MY CIPP
The CIPP's Advisory Service team provides answers to popular questions
Q: As it was my understanding that the March 2020 pension contributions were for tax year 2019/20, I made payment of them to the pension scheme before 6 April 2020. I was not aware, however, that the actual pension contributions for our company were to be paid to the defined contribution pension scheme around 15th of the following month (i.e. in April). Therefore, thirteen payments have been made to the pension scheme for tax year 2019/20. Can you please advise if it is correct to make pension contributions for March before the start of the new tax year and what effect if any there might be for members? A: When making contributions to a pension scheme, employers and pension scheme administrators should be aware of the annual allowance and the due date for making contributions. The annual allowance is the limit for tax relief purposes for: (a) the total amount of contributions that can be paid to a defined contribution pension scheme; or (b) the total amount of benefits that a member can build up in a defined benefit pension scheme. The annual allowance is currently £40,000 although a lower limit of £4,000 may apply to those who have already started accessing their pension. The annual allowance is not a ‘per scheme’ limit. (See guidance on the Pensions Advisory Service site: https://bit.ly/3lqJKXz.) The rule is that member contributions to defined contribution pension schemes must be paid by 19th of the month following the month in which they were collected from pay (or by 22nd if contributions are paid electronically). These dates do not override any earlier due date specified in the payment schedule. Employer contributions must be paid by
the due date in the payment schedule. Although March contributions might be scheduled for payment to the scheme by 19 (or 22) April, this does not preclude the possibility of making payment earlier (e.g. before 6 April). Though it would seem that thirteen monthly payments of contributions have been made in tax year 2019/20, thereby raising the possibility that the extra contributions might have pushed an individual’s pension savings over the annual allowance, this may not be the case as the tax charge arises on excess savings in the individual’s pension input period. You should discuss the issues with the scheme administrator. Q: I have a request to deduct lease contributions for car hire from an employee’s earnings. Can you advise if this deduction is from net or gross pay? A: Any lease costs would be deducted from the individual’s net pay. For more information see section 114(A) of the Income Tax (Earnings and Pensions) Act 2003. If your employees have lease agreements, company car benefit taxation rules will apply, and the provision of the car must be reported in the P11D return. Any contribution made by the employee is then reported as an amount made good in the return. Q: We have implemented a new system whereby employees can have the facility of accessing early pay for pay already earned. Could this affect staff members who are on universal credit? A: The term used to describe a payment does not decide its treatment, as it is necessary to look at the substance of
the matter. Something described as an ‘advance’ may actually be a ‘loan’ or a ‘payment on account of earnings’. Section EIM42280 (https://bit. ly/2GCFkh0) of HM Revenue & Customs’ (HMRC’s) Employment Income Manual , addresses the issues. If an employee and employer make an agreement under which the employer lends money that the employee agrees to repay at a future date or dates, the amount is a loan not a payment on account of earnings. A system allowing employees to draw an advance of salary is a loan repaid out of a future salary. PAYE (pay as you earn) is applied when the salary is paid – not when the advance is. In the noteworthy case Williams v Todd, which involved an interest-free advance to an Inspector of Taxes, Justice Walton said “I do not consider that the advance can be truly called anything other than a loan”, noting there was “an express term of the advance that it is repayable on demand” and adding “the advance does not fall within the scope of income to be assessed under the PAYE system.” For purposes of universal credit, the Department for Work and Pensions receives claimants’ earnings information from HMRC that had been supplied in employers’ full payment submission (FPS) returns. Thus, if the advance is a ‘loan’ and not a ‘payment on account of earnings’, the employer would not make a FPS to report the amount advanced, as the earnings would be included in the FPS return when the employee was paid for the pay period in question. Q: How would you deal with overpayments made in a previous tax year and those in a current tax year?
| Professional in Payroll, Pensions and Reward | December 2020 - January 2021 | Issue 66 8
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