REWARD
● work accident insurance – to provide work insurance coverage. Each of these insurances is based on the principle of an equal contribution provided by two contributors, with the employee and employer making a matching contribution. So, pension insurance, for example, is charged at a rate of 9.3% paid by both employee and employer. There are many challenges for payroll here. Firstly, all the contributions need to be calculated separately and shown on payslips as individual values. Not all the contributions are matching ones. The work accident contribution is an employer- only contribution, with premiums set by reference to industry risk and the track record of the employer – so those in more dangerous industries or with a poor safety record pay more. The long-term nursing care contribution charges an additional 0.25% premium on all employees aged 23 and above who haven’t had children, and while the standard contribution rate of 1.525% paid by both employee and employer is observed over most of Germany, in Saxony, employers pay 1.025% and employees pay 2.025%. The challenges of income ceilings A further challenge is the application of income ceilings to cap contributions. In Germany, these vary between the different types of insurance but also between the different areas of Germany – for the purposes of pension and unemployment insurance, this is set as an annual ceiling of €84,600 in west Germany but reduces to €81,000 in east Germany. At least this feature of German payroll is set to disappear by 2025, as the German government works to harmonise these ceilings. Thank goodness for decent payroll software which will hold all the necessary indicators to ensure the correct calculation is performed. The question of income ceilings is worth considering further. In the UK, things are straightforward with our earnings ceilings operating on a per pay period basis – so we only need to consider how much the employee has earned for this pay period when calculating National Insurance (NI). France and the Netherlands have similar insurance systems to Germany and require a complicated annual ceiling to be applied to a running total to date. The impact of this calculation can mean that employees with variable pay, which spikes with high bonuses and falls in other periods, pay a
much lower contribution, followed by a subsequent increase. Think of calculations of NI for directors with no annual alternative method, but for all employees, and imagine trying to explain those peaks and troughs in the social security deduction to querying employees. As an aside, we should also consider the impact of such models on expatriate employees. Consider the position in Japan, which has a system based on the German model, with separate insurances as follows: ● employee pension insurance ● employment insurance ● health and nursing care insurance ● worker’s accident compensation (employer only) ● child rearing insurance (employer only). Think of calculations of National Insurance for directors with no annual alternative method, but for all employees, and imagine trying to explain those peaks and troughs in the social security deduction to querying employees The UK and Japan have a bilateral agreement on social security that ensures an assignee doesn’t have to pay two lots of social insurance, but unfortunately it only refers to pension insurance. So, when a Japanese assignee arrives in the UK on a work assignment with their certificate of insurance issued by Hello Work, the certificate will exempt the individual from UK NI. But when the British assignee arrives in Tokyo with the equivalent certificate, it will only exempt them from employee pension insurance, and in principle, the other insurances may apply (in practice this doesn’t always occur, because some of the other insurances are only charged once the employer’s headcount in Japan reaches five employees). Perhaps, this could be classed as an unexpected payroll outcome. Let’s return to the subject of calculation
of contributions. We often have a rate of contribution expressed as a set percentage, and an earnings cap. Unlike the UK, most of the rest of the world genuinely caps both employee and employer contributions to a stated maximum income figure to reflect the fact there’s also a cap on the benefits provided. But you can see, using the Germany example, that 18.6% of annual income up to €84,600 is a decent pension pot. However, some countries make that ceiling a little more challenging to work with. We return to Japan to look at the concept of standard monthly remuneration. Employee pension insurance rates are set at 9.15% for the employee, with a matching contribution from the employer. However, this isn’t calculated on the employee’s monthly gross pay. Instead, contributions are standardised across a table with 32 monthly salary grades ranging from ¥88,000 to ¥650,000. Although the Japanese financial year runs 1 January to 31 December, the setting of standard monthly remuneration considers pay in the period April – June, which then sets the new monthly salary grade that will be used in the period September – August. Consider the following example: Example An employee earns the following: ● April – basic salary of ¥395,500 ● May – basic salary ¥395,500 plus overtime of ¥ 56,500 ● June – basic salary of ¥395,500 plus a newly awarded car allowance of ¥20,000 The employee’s standard monthly remuneration only needs to be re-calculated in the April – March year if a pay increase pushes them up two salary grades or more. You need the information on standard monthly remuneration, otherwise the deductions taken for social insurance won’t correspond to the published percentages. This approach isn’t unique to Japan, with the Philippines, Malaysia and Trinidad all deploying similar systems. ● average monthly remuneration is ¥395,500 + ¥452,000 + ¥415,500 = ¥1,263,000 / 3 = ¥421,000 ● this places the employee in salary grade 24 in pay range ¥395,000 – ¥425,000 ● contributions are calculated based on ¥410,000 – mid-point on salary grade 24 ● the employee contributes ¥37,515 (9.15% of ¥410,000) with a matching contribution from the employer.
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| Professional in Payroll, Pensions and Reward |
Issue 82 | July - August 2022
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