COMPLIANCE
Key points
What’s the issue? The cost-of-living crisis is causing some employers to look for steers on ways to support employees.
What does it mean for me? As well as the tax implications for employees, where they are lower paid, it’s key that advisers understand the universal credit (UC) interactions of some of the potential solutions. What can I take away? Sometimes this can mean employees may not feel much of the benefit of their employer’s generosity – awareness, communication and signposting to specialist support are key.
Y ou may remember the furore a few years ago when Greggs announced a £300 bonus would be paid to all staff, linked to the success of the company’s vegan sausage rolls. The furore wasn’t because of the gesture, but because it transpired that some workers who were on UC would keep just £75 of the £300 pay-outs, because UC is a means-tested benefit. The cost-of-living crisis has seen an explosion of suggestions as to how employers can support employees. If you’re an adviser with employer clients who are investigating some of the main options, this article will help you by looking at the reality of marginal deduction rates and the other weird and wonderful UC interactions you should be aware of. The cost-of-living crisis has seen an explosion of suggestions as to how employers can support employees How does UC work? UC is a monthly payment. Broadly, the amount of UC a person is entitled to is based on their personal circumstances, their capital and other income and, importantly, their net pay in a monthly assessment period. Every time an employer pays someone, a copy of the real time information (RTI) payroll data is sent to HM Revenue and Customs (HMRC). This RTI data is shared by
HMRC with the Department for Work and Pensions (DWP) for UC purposes. Further details about how UC works, aimed at employers, can be found at: http://ow.ly/ WTPi50M31we. Giving a pay rise or offering overtime or additional hours Boosting incomes is perhaps the most obvious way employers can support employees and will likely have the most immediate impact. From an employee’s perspective, earning more means things like tax and National Insurance (NI) might increase, as well as sometimes paying more in pension contributions. But it may also impact on the amount of UC they receive, as the higher their wages, the less UC they get. For UC purposes, there’s a 55% withdrawal rate on net pay. Some claimants are entitled to a work allowance of up to £573 per month before UC starts to be progressively withdrawn. See below for a basic illustration of how this works in practice. Impact of a pay rise on UC Jenny, 35, is a lone parent. She usually works around 25 hours a week in a pub, at the minimum wage. At £9.50 per hour, there’s no tax or NI (earnings of £237.50 per week). Because Jenny’s on a low income, in a month where there are five pay days in the UC assessment period, she receives UC of £286.93. If Jenny’s employer were to give her a pay rise or increase her hours such that she received an extra £25 per week, based on current rates, her award would be £236.91 per UC assessment period. There’s also tax and NI at 33.25% on her earnings above £242 per week (£6.81 per week). So, of her £125 increase in terms of gross earnings during her UC
assessment period (assuming there are five pay days in that period), the true value of the £125 increase to Jenny is only £40.93. The Treasury receives the remaining amount (£84.07) in reduced welfare payments (£50.02) and increased income tax and NI revenue (£34.05). The marginal deduction rate on the £125 is 67%. And this is before we consider whether Jenny might lose any passported benefits. A one-off bonus Some employers might not be able to afford an ongoing increase in pay or hours but may prefer to top up an employee’s pay with a one-off cost-of-living payment. However, for some lower paid employees who are near the edge of eligibility for UC, a one-off bonus could mean their income in the UC assessment period is high enough to leave a nil UC award and close the claim, requiring another claim to cover the next assessment period. Our understanding is that there’s a rapid re-claim process in such cases. If someone receives a very large bonus or earns much more than usual in one month, this may also affect their UC payments in later months. This is known as surplus earnings and is outside the scope of this article; however, more information is available on LITRG’s revenue benefits website (see http://ow.ly/KZzR50M33YO). Changing pay frequencies An employer’s response to the cost- of-living crisis doesn’t have to just be about increasing an employee’s income directly. Many people these days are paid monthly, as this saves quite a lot of payroll administration for employers. However, this often doesn’t match an employee’s cash flow needs. Some employers may be considering changing
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| Professional in Payroll, Pensions and Reward |
Issue 87 | February 2023
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