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Whether you’re a business owner, head of department, self employed worker or just starting out, there is a whole world of national insurance, tax and employment legislation to navigate. We’ve put together a guide to some of the recent changes and latest practices to follow when employing, rewarding and retaining staff.
In this guide we’ll take a look at the legalities when it comes to employment, how national insurance works for different types of employment, as well as all there is to know about workplace pensions! Use the links below to skip ahead to the sections you need to read and contact the team at Black and White Accounting if you still need help, and they’ll be happy to assist you.
Part 2 -Understanding National Insurance
Part 3 -PAYE Settlement Agreements (PSAs), Expenses and Payroll
Part 5 -Tax Rules for Freelancers and Gig Economy Workers
Part 1 – Legalities
First things first, be sure that whoever your employing has a legal right to work in the UK. If you are an employer, then it is your responsibility to check that your employees are legally allowed to work in the UK. The fine payable by employers has now doubled to £20,000 per illegal worker, making it imperative that you have a water-tight system in place when taking on staff.
In order check your employee is allowed to work in the UK, your employee will need to provide documentation from one of the two lists provided by the Government. If your employee provides a document from List A (for example a UK passport) you will only need to check the document once at the start of the employment. If your employee provides a document from List B (for example a current passport endorsed to show the holder is allowed to stay and work in the UK) you will need to check the documents every 6 months.
When you perform a check of the documents, you will need to do so in the presence of the employee, to verify the photograph, and you must check the document has not expired. You will then need to take a photocopy of the document, making a record of the date that the check was made. You must keep the photocopy securely and in compliance with the Data Protection laws, for the duration of the worker’s employment, plus 2 years after they have left.
Another employment law which is rarely relevant but of great importance is around employment tribunals. These take place when there is a dispute between an employer and employee and take place to attempt to settle the dispute between the parties without proceeding to a full hearing.
Following a consultation on the in 2013 measure, two main charges will be applied. The first will be payable at the issue of the claim. The second, a hearing fee, will be due four weeks before the hearing takes place.
When the fees came in, experts were split, with one saying “The two-stage fee structure chosen by the Government is attractive because it incentivises settlement and provides a fairer basis for cost contribution, reflecting a ‘pay for what you use’ approach, as against a single issue fee.”
However, they warned that this system will create extra administration and add more complexity to claims.
In conjunction with this two-stage structure, there are two fee levels, depending on the nature of the case. Level one cases began incurring charges of £390, level two cases costing £1,200, assuming that both the initial payment and the hearing fee has been paid.
At the time of introduction the Government had to be careful to address concerns that fees would prevent poor claimants from receiving justice for genuine claims. This is also balanced with the risk that the majority will become eligible for fee remission or a waiver, thus diminishing the purpose of the charges. In order to balance out any unfairness, claimants will be refunded the cost of the fees if they win their case. The charges can also be reduced or waived if a claimant is unable to meet the costs.
If you have questions about employee related legal fees, talk to Black and White Accounting for advice – email [email protected] or call 0800 140 4644 today.
Part 2 – Understanding National Insurance
Paying yourself or your employees the correct amount can often be affected by National Insurance contributions. These are separate to tax but calculated in a similar manner and is used for state benefits like statutory sick pay, state pensions, Jobseeker’s allowance and bereavement benefits. Your National Insurance contributions are paid to HMRC and build up your entitlement to various state benefits. Everyone aged between 16 and the State Pension age will be required to pay National Insurance on their earnings over the various thresholds.
HMRC keeps detailed records of the National Insurance that you have paid over the course of your working life. You can request this statement from HMRC at any time, which will give you an indication of the state pension you can expect.
You will also be given the opportunity to make voluntary NIC payments in order to top up your entitlement. At present you need to have 30 qualifying years of National Insurance credits or payments to get the full State Pension.
The amount of National Insurance you have to pay depends on your work situation:
- If you are employed you will pay Class 1 National Insurance at a rate of 12% on your earnings between £183 and £962 per week (which translates to £792 to £4,167 per month). You will also pay 2% of your earnings over £962 per week. These payments should be deducted from your salary by your employer.
- If you are self employed you will pay both Class 2 and Class 4 National Insurance. Class 2 is paid at a flat rate of £3.05 a week unless your annual earnings are under £6,475. HMRC will send you quarterly statements to request this payment. Class 4 National Insurance is payable on your annual business profits between £9,501 and £50,000 at a rate of 9% and a further 2% on profits over £50,000. Class 4 will be calculated when you submit your self assessment tax return and payable on the 31st January following the end of the tax year.
- You can make voluntary Class 3 National Insurance contributions, which you can pay to HMRC on a monthly or quarterly basis. This helps fill any gaps when National Insurance was not paid or contributions were lower than they should have been. A voluntary Class 3A national insurance contribution also came into effect in 2016, allowing pensioners to top up their additional State Pension.
Of course you are able to make payments into a personal pension fund and there are many different products available. We highly recommend that you seek the advice of a qualified Independent Financial Adviser when choosing investments and pension products and navigating tax returns.
If you have any queries regarding National Insurance, please don’t hesitate to get in touch and our team of qualified accountants will be happy to advise. You can contact us by calling 0800 140 4644 (or from a mobile call 0333 370 6566) or email us on [email protected].
Part 3 – PAYE Settlement Agreements (PSAs), Expenses and Payroll.
Saving time on Benefit-in-Kind (P11d) administration and saving your employees Tax and National Insurance costs seems like a win-win situation, but it’s one you may be able to benefit from with a PAYE Settlement Agreement (PSA) and by payrolling benefits and expenses for your employees.
What is a PSA?
A PSA allows employers to make one annual payment to cover all the tax and National Insurance due on expenses and benefits for employees, meaning that an employee does not have to pay the PAYE tax or National Insurance.
What’s can be included in a PSA?
These expenses or benefits must be minor, irregular or impracticable to qualify, for example:
Minor: Includes items such as small gifts, staff entertainment, telephone bills etc
Irregular: Not paid regularly and are not payments that employees have a contractual right to, such as relocation expenses
Impracticable: Difficult to place a value on or divide up between individual employees, for example staff entertaining
These benefits do not include high value, cash payments or wages.
What are the advantages of a PSA?
Having a PSA in place means you won’t need to put the included benefits through payroll to work out tax and National Insurance; just include them in the P11ds or pay Class 1A National Insurance on them at the end of the tax year.
What does “payrolling benefits and expenses” mean?
Payrolling benefits in kind eliminates the need to complete a P11d declaring the taxable value of the benefits at the end of each year. Instead, employees will pay the tax on a monthly basis through their payroll rather than through an adjustment of their individual tax code in the following year.
Employers can payroll the majority of benefits they offer but they can also choose not to include all the benefits they offer.
How do these schemes work?
Applications for a PSA needs to be submitted by 5 July following the end of the tax year and will need to detail the benefits to be included. Once agreed with HMRC the PSA remains in place if the employer or HMRC don’t make any changes or cancel it.
As for payrolling benefits, this is a voluntary process and applications to payroll benefits must be made on or before the start of the tax year in which the employer wants to payroll benefits. Applications should be made through the payroll and benefits online services tool. Once established, HMRC will assume that employers will continue to payroll benefits.
Specialist tax advice from Black and White Accounting
To set up these schemes and understand their subtleties and details, employers should seek specialist tax advice to ensure they utilise both PSA and the payrolling of benefits to their full potential.
If you would like further information about PSA and payrolling benefits and expenses our specialist tax team at Black and White can help you. Contact Black and White Chartered Certified Accountants today or call us on 0800 140 4644.
Part 4 – Workplace Pensions
What is a workplace pension?
The Pensions Act 2008 requires all companies to offer eligible staff a pension scheme which they must also contribute towards.
All employees over the age of 22 and earning at least £10,000 a year are automatically enrolled onto your workplace pension, paying into it through their pay packet. Employees eligible for automatic enrolment have the right to opt out within the first month, just as non-eligible staff can volunteer to opt in.
Ongoing compliance requirements
With an average of 50,000 small businesses a month auto-enrolling between 2015 and 2018, the demand for advice has overwhelmed specialists. It’s no surprise then that while many companies have complied with the administrative processes and deadlines, they’re failing to meet other, ongoing, requirements:
- Providing access for employees to proper financial advice and education.
- Taking regular independent financial advice on benefits and features available in the market.
- No system for ongoing governance of the scheme to ensure it remains compliant.
- Re-enrolling employees in the scheme. As a result, many employers are just looking for the simplest and cheapest option – missing out on the opportunity to greater incentivise their staff.
What is the penalty for failing to comply with Workplace Pensions auto-enrolment guidelines?
In 2017, Johnsons Shoe Company was fined £40,000 by the Pensions Regulator and paid £2,000 in costs.
Despite numerous reminders, Johnsons failed to check which of its staff were qualified for auto enrolment and to inform the Pensions Regulator. The company claimed it had been too busy, which clearly cut no ice with the regulator.
More recently, this Summer the chairman of Samuel Smith Old Brewery was fined £8,000, and his company nearly £19,000, because they failed to provide the Pensions Regulator with information about the financial state of the business. (This was required for checks into whether its pension schemes were being supported adequately).
Some businesses have tried refusing to pay fines but they can be taken to court, and the regulator now has powers to seize assets! Professional advisors also have the responsibility to report any breaches to the regulator, so it is likely there will be more high profile examples coming into the spot light!
Black and White Accounting can help you with workplace pensions
If you’re not sure whether you’re meeting your ongoing workplace pension obligations, Black and White Accounting can help by providing timely and up-to-date advice. Ensuring that you avoid any fines and your employees receive a realistic pension.
To find out more about how we can help you, contact Black and White Accounting today, or ring us on 0800 140 4644.
Part 5: Tax Rules for Freelancers and Gig Economy Workers
Arguments over who is or isn’t an employee and what rights people should have in the gig economy have been raging all year. Every court case seems to blur the lines between the self-employed, workers and employees.
Gig Work, Freelancing & The Impact on Employers…
Whilst the political battles continue over whether the gig economy is “flexploitation” and big corporations using employment law and tax loopholes, the reality is that a more flexible approach to working hours is becoming popular.
The Office of National Statistics says that in 2015, out of a total workforce of more than 31 million in the UK, 800,000 were on zero hours contracts and nearly two million people were freelancing.
It’s important for employers, employees and freelancers to understand where they stand, particularly surrounding IR35 regulations, or risk fines from HMRC.
What’s the difference between the self-employed, workers and employees?
The wording and content of a contract are crucial but from HMRC’s perspective, the actual performance is equally as important. A self-employed freelancer, or contractor, has a contract for services, whereas an employee will have a contract of services, or an employment contract.
A freelancer is committed to delivering an outcome for the contractee, whether in services or delivered goods, and usually to a deadline. How they do it, what tools they use and who actually carries out the work, is down to the contractor.
While a self-employed contractor has greater freedom, for example to work for other employers, they have to provide their own equipment and miss out on employment rights such as a workplace pension, holiday and sick pay, maternity and paternity rights and redundancy pay-outs.
An employment contract names a specific person to carry out a role. They can’t be substituted and the contractee dictates how, where, when and for how long they perform a service. A zero-hours worker is also an employee, but their contract does not specify set hours of work. However, they still have rights and obligations like any other employee.
The grey area between the self-employed and the employed…
Once an employer requires a particular contractor to be on site and asks them to work set hours to the exclusion of other contracts, gives them an office or tools for the job and controls their activities, then they start to look like an employee, with the employment rights and tax implications this brings.
Tax implications for freelancers
If you’re an employee, you don’t have to worry about bookkeeping unless you have sources of income in addition to your salary, for example a buy-to-let property, bank interest, or shares, because your employer will deduct and pay income tax and National Insurance from your wages.
However, self-employed freelancers are responsible for making their own tax and national insurance contributions. We advise clients to put aside a percentage from each settled invoice to cover the tax bill they receive twice a year from HMRC.
Generally, for a given earnings level; a self-employed individual will pay less tax, so take home more income. (If they have a good accountant! There are many ways to ensure you are only paying the amount of tax you need to. For example, by using the right business structure, tax planning, investments and pensions.)
We also offer book keeping services to make sure clients record all allowable business expenses to offset profits and free up their time so they can focus on what they so best – their business!
If you’re self-employed, you should also consider a personal pension, the most tax-efficient way of planning for the future.
The Uber effect on freelancing
Disruptive business models, as used by Uber, have unlocked the employment market for many workers and things will never be the same again. In fact, the research company Gartner predicts that by 2020, 30% of the UK workforce will be freelancing.
The Government, HMRC and legislators who make decisions, for example, on statutory benefits, will have to adapt the employment framework to be more flexible. In the meantime, Black and White Accounting are here to help.
Business advice and accounting services in Hampshire and Surrey for Self-employed, Workers and Employees
At Black and White we help businesses and individuals of all sizes to plan financially for the future, keep on top of their accounts and pay only the tax they need to.
We are specialist self-assessment accountants, with expertise in income tax, corporation tax, book keeping & payroll and VAT, so we will ensure you get the support you need. Call us now on 0800 140 4644 for a free initial consultation or send us your enquiry here.
