Is Pension a taxable benefit ?

It’s that time of the year when year-end reporting for PAYE is in focus.

Everybody is confused about the yearend tasks, taxable benefits, PAYE settlement agreements.

Due to auto enrolment many of the employers are now paying pension to their staff.

I was confused about whether employer’s contribution towards pension will be a taxable benefit.

No where I have heard that it is the case but it is always good to double check if a doubt comes to your mind.

I started searching – no answers !!!

Finally I came across HMRC guide CWG2 , it clearly states that Pension contributions are NOT to be included PAYE tax or NIC ; refer Chapter 5

March 2021 – Legislation reference 

Employer’s contribution to employee’s registered pension schemes do not count as earnings or taxable benefits under ITEPA 2003, s 308.

Plus, they do not attract employers’ NICs (SI2001/1004, Sch 3)

Directors and PAYE

Satyajit Ray

• Directors are employees.

• Directors are not entitled to National living/minimum wage.

• Directors usually register for Self-assessment (SA). They will need to complete employment pages of the return.

• Two methods for computing National Insurance Contributions (NICs) for directors:

a) Cumulative ; or

b) Regular employee method

Please note both method give similar results at the end of the tax year.

 

Bonus facts:

• Directors can register for `Annual Scheme` who are paid on an annual basis to avoid sending (Employee Payment Summary) EPSs every month.

Dividends can only be paid when there are sufficient profits made in the business this could be current year profits or brought forward reserves.

• NIC is not due on Dividends.

 

Record keeping: PAYE records needs to be kept for 3 years.

• Its advisable to keep records for 7 years.

 

Paying directors without running payroll

We can only put £120 (LEL : tax year 20-21) x 52 = £6,240 as director’s wages.

“as you do not need to register for PAYE if none of your employees are paid £120 or more a week”

See link below:
https://www.gov.uk/paye-for-employers

 

Optimum salary for directors

If the employer is eligible for Employment Allowance , which will happen in case there are two directors husband and wife or two friends both directors in the company. We should pay them a salary equal to the personal allowance.

In other cases uptill the NIC secondary threshold.

Maths on the above:

Suppose A earns a salary of £12,500 (tax year 20-21), he pays no tax but NIC @ 12 % above primary threshold (£9,500). Thus he pays 12% on £3,000 i.e. £360.

But as the company does not pay Employer NIC, company can save 19% on £3,000 i.e. £570 , difference £210 saved.

For two directors saving are £210 x 2 = £420 per annum.

 

Minimum Salary for State Pension

Any individual (including a director) earning between £120 (LEL) and £183 (PT) a week,
is treated as having been paid the contributions to protect your National Insurance record.

  • Employee starts paying NIC on salaries over PT and
  • Employer starts paying NIC on salaries over ST

See link below:
https://www.gov.uk/national-insurance

 

Interest on directors loans

If a director has given loan to his company and charges interest on it, this interest income will be covered by Personal savings allowance.

 

Auto enrollment

As per Pension regulator “organisation with one or more directors who do not have contracts of employment is not an employer if it does not have any staff other than the director(s).

The company will have no automatic enrolment duties and does not need to complete a declaration of compliance. In this case they should let us know that they’re not an employer.”

See link below:
Pension Regulator website

Employment Allowance: Group / Connected Companies

Employment allowance in group companies can only be claimed by any one company.

An employer gets £3,000 off their Class 1A (Secondary) National Insurance in each tax year.

The question arises – can two or more companies in a group claim £3,000 each.

The answer is No, only one of the group companies can claim employment allowance. Tax payer decides which company gets it.

I would highly recommend a read through the technical guidance link given below:

a) HMRC even includes unincorporated businesses in connected businesses.

b) Besides share-holding and control as under Corporation Tax Act 2010, HMRC has included within connected businesses – economically interdependent businesses as well.

Technical guidance in this case is highly readable with lots of examples.

Sources:

Basics

Technical guidance: Connected companies

PS – I came across this little gem of information among audience questions today on HMRC Webinar: Employers – what’s new for 2018. I will highly recommend subscribing to these webinars. They are free !

 

October 2019

HMRC’s latest Agent Update Issue 74 informs that from 6 April 2020 Employment Allowance will be restricted to employers with NICs liabilities of under £100,000.

That is employers will need to look at their last tax year’s Employer NIC expense and if its over £100k they cannot claim £3k Employment Allowance.

If employer is part of a group Class 1 NICs liabilities of all companies, and/or PAYE schemes, needs to be added together to assess eligibility for Employment Allowance.

 

PAYE Tax Code change resulting in employer being out of pocket

My client employs a nanny for his children. This used to be nanny’s second job and we were using `BR` tax code to process her salary.

She left her first job, making this her only job. We advised her to call HMRC to get her tax code changed. HMRC sent us a notification with the changed tax code.

On changing her tax code on the payroll software it resulted in a massive refund for the nanny. This refund employer has to pay from his own pocket.

This client has only one employee and after change of tax code future months PAYE bill would also be zero thus no scope of set off with future months PAYE bill.

I called the employer helpline, they were very helpful and they advised me to apply for a funding via link: https://www.gov.uk/payroll-funding

Via this link either employer or agent can apply for funding.

HMRC advised me that if the application was approved, funds would be credited in the nominated account in circa two weeks’ time from date of application.