It is time to look at the changes that the new tax year (5 April 2019) provides for those clients with employees.
Workplace Pension / Auto Enrolment Pension Rates
The first notable change is the increase in contribution levels into the workplace pension from April 2019. Currently, Employers pay 2% into the scheme and Employees pay 3%. This increases to 3% and 5% respectively from April 2019. For an employee earning £18,000 this means that the annual Employer contribution will increase by £117 and the annual Employee contribution will increase by £234. Employers need to be prepared for this increase in terms of monitoring their profitability and cashflow and for many lower paid employees, this may represent a significant decrease in their net pay. Employers need to ensure that they have communicated the increase to all relevant employees before the first pay period which is affected or preferably as soon as possible.
National Minimum Wage Update
National Minimum Wage (NMW) rates increase from 1 April 2019. The average increase in the national minimum wage rate is 4.63% with 4.85% applying to those aged 25 and over and 5.41% relating to apprentices. In reality this means that someone aged 25 years or older and working 35 hours a week on NMW will cost their employer £808 extra per year taking into account the Employers NIC and increased pension costs.For businesses relying on staff paid at the NMW rates, such as those in the catering, hairdressing and cleaning industries, consideration needs to be made to cashflow and profit levels which are likely to decline if nothing changes. To mitigate the increased costs it is very likely that the sale or retail value will need increasing to maintain the profit levels for the business. Price rises are always difficult, however the industries likely to be affected the greatest are those that sell to the general public and these are the businesses where the public are less likely to take a sales increase lightly. Advice is to plan for the changes in advance and communicate the reasons why to your customers.
Detailed NMW rates can be found on the HMRC website using the following link. https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2019-to-2020
Payroll Software Updates
As the majority of employers are using Payroll software, this should not present an issue but every now and again we come across clients that have not pushed the right update button or decide they don’t need support anymore. Payroll is one area where there are guaranteed changes every tax year and therefore a reason why it is very important to ensure that your software has been updated with the correct rates. A recommendation is to manually check the tax rates and limits updated on the software to ensure that they are correct. The main rates that get updated automatically are the Tax and NIC limits together with the personal allowance. When running your payroll for any April period any employee that was on a standard personal allowance for 2018/19 tax year should see their tax code change from 1185L to 1250L. Details of the tax limits and codes can be found using the following HMRC link https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2019-to-2020
Overtime and Holiday Pay
An area that has created great confusion during the year is the potential payment of holiday pay on overtime that is worked, whilst this is not a new change it is one that has received some press during 2018. In simplistic terms where you have employees that are working regular excessive overtime (guidance indicates 5% of normal hours) there may be a requirement to ensure that holiday pay is paid on the overtime element. This is quite a complex calculation which very often payroll software is not able to calculate and manual calculations have to be completed as it uses an average 12 week calculation. The main reason that this legislation changed was due to an employer engaging employees on a 25 hour contract, however in reality the employees were provided with work that regularly meant they were working a 40 hour week. In terms of holiday pay this meant that they received 28 days holiday at 5 hours per day instead of being paid 28 days holiday at 8 hours per day. This is an area in which there are disagreements over the treatment of “voluntary” overtime from different professional bodies, therefore we would advise that if you have any concerns over whether your holiday pay is being correctly treated then you should seek advice from either an HR specialist or from a Payroll specialist.
The changes above clearly shows that there are continued cost burdens for Employers and if not anticipated by a business can result in a reduction in profits and increase in cashflow going out of the business. Clearly a business will therefore need to have a strategy and a plan in place to deal with the impact of these issues.
At Lambert Chapman LLP we are able to assist you with pricing models as well as helping you with the processing of your payroll.
Disclaimer: The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.