Ongoing U.K. Payroll Changes Beyond Data Protection


Payroll professionals in the U.K. face a big compliance change in the form of a regulation that is to overhaul how businesses process and handle data, effective May 25, 2018, replacing the Data Protection Act, Eira Hammond, chair of the Chartered Institute of Payroll Professionals, said May 17.

Regardless of Brexit, the U.K.’s vote in a June 23, 2016, referendum to leave the European Union, U.K. employers and employees are to be required to comply with General Data Protection Regulation until it is replaced with a new U.K. Data Protection Act, Hammond said at the American Payroll Association's 2018 Congress in National Harbor, Md.

The consequences of noncompliance are substantial. Fees for substantial infractions can reach up to 20 million pounds or 4 percent of global turnover, Hammond said. Lesser infringements may result in fees of 10 million pounds or 2 percent of worldwide turnover, she said. 

Emergency Tax Codes

New emergency tax codes were released April 6, 2018, by HM Revenue and Customs, the U.K.’s tax, payments, and customs authority, Hammond said.

The amount that must be withheld from an employee’s pay is generally determined by the amount of taxes the employee has paid in the tax year to date, the amount of the employee’s salary that falls under each tax bracket, and any personal allowances. 

“Tax codes” formed from a combination of numbers that are used to calculate how much income is taxable and letters that are used to determine how that income should be taxed are assigned to employees to signify how much tax should be withheld from their salary, Hammond said.

HM Revenue and Customs adjusts employee tax codes throughout the year to reflect different salary amounts and other factors, Hammond said. Employees and employers are notified of the changes, she said.

An employee’s pay slip following notification of the tax-code change should include the new tax code, Hammond said. If the employee paid an incorrect amount in the previous pay period, the pay slip also should indicate any adjustments that must be paid, she said.

An employer may ask a new employee to fill in a “new starter checklist” or may request details about previous incomes and pensions if an employee has not provided a P45, Hammond said. If an employee sends their new tax code to HM Revenue and Customs in a PAYE Coding Notice, HM Revenue and Customs also notifies the employer or pension provider, she said.

An emergency code generally assumes that the employee is only entitled to the basic personal allowance and will temporarily pay tax on all income above that basic personal allowance. Emergency tax codes do not take into account any other tax code allowances and tax code reductions and reliefs the employee may otherwise be entitled to.

Employers who have insufficient do not have enough information about an employee to assign the correct tax code may assign an emergency tax code if that employee lacks a prior employment history, was previously self-employed, has started receiving company benefits, has started receiving the state pension but is still working, or does not have a P45 to indicate the amount of tax the employee has paid in the current tax year and the employee’s tax code, Hammond said.

Effective since April 6, 2018, the new emergency tax codes are 1185L W1, 1185L M1, and 1185L X.

The number indicates the basic personal allowance for the 2018/2019 tax year. The M1 code is used if an employee is paid monthly and the W1 code is used if an employee is paid weekly, indicating that the employee’s tax should be calculated based on what they are paid in that current pay period rather than the whole year. If the employees pay periods are non-standard, the tax code may end in X, Hammond said.

Other emergency tax codes may apply if an employee has multiple sources of income, Hammond said.

The amount collected under PAYE from employees subject to emergency tax codes can account for up to 50 percent of an employee’s total pay in any one month, Hammond said. 

New emergency tax codes are generally released each time the basic personal allowance is adjusted, she said.

There is not an emergency tax code for Scotland.

Pension Contribution Calculation 

The state pension age, minimum pension contribution level for employers, and the minimum pension contribution level for employees are all subject to planned increases that were recently announced by the U.K. government, Hammond said.

Minimum pension contributions levels are increased for both employers and employees as of April 6, 2018, and are to increase again April 6, 2019.

Effective since April 6, 2018, the required minimum contribution rates for an employee pension plan are 2 percent for employers and 3 percent for employees, for a total rate of 5 percent, an increase from the previous minimum contribution rates of 1 percent for employers and 1 percent for employees.

Starting April 6, 2019, the required minimum contribution rates for an employee pension plan are to be 3 percent for employers and 5 percent for employees, for a total rate of 8 percent.

Employers under all automatic enrollment pension schemes with contribution rates that would be below the minimum amount after the rate increases are to be required to apply the higher rates to remain under a qualifying scheme, Hammond said.

Employers must pay the minimum contribution matching to the rate paid by an employee unless an employee opts out, Hammond said.

Employees are to continue to have the option can opt out, which will also opt them out of the contribution, she said.

The state pension age, which determines whether employees are subject to automatic enrollment and minimum contribution levels, is to rise to age 65 for women by November 2018, an increase from the previous state pension age of 61 that applies to women. The state pension age for men is to remain 65 for the 2018/2019 tax year, Hammond said.

The state pension age that applies to both men and women is to increase to age 66 by 2020. The state pension age is projected to further increase to age 68 between 2044 and 2046 then to age 67 between 2026 and 2028 under current U.K. law. 

However, the U.K. government is conducting an ongoing review of the state pension age and has announced plans to adjust this time table. The state pension age would increase to 68 between 2037 and 2039 under the U.K. government’s proposed timetable, Hammond said.