REWARD
confidential and mysterious. And with things like child allowances and relief for life assurance or annuities, they were much too complicated for many employees to understand, and without today’s internet resources there were no simple sources of help. Coding notices were, of course, all prepared manually and sent by post, and often failed to keep up to speed with people changing jobs. And while employees with simpler affairs often came to trust PAYE for keeping their finances in order, many couldn’t cope with the way that safety blanket disappeared when they retired and struggled to grasp the different world of pension taxation. Over the years, successive governments have understandably been tempted to use the PAYE regime to bring in or pay out other items. Bringing NI under the PAYE wing was perhaps the most straightforward, provided category letters didn’t change too often. However, bringing in other items, like recovering student loans or paying out funding for sickness or parental circumstances – not to mention tax credits – could leave employees often confused and sometimes unexpectedly out of pocket. Perhaps the greatest complications came with the use of PAYE codes to collect tax due on benefits in kind which had usually been enjoyed one or two years earlier. Hardly surprisingly, many employees who wanted to keep track of what they owed or were owed found the challenge insurmountable. It's not just tax For people who wanted to manage their finances responsibly, income tax was only one obstacle in the way of knowing what money they could expect to receive, or conversely what they needed to keep in reserve for future commitments. If they were still repaying a student loan, their awareness of how much they still owed was generally a year or so out of date. And as a result, many suddenly found they had over-repaid and had to wait for a refund. Many employees had little understanding of how much pension they could expect. Those expecting a workplace pension based on final salary were fortunate. But with other occupational pensions, or private pensions or annuities, it all depended on the vagaries of the financial markets, with very little forecasting information provided. And while you could obtain an estimate of
what state pension had been earned by your NI contributions, the procedure was clunky, slow and not well publicised. So, what’s changed? A lot has improved in the last decade or two. You can now sign up to an online account with the Student Loans Company or with most pension providers to allow you to obtain up to date figures and future forecasts. Employees can also now access an online account to check their up to date tax position and can provide information to make it more accurate. PAYE codes have fewer complications, with the disappearance of some of the more esoteric reliefs and charges. Notices of coding now carry specific information in easy-to-understand language This welcome switch to plain English has carried through into the GOV.UK website, which can prove very helpful to employees and pensioners. And for those who wish to compare several sources, there are a range of other websites with guidance written from a more independent perspective. “Employees can also now access an online
be taxed as extra pay of (say) £100 a month. This is arguably easier than the pre- payrolling challenge, which would involve talking to an employee about a benefit they agreed to two years ago, which has now resulted in a tax bill in the hundreds or thousands of pounds. Work in progress? Hopefully changes like these will have helped many employees and pensioners to understand and manage their finances better. Hopefully they also feel less at risk of receiving a nasty surprise bill. This, in turn, should help with the current pay on demand initiative, as employees can better understand when it might make sense to take some of their wage or salary earlier than normal. But there’s still a lot of room for further improvement, particularly on the HMRC side of things. We’re much closer now to the aspiration that employees would pay their tax in-year with no need for any later adjustments, but with a bit of imagination on the part of government, in consultation with the CIPP and other experts, I believe we can get closer still. And isn’t that a prize worth fighting for? A lot of the remaining problems are about the speed at which employees can get back onto the correct cumulative tax code following a job change or after retirement. In my experience, the new employer is sometimes too keen to get the employee to fill in a starter checklist, without checking first if they have a P45, or imminently expect to receive one. At the same time, a redundancy payment or final bonus from the old employer seems sometimes to lead to an incorrect tax position continuing for months, often caused by the unnecessary use of week 1 / month 1 codes. Can it really be that tough to resolve these issues? And can we not at the same time facilitate more improvements to payrolling of benefits? Why are there still two benefits which employers aren’t allowed to put through the payroll, and why is there no common strategy across benefits in kind and share-related benefits? Employers in the USA, Canada and other countries have payrolled all these benefits since the 1940s, which is so much easier for employees and for employers once they have transitioned to this way of collecting the tax due on benefits. n
account to check their up to date tax position and can provide information to make it more accurate”
Thanks to real time information from employers, the number of people ending the tax year with more tax to pay or reclaim has significantly reduced, and in most cases any balance is cleared within a few weeks of the year end, even for those with the additional complication of a self- assessment account. But perhaps the most useful change in the taxation arena has come with payrolling. Employees who have previously been shocked to receive an unexpected tax bill for a benefit they enjoyed a year or two ago (and may have forgotten all about) can now see their tax liability on benefits settled in real time. It’s relatively simple for an employer to tell an employee considering choosing a benefit that it will
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| Professional in Payroll, Pensions and Reward |
Issue 91 | June 2023
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