The introduction of RTI in 2013 signified a sea change in approach from HMRC. Since then, we have witnessed an increasing number of legislative changes each year with a few common themes:
- Electronic submission of data
- More stringent regulation on areas including:
- Labour classifications
- Pension contributions
- Time tracking
- Leave entitlement
- Management of employee data
Whilst these changes are largely logical, fair and in the interest of both employers and employees, they present one consistent and key challenge to businesses – data.
2020 is no exception to the rule and is set to be another important and challenging year for Payroll, Finance and HR departments alike. April this year sees the introduction of legislation which will impact on how you pay your employees, their leave entitlement and importantly how you report on this.
We take a look below at some of the biggest changes and discuss the benefits of taking a more strategic approach to capturing, managing and analysing your payroll costs in NetSuite regardless of legislative requirements. Please refer to the February HMRC Employer Briefing at the bottom of this article for the official guidelines additional information on these points and other changes being introduced.
Off-Payroll Working Regulations Extend to Private Sector (IR35)
Off-payroll rules are designed to make sure that an individual who works like an employee, but through their own limited company, pays broadly the same Income Tax and National Insurance contributions as other employees. The rules do not apply to the self-employed.
Following successful amendments to regulations for public sector companies in April 2017, the same changes are now being applied to private sector and third sector organisations who meet at least two of the criteria below:
Businesses who match the criteria above and engage with contractors or individuals to provide services via arrangement like PSCs or agencies will now be responsible for identifying, reporting and paying the correct Tax and NI Contributions. If you are unsure if any of your resources require to be paid or managed differently, please refer to HMRC’s Check Employment Status for Tax Tool today.
HMRC are also hosting a series of webinars throughout February and March to clarify the key points.
Please note that a recent change has been introduced to proposed legislation meaning that changes apply to services delivered on or after 6th April and not payments made on or after 6th April.
- More than 50 employees
- An annual turnover over £10.2 million
- A balance sheet worth over £5.1 million.
Almost all workers are entitled to 5.6 weeks paid holiday each year. This includes agency workers, workers with irregular hours and workers on zero-hours contracts. Where a worker has fixed hours and is paid a salary, they continue to receive their salary whilst on leave. However, where workers undertake regular overtime, or have variable hours, their holiday pay should be calculated using a reference period.
Currently employers should look back 12 weeks and calculate the average weekly pay received for that time. For weeks where no work was performed, and thus no pay earned, the week is discounted. The employer then looks back a further week until 12 weeks in which the worker was paid are counted.
From 6 April 2020, the reference period is being extended. Instead of looking back 12 weeks, employers need to calculate the average over a 52 week period.
As unpaid weeks are excluded, this can require employers to count back over a year into the past. To avoid having to go back indefinitely, a limit of 104 weeks’ worth of data is being introduced; two full years.
Increase in National Minimum Wage & Living Wage Rates – 1st April
The National Living Wage, which is the statutory minimum for workers aged 25 and over, will increase by 6.2% to £8.72 per hour on 1 April 2020.
National Minimum Wage rates for younger workers will also increase above inflation. As the minimum wage increases more employers than ever will be directly affected, including some of those who currently pay above the minimum.
Please refer to the HMRC Employer Briefing for links to the full rates as well as information on educational webinars available.
Beyond the National Living Wage increase dictated by the government, the Living Wage Foundation have also increased the “Real Living Wage” by 30p per hour to £9.30 for the UK, with the exception of London which is slightly higher at £10.75, an increase of 20p per hour.
National Insurance Contribution Threshold & Statutory Rates 2020-21
The government confirmed that the NIC Primary Threshold will increase to £9,500. A typical employee should save around £104 in 2020-2021, while self-employed people, who pay a lower rate, will have £78 cut from their bill.
All the other thresholds will rise with inflation, except for the upper NICs thresholds which will remain frozen at £50,000, as announced at Budget 2018.
The threshold changes will not affect low earners’ entitlement to contributory benefits such as the State Pension, with the Lower Earnings Limit and Small Profits Threshold, above which individuals start building entitlement to contributory benefits, rising with inflation.
Please refer to the Employer Briefing below for the published statutory rates for 2020-21
The Thing(s) About Payroll Data and New Legislation is…
- “How do they expect you to be able to get that?”
- “HMRC don’t understand what it takes for us to pull stuff like that together.”
- “It’ll take hours to put it together and then we’ll need to check it all, again!”
- “They must just sit in their office and look for ways to make things harder for us!”
When discussing the topic of data in relation to new legislation, you could be forgiven for looking at it purely from the perspective of the effort required to produce the information specified by HMRC. It can certainly present challenges and there are severe penalties for those who do not comply, so it gets done by hook or by crook.
However, given that HMRC are likely, if anything, to increase both the frequency and rigidity of their legislation, mixed with the fact that for most businesses, payroll is one of, if not, the largest cost in the organisation, should the questions not be: ”Why is it so difficult for us to produce this information?” and “What else do we currently not know about the largest and most important cost within our own business?”
In our experience, the answer to both of these questions essentially lies in the way that payroll data is structured and used within an organisation.
“Why is it so difficult for us to produce this information?”
More often than not there are two key factors behind this:
- The data is not available in a unified system. This means that the data on its own doesn’t actually exist in a usable format. You rely on key individuals with insider knowledge of systems, processes and quirks as well as manual effort, and most likely spreadsheets to create the data for each new request, as opposed to filtering existing data to fit the requirements the way you do with other reports in your business.
- You’ve never had to look for this data before. Each legislative change introduces a new level of complexity, normally placing more onus on employers to correctly categorise data and submit reports to ensure the correct tax and NI contributions are being paid to the government.
It is often the case that payroll is only viewed at the senior level as a summarised cost on your Nominal Ledger and P&L. The data behind the summary is rarely interrogated alongside or in as much detail as other critical KPIs, despite being the most important cost in the business.
This can likely be linked to the first point – the data behind the summary is often not easily available as it is being pieced together from a number of sources.
By unifying systems, you provide a much more complete dataset and core to work from. Instead of wasting hours manually creating individual outputs because “HMRC said so”, you could be implementing a platform which allows data to be easily entered, viewed, managed and reported on by whatever criteria you like, either for internal reporting or legislative compliance.
“What else do we currently not know about the largest and most important cost within our own business?”
Despite normally being the largest cost within a business, payroll regularly seems to be viewed as a standalone function, separate to other KPIs within an organisation.
The detail behind payroll is known by those who manage it, senior figures and managers will certainly know the figure and check the wage bill, however it seems to be accepted as a summary cost when viewed alongside other critical data and not queried, managed or potentially optimised to the extent which other functions such as sales, purchases and financial performance usually are.
Imagine for a second, a board meeting where sales figures are not presented and dissected by region, rep, product, margin, revenue and projected sales for the next month, quarter and year. Or purchases were just posted as a summarised figure on the P&L which everyone largely accepted assuming they were roughly the same as the previous month.
Why then, not analyse your biggest cost in the same detail?
- How much to the penny does it cost you in labour to deliver x, y or z?
- Who are the biggest costs, why?
- What do they do and how does this relate to other business functions?
- Who is likely to be happy, unhappy? Can we do anything about that?
- How do labour costs impact margins across different departments?
- How many items were shipped or projects delivered this month versus last month, compared to the total wage bill by department this month versus last?
- What impacts will new regulations have on monthly outgoings?
- What percentage of the wage bill is allocated to pension contributions or benefits in kind?
- Is this impacted by bonuses? Shift-work allowance? Etc.
Having worked with hundreds of businesses over the years to unify the management of payroll within NetSuite we are often reminded of a famous quote, to paraphrase:
“There are things which we know that we know, things which we know that we don’t know, and then there are “unknown unknowns” that is to say things which we don’t know that we don’t know”
Unknown unknowns within the biggest cost in your business is a pretty scary prospect when you look at it like that.
As has been covered in this article, HMRC are becoming more demanding in their requirements for businesses to classify, report and submit on new criteria and will be equally less forgiving of those unable to comply. Now is the time to take control of your payroll and eliminate those “unknown unknowns”.
By proactively taking a more strategic approach to managing, reporting and optimising your payroll data, not only will your business be better placed to adapt to the ever increasing regulations and submission requirements of HMRC, you will truly understand the impact of your most important cost and put your biggest asset, your people, at the heart of your strategy.
Please see here for the February 2020 HMRC Employer Briefing for specific information on the points above, plus additional information.
Click here to watch a 3 minute overview of how our solution can reduce processing time, give you to the penny analysis of labour costs within NetSuite and put your people at the heart of your strategy.
About Infinet Cloud
If you are a NetSuite Customer and would like to learn more about how Infinet Cloud Payroll or Managed Payroll Services can solve these problems for you, today, please get in touch.
Founded in 2008, Infinet Cloud is the only on-platform payroll solution for NetSuite. Our software is HMRC Accredited and is the highest rated “Native Application” on SuiteApp.com. Running completely within NetSuite and linked to your nominal ledger, our SuiteApp allows you to transform your payroll from an operational to a strategic function within your business.