.