The hidden role payroll plays supporting families
25 June 2019
This article was featured in the July/August 2019 issue of the CIPP's magazine.
Helen Hargreaves MSc ChFCIPPdip, CIPP associate director of policy, reveals details and urges payroll professionals to look closely at pay dates
As payroll practitioners, we all know how important our role is, both to the workers we pay and to the employer. But we also play a vital role for the UK as a whole with payroll collecting around £300 billion for the Exchequer each year. Just look at the impact that the work you do has on each and every one of us, both directly and indirectly.
The bigger picture
Without wishing to sound too smug about it, payroll genuinely does help to keep the UK economy running. And although most of the population complain about paying income tax, they would probably be complaining much louder without it because the income tax collected through payroll is used to help fund public services such as the National Health Service (NHS), education and the welfare system, as well as investment in public projects, such as roads, rail and housing.
National Insurance contributions (NICs) fall into a number of classes. Classes 1, 2 and 3 NICs paid are credited to an individual’s NI account, which determines eligibility for certain benefits. Classes 1A, 1B and 4 NICs do not count towards benefit entitlements but must still be paid if due.
Payroll is responsible for calculating/deducting and paying classes 1, 1A and 1B NICs. Like income tax, NICs also help to fund the NHS but unlike income tax, paying NICs has a more direct impact on individuals because this is how they build up entitlements to claim their state pension, bereavement benefits for their spouse or civil partner if they die, and benefits if they are unemployed or off work sick – see the table.
...policies to help support working parents, with varying degrees of success...
As well as paying the NICs which fund state benefits, payroll is also responsible for making statutory payments if an individual is absent due to illness or becoming a parent.
These statutory payments are not paid out of NICs but directly by the employer, although small employers can claim back some or all of the cost from the state. Employers often choose to run their own sick pay and maternity schemes which can be more generous than the statutory payments.
Over recent years the government has introduced several policies to help support working parents, with varying degrees of success. Considered by many to be solely a human resources (HR) function, the payroll department plays a vital but often unacknowledged role in enabling many of these policies, the most obvious of which being the paying of maternity, paternity and adoption pay, as well as making the correct amendments to pay for emergency and parental leave. But there are also other ways in which payroll helps support families.
Shared parental leave and pay – Shared parental leave (SPL) can give parents more flexibility in how they share the care of their child in the first year following birth or adoption.
Parents can share up to 50 weeks of leave and up to 37 weeks of pay and choose to take the leave and pay in a more flexible way (each parent can take up to three blocks of leave, more if their employer allows, interspersed with periods of work).
Eligible parents can be off work together for up to six months or alternatively stagger their leave and pay so that one of them is always at home with their child in the first year.
But with this flexibility comes an essential requirement for good, timely communication between payroll and HR to ensure the parents are paid correctly depending on whether they are working or on a period of SPL.
However, despite being introduced in 2015, there are still very few families taking advantage of SPL. The government has been considering how to encourage greater use of shared parental leave, and whilst a Bill to extend to the self-employed is making slow progress through Parliament, the proposal to extend SPL to grandparents has been shelved, for now at least.
Flexible working – There are many forms of flexible working. It can describe a place of work, for example homeworking, or a type of contract, such as a temporary contract. Other common variations include part-time working, flexitime, job sharing and shift work.
Whilst requests for flexible working in any of its forms would naturally be dealt with by HR, payroll plays a key role in ensuring that workers get paid accurately if their working hours or patterns change.
...important that you send accurate reports to HMRC...
Perhaps payroll’s biggest impact, and one upon which most workers will be unaware, is on universal credit (UC). When the government announced that UC would be introduced, replacing means-tested social security benefits and tax credits for people of working age, we were told that UC would simplify and streamline the benefits system, improve work incentives, tackle poverty amongst low income families, and reduce the scope for error and fraud.
The delivery of this new benefit would require the use of employment earnings obtained from employers (and pension payers) in real time rather than being based on averaging historical amounts of earnings obtained from the P14 annual returns submitted by employers.
Real time information (RTI) is the system which collects information on pay as you earn deductions at the time an employee is paid. The information is then reported to HM Revenue and Customs (HMRC) via a full payment submission (FPS) at each pay run. Receiving information through RTI, a claimant’s UC can be amended based on changes to earnings rather than the claimant providing details of their income. This all sounds marvellous in theory, but UC has not been without its problems, one of which surrounds the timing of pay days falling within the claimant’s UC assessment period.
In a recent judicial review case heard at the High Court (https://bit.ly/2N6I7xK), brought on behalf of four single mothers, Lord Justice Singh and Mr Justice Lewis ruled that the Department for Work and Pensions (DWP) has been wrongly interpreting the UC regulations. The case challenged the rigid, automated assessment system in UC which meant the mothers lost several hundreds of pounds each year and were subject to large variations in their UC awards because of the dates on which their paydays and UC ‘assessment periods’ happened to fall.
The mothers all had monthly paydays that ‘clashed’ with the dates of their monthly UC assessment periods, with the result that if they were paid early some months, because for example their payday fell on a weekend or bank holiday, they were treated as receiving two monthly wages in one assessment period – which in turn dramatically reduced their UC award. This is a problem which has affected many working claimants and has been widely reported in the media.
In addition to creating wildly fluctuating UC awards, when the mothers received two pay cheques in one assessment period they lost the benefit of one month’s work allowance. The work allowance is the amount of earnings claimants with children or with limited capability for work can keep in full before UC is tapered away at a rate of 63p per pound, worth hundreds of pounds each year.
The hearing of the claims took place on 27–28 November 2018, and the CIPP was asked to provide, via written witness statements, expert testimony about the payroll practices around pay dates falling on non-banking days. Despite the DWP putting forward several arguments attempting to justify their method of calculating UC awards, these arguments were rejected by the court which found that correctly interpreted, the regulations mean the DWP can and should adjust its calculation of UC awards when “it is clear that the actual amounts received in an assessment period do not, in fact, reflect the earned income payable in respect of that period”. In other words, wages are to be allocated to the month in which they were earned, rather than to the assessment period in which they were received.
However, and perhaps as a result of this case, HMRC has recently issued guidance about the dates employers should report in FPS returns when the regular payment day falls on a non-banking day. With a nod to the impact of payroll on UC, the HMRC guidance states: “It is essential that you report when you pay your employees on time and use the right payment date when doing so. Remember if you use an incorrect payment date, this could impact on your employees’ financial situation, including any income-related benefits, such as Universal Credit, so it is important that you send accurate reports to HMRC on time or as soon as you are able to do so.”
Acknowledging the occasions when employees are paid on a different day to that agreed, such as when the regular payment date falls on a non-banking day (i.e. on a Saturday or Sunday or on a bank holiday), HMRC advises that a payment reporting easement applies to ensure that this payment is treated correctly for tax purposes. When payments are made early or late because the normal payment date falls on a non-banking day then the date entered in the FPS return should be the regular payment day/date.
This instruction may come as a surprise to some but knowing now the significant impact the payment date can have on employees, I urge everyone to check their own payroll system to ensure this rule is followed. This is all part of ensuring that the ‘hidden role payroll plays supporting families’ continues.
|Benefit||Class1: employees||Class 2: self-employed||Class 3: voluntary contributions|
|Basic state pension||Yes||Yes||Yes|
|Additional state pension||Yes||No||No|
|New state pension||Yes||Yes||Yes|
|Contribution-based jobseeker's allowance||Yes||No||No|
|Contribution-based employment and support allowance||Yes||Yes||No|
|Bereavement support payment||Yes||Yes||No|