The Fizz! Blog

Going on maternity leave? Think twice about opting out of your employer’s pension scheme

When someone's about to go on maternity leave, they'll quite often look at trying to temporarily cut all unnecessary overheads.  You might think that one sensible step would be to opt out of their employer's pension scheme for a while.  Cutting this particular overhead is probably a very bad idea though.

If your employer operates their Automatic Enrolment pension scheme on the most common basis, you’ll be making a contribution each month, and so will they.  Those contributions vary according to your income, and get capped if you’re earning more than £50,000 per annum.

If you go on maternity, your income drops, and so do your contributions.  In fact, after the first six weeks of leave, from which point your salary will probably just consist of basic Statutory Maternity Pay, they’re likely to drop to zero.

But, crucially, your employer’s contributions do NOT reduce at all.  They’re obliged to carry on paying into your pension pot at the level mandated by your normal salary!  Other non-salary benefits work on the same basis, too; they can’t take away your company car or withdraw your medical insurance, for example.

So, by opting out at the start of maternity, an employee could lose nine months of employer pension contributions, whilst saving herself virtually nothing.  A very easy trap to fall into!

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HMRC pushing back on early furlough claims

In Spring 2020, a company called Carlick Contract Furniture Ltd furloughed much of their workforce, and began claiming funds from HMRC under the Job Retention Scheme to cover the cost. As part of that process, they did something that a lot of other employers will have done. They included a couple of new employees, who had been taken on in February 2020, but hadn’t been paid that month - as is often the case with people who start late in the month, it was agreed that they’d just be paid for their February hours on their March payslip.

However, the JRS rules were actually unambiguous on this point. Although people were quite understandably wanting to stretch those rules in the interest of fairness, it was made quite clear that to come under the scheme, an employee had to have formed part of a formal payroll report to HMRC prior to 19 March 2020. For most monthly-paying employers, that meant the person had to have been paid at the end of February. It wasn’t enough to have been an employee, you had to have had salary actually reported to HMRC. This isn’t something that emerged later on - it was widely discussed on accounting and payroll forums and everyone advising on claims and making them knew or should have known about it.

HMRC picked up the point, and demanded Carlick repay the money. The First Tier Tribunal has ruled (whilst expressing some regret) that they’re within their rights to do so, despite the claim having been in the spirit of the rules. This is obviously very unfortunate for the employer, who hasn’t benefited from the money and was really being kind to the employees, who otherwise they’d have simply cut loose. But it was always clear that the claim was not permitted by the letter of the law, so if you made a similar claim you should expect there to be a good chance that HMRC will come and ask for the money back at some point, and that if they do then you’ll have to pay.

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It's party time! Tax at Christmas 2022

After a party-free 2020 and a party-light 2021 perhaps it's going to be a party hard 2022!  If you're hoping to get the party started, here's a reminder about the tax rules around work Christmas parties and gifts.

If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67 in the long run, once they've got the VAT back and saved corporation tax on what's left.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift (as we've written before, sporadic gifts and benefits each valued at £50 or less are explicitly considered trivial by HMRC). Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67. Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax in full if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer, say, a bottle of whisky then that's still completely fine, and may well make great business sense! But a) you can only claim the VAT back on the gift if it costs less than £50 and b) you won't save corporation tax on it however much it costs. So a £49 bottle will cost a company £41 in the end (it can get the VAT back but can't save any corporation tax) and a £100 bottle will cost it £100 - it can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

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Can my limited company pay for my counselling or therapy sessions?

As ever with these questions, the "can" is a red herring that tempts a literal but unhelpful answer.  Your company can pay for anything, the real question is whether there will be knock-on tax consequences that make it a bad idea.

In this case, perhaps surprisingly, there probably aren't any adverse consequences.  The rules, HMRC's guidance about them and HMRC's internal manuals are clear - an employer can pay for counselling for employees with no tax consequences for the employee, and though HMRC say the exemption is tightly drawn it actually covers a lot of areas.

Now, this exemption is plainly not intended for owner-managed businesses.  For a big employer, claiming that they're only providing the therapy because of their needs as an employer, and that long-term personal benefit to the employee may well be created as well but it's not the reason for their footing the bill, is a reasonable assertion.  If it's your own business, then that dividing line between employer and employee is not so clear.  But HMRC are pretty unambiguous about it, so if you’re comfortable that the counselling you’re contemplating falls within HMRC's guidance as tax-free, then you should feel confident going ahead.  Your company must provide the therapy, so should contract with the therapist itself - it's no good arranging it yourself and claiming the costs back if you want the setup to be robust.

If you're a sole trader or a partner in a partnership, then this doesn't apply; these are employment tax rules.  A sole trader or partner will probably find it difficult to impossible to sustain the argument that the cost is tax-deductible - it's have to be incurred wholly and exclusively for the purpose of their trade.

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Which umbrella company should I choose?

An umbrella company offers a simple service.

A business is going to pay an individual to do some work for it. The business judges that the individual’s role amounts to that of an employee, who should properly be paid via PAYE. The business doesn’t want the admin of doing that themselves. The umbrella company offers to employ the individual instead, and invoice the employer for the salary and the other associated employment costs (NI, pension).

Or, a business is going to pay an individual to do some work for it. The business, considering it to be an employment role but being unwilling to put the person on PAYE, tells the individual that they must invoice them via some other entity, most commonly a limited company set up by the individual themselves for that purpose. The individual can’t be bothered doing that, or knows that in the hands of her own company the income will fall under IR35 and be subject to full employment taxes anyway. Instead she decides to sign up with an umbrella company, who will receive the fees, operate PAYE on them, and pay her the net.

What’s in it for the umbrella company? A fee (most commonly suffered by the employee, even if the business insisted upon the arrangement, naturally!).

They’ve had a chequered history. You can see that in theory they’re simply a vessel to get fees from A to B, with the appropriate employment taxes paid. So they should all end up with more or less the same split of money between the worker and HMRC, with their commission being the only variable.

However, market forces meant that they began to compete with one another, to try and offer a bigger share of the split to the worker and less to HMRC. This was never achieved by legitimate means. A favourite trick was based on a wilful misunderstanding of the rules on something called dispensations. A dispensation was an arrangement with HMRC, where HMRC said - for example - “If you reimburse an employee for legitimately incurred and legitimately tax deductible travel costs of up to £30, don’t bother telling us about it, we don’t want to record it as both income and deduction for the individual, it’s a waste of time as it ends up at zero”. Then, regardless of whether any such costs were actually incurred or not (they weren’t) the umbrella company would include a tax deduction of £150 on every week’s payslip, with a consequential suppression of the tax deduction truly due.

Eventually, HMRC got wise to this. Those schemes were exposed and shut down. Any time you read anything promising you materially greater take-home pay than similar providers, it should always have been clear that this could not be achieved legitimately, but now - crossed fingers - we’re back to an acceptance that umbrella companies are machines that process the same inputs in the same way and should, consequently, churn out the same outputs.

A rather long-winded way of saying - it shouldn’t matter, they should all be pretty much the same!

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I’m about to hire someone - what are the additional costs I need to budget for?

Clients frequently ask how much they need to budget for additional employment costs (by which they generally mean National Insurance and pension contributions) above and beyond the gross salary they’re going to be paying an employee. When creating financial projections, we tend (depending on the purpose of the projections and the level of accuracy merited) to default to 10%. In real life, though, it does depend upon how your workforce is made up.

With your first employee, the best answer is often “very little - it needn’t inform any decision making”. That’s because, at present, the Employment Allowance means that almost all employers are excused from paying the first £4,000 of Employer’s National Insurance. If you make your first hire, and they’re paid £35,000, say - the NI is covered in full, nothing for you to pay on top. You’ll end up needing to operate a pension scheme in due course, but annual employer contributions will be less than £1,000 under a standard setup. There’s going to be a bit of cost in getting the payroll processed and the pension set up of course, and you’d be wise to pay someone to help you get the HR and contracts side of things set up properly, but the additional costs at this point shouldn’t really make any difference to a sensible business owner.

Once the Employment Allowance is used up, the costs are more meaningful. Because National Insurance only kicks in on income over £9,000, and pension contributions are generally only calculated on income over £6,000, for relatively low-paid part-time staff, additional costs are minimal - for someone on £10,000, NI and pension contributions add less than 3%. But if someone is on £20,000 the additional costs are about 10%. By the time they’re on £40,000 the additional costs are just under 14%. They don’t get any higher than that. So if you wanted a “worst case” number, go with 14%. But you can see how important the make-up of the workforce is, and why 10% is generally fine for projections.

None of this is intended to deter anyone from employing staff! The extra costs are a fact of life, and generally a robust and successful business will take them in its stride, and won’t try to play fast and loose with employment law and pretend that employees aren’t really employees in order to avoid them - if a business can’t be successful within the rules that’s generally a problem with the business, not the rules. At the same time, though, it’s a really smart thing to think about and budget for.

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Are staff flu jabs tax-free for them? It depends

Many employers pay for their employees to have a flu jab each year.  They figure that the expense will be worth it for a combination of a) reducing sickness absence and b) being kind to their team.

Historically, they’ve most commonly done it by giving the employees vouchers that they can take to a provider to cash in for a jab, or arranged for the jabs to be done at the workplace.  There’s no tax bill for the employee (the voucher or jab will have cost less than £50 and will be covered by the “Trival Benefits” exemption).  

Apparently, in the last year or so demand has increased and vouchers have been harder to get, and many people haven’t been in their workplace to get it done there.  Consequently, many employers have asked the staff to arrange the jab and reclaim the cost on expenses.  That, however, *is* a taxable benefit, and the employee is supposed to be taxed on it - expense claims lie outside the Trivial Benefit rules.

Think about how you’re doing things, not just what you’re doing!

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Working from home allowances and PAYE codes

It’s long been the case that, if an employer requires an employee to work from home, they can pay them a small tax-free amount to reflect the extra costs that the employee might incur as a result. It’s also long been the case that, if the employer doesn’t do that, the employee can at least ask HMRC for tax relief on the allowance they could be receiving but are not.

Until 2020-21 it didn’t happen very often, but of course last Spring the number of employees working from home increased exponentially. Many (probably most) employers didn’t pay the allowance (£312 for the whole year) - apart from anything else, the employees were generally financially better off anyway as a result of not having to commute. So lots of employees claimed tax relief on the £312 instead, which meant HMRC adjusted their PAYE code to collect a little bit less tax each month.

With most PAYE code adjustments, HMRC automatically roll it forward year-on-year, on the assumption that the situation will persist. However, they’ve confirmed that they’re *not* rolling forward the home working adjustments, and a fresh claim must be made each year. This is more good than bad, as it avoids the risk of an inappropriate tax deduction being given for many years and then having to be clawed back by HMRC later when they realise. If you or your employees need to make fresh claims for 2021-22, here’s some more guidance:

https://www.gov.uk/tax-relief-for-employees/working-at-home

The extended Coronavirus Job Retention Scheme and a trap to look out for

In the Budget, the JRS was extended until 30 September 2021, from its previously scheduled end date of 30 April 2021.  Hopefully by the autumn relatively few employers will still need to use it, but it's there if they do.

In the first version of the scheme, claims could be made in respect of furloughed employees who'd been reported to HMRC prior to 19 February 2020 as being on the employer's payroll.  In the second phase, they had to have been reported to HMRC prior to 30 October 2020.  For this (fingers crossed) final stage, they need to have been reported to HMRC prior to 2 March 2021 as being on payroll.

So, that means that anyone who was on your February 2021 payroll can now be furloughed (if necessary) and a claim made from the government towards their wages, right?  Not so fast.  For a staff member who didn't meet the conditions for the first two phases, a claim can only be made for pay periods beginning 1 May 2021 onwards.  For March and April, the final two months of the current/second phase of the scheme, they're still excluded.  It seems quite likely a bunch of employers could miss that condition if they're not careful, and furlough recent starters in the mistaken expectation of being able to claim from the government towards their wages - this wrinkle has not been highly publicised.

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More furlough winners and losers

Many people were wondering what basis would be used for working out the appropriate furlough claims for March and April 2021 for staff on variable hours.  Up until that point, part of the process has involved looking back to the same month a year earlier, and using the higher of that month’s pay or average 2019-20 monthly pay.  But that process would start to fall apart from March, because if you looked back a year you’d be looking at a month that could itself already involve furlough pay, and then you may be starting to work with 80% of something that’s already been reduced to 80%, which is hardly fair.

The new rules have now been published, and they dictate that for those months, you’ll look back two years, to March 2019 and April 2019, for the single-month element of the "higher of" comparison.  That’s going to be great news for some people.  Somewhere out there, there will be someone on furlough who was paid on average £500 a month in 2019-20, but had a really big April 2019 when they were paid £3,000.  That means they’ll have had a furlough bonanza in April 2020, when the system looked back to April 2019 and based their pay on that big month.  And now they’re going to have another big furlough month in April 2021, getting a second chunk based on that same April 2019 pay.

On the other hand, this “look back” system produces losers too, even before the new March/April wrinkle.  Anyone with fixed hours who has increased those hours in 2020-21 and is now furloughed is going to be paid based on a similar look back to 2019-20.  Imagine someone was working three days a week back in January 2020, but within the last 12 months they’ve gone up to four days.  Now their employer has furloughed them for one of those four days a week.  They’re going to get no pay for that day, unfortunately.  The system will look at their usual hours back in January 2020, then look at their actual hours worked in January 2021.  There’s no difference, and that means there’s no claim.

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