Payroll Changes - What employers need to know

There are two main topics high on the payroll agenda at the moment; Real Time Information (RTI) and Automatic Enrolment. We gave you an overview of the employer considerations for RTI a couple of months ago in issue 17.4 and since then, the pilot which began in April, has been progressing smoothly.  It is reassuring to know that HMRC are one of the ten volunteer employers to join the pilot as this will allow them to see first hand how it is working from an employer’s perspective. It is still early days but so far the pilot is on track and all the expected PAYE submissions have been received and processed by HMRC. The whole point of the pilot is to identify any implementation issues and as yet there have been very few and those that have occurred have been resolved quickly.  HMRC is still working on their migration strategy but their current thinking is that most employers will be required to join RTI from April 2013 and all employers will be required to be routinely reporting PAYE in real time before October 2013.

Automatic Enrolment
Starting from October 2012 all eligible employees will have to be automatically enrolled into either their employers’ existing workplace pension scheme or an alternative qualifying pension scheme. Not all employers will have to comply with the new duties as soon as October 2012 as the changes are being rolled out over the next five or so years based on the largest to smallest PAYE schemes. The ‘staging date’ is the term used for the date that an employer’s automatic enrolment duties start and is the first piece of information required in order to start planning. Some employers may want to align their staging date with other key dates in their financial or operational calendar, so to allow some flexibility; employers may choose a different staging date, as long as it is earlier than their staging date. 

Many employers will already have a workplace pension scheme in place when the time comes to comply with the duties. It may well be that this scheme meets the criteria required to be a qualifying scheme, however this must be checked prior to an employers staging date and subsequent registration with The Pensions Regulator.

Timeline of duties
The minimum contribution rates that an employer must pay into their worker’s pension scheme will be introduced gradually. This is known as ‘phasing’ and will apply to most, though not all, types of pension scheme (check with your scheme provider). From October 2012 the minimum contributions will be a total contribution of 2 per cent with at least 1 per cent employer contribution. The proposed duration periods are set out below but note that contributions can exceed this minimum and can also be employer contribution only.

Identifying ‘workers’
Once the staging date has been identified the first step for employers is to see if they employ anyone classed as a ‘worker’. This is where the understanding of contractual relationships is very important. A ‘worker’ is defined as any individual who works under a contract of employment (an employee); has a contract to perform work or services personally (i.e. they cannot send a substitute or sub-contract the work); is not undertaking the work as part of their own business.

The next step is to ascertain what type of worker they are as it is only in respect of certain types of workers that an employer will have duties. There are 2 main categories of worker for which the employer duties apply which are ‘jobholders and ‘entitled workers’.  The category of jobholder then further subdivides into 2 groups, ‘eligible jobholders’ and ‘non-eligible jobholders’. The category a worker falls in to is determined by their age and whether they earn qualifying earnings.  It is the eligible jobholders who are between the age of 22 and State Pension age and whose qualifying earnings are over £8,105 per annum who must be automatically enrolled. 

Assessment dates
The dates on which an employer will have to assess a worker are the employer’s staging date, for a worker already in employment on that date; the first day of employment, for a worker who starts employment after the employer’s staging date; the date of the worker’s 22nd birthday, where this occurs after the employer’s staging date; the date of the worker’s 16th birthday, where this occurs after the employer’s staging date.

The first two are straight forward enough in that when the duties apply, employers will ideally already have assessed the workers who currently work for them and from then on the assessment is made when an employee joins the company. However employers will also need to be aware of employees who will become one of the categories of worker when they reach their 22nd and 16th birthdays. 
So a process will need to be in place to trigger when these events are due to happen in order to comply with the resulting duties.

Joining window
The law also sets out the time limit for completing automatic enrolment. During what is known as the ‘joining window’, a one month period from the eligible jobholder’s automatic enrolment date, the employer must give information to the pension scheme about the eligible jobholder; give enrolment information to the eligible jobholder; make arrangements to achieve active membership for the eligible jobholder, effective from their automatic enrolment date.

Once enrolled into an automatic enrolment pension scheme, an eligible jobholder can decide to opt-out of the pension scheme. It is important they are able to make an informed decision so the employer must provide the eligible jobholder with certain enrolment information, within the joining window, that tells them that they have been, or will be, automatically enrolled and what this means to them; of their right to opt-out and their right to opt back in, and; a statement about where to find further information about pensions and saving for retirement.

Postponement
Postponement is an additional flexibility for an employer that allows them to choose to postpone automatic enrolment for a period of their choice of up to three months. This option has been introduced to help allow for temporary and casual workers. To exercise that choice, the employer must issue the worker or workers with a postponement notice.

Payroll system
An employer’s payroll system can support various aspects of the enrolment process and ongoing scheme membership, so it must be ready to deal with this and be capable of doing so. Business software providers have already been made aware of the changes they will need to make, to ensure that their products are able to support the new employer duties. 

The actual process of calculating and paying contributions is unchanged by any of the employer duties. However, what may change is the rate of contributions and the components of pay included in the calculation of pension contributions. Employer’s will need to establish from the scheme whether tax relief is to be given at source (contributions deducted from net pay) or under net pay arrangements (contributions deducted from gross pay), and ensure their payroll is set up accordingly. 

On the employer’s staging date, it is likely there will be a number of eligible jobholders to be enrolled at the same time. Payroll should be ready to make deductions and pay across to the scheme from the staging date. Employers who operate a weekly payroll should allow enough time to set this up because, if the eligible jobholder is making contributions, deductions must be made from the first week.  The employer should also build into their payroll processes the ability to refund any contributions deducted from a jobholder who opts out during the opt-out period.

Summary
This really is only a brief outline of the main considerations for employers. There is a lot of detail within these new duties and it is important that everyone involved becomes familiar with the rules. The key piece of information to know now is the staging date and then employers can find out how a current scheme (if there is one) may fit in with the automatic enrolment requirements. It is important that communication starts as early as possible to all those who will be involved and that isn’t just to employees; speaking to pension providers and software providers is essential to find out where they are in their planning stages and to ensure that they will be able to fully support the employer’s new duties.

Help and support
The Pensions Regulator has created a seven step guide which details every stage of the automatic enrolment process and specifies all employer obligations in relation to the new regulations - 
tinyurl.com/cau9aga. 

Further information on RTI
tinyurl.com/7s73fjt

ABOUT CIPP
The Chartered Institute of Payroll and Pensions Professionals has in excess of 5,000 individuals enjoying membership benefits. In addition, the CIPP is the UK’s leading provider of qualifications, training and consultancy for payroll, and has a Pensions Faculty responsible for delivering qualifications and membership services to those responsible for public sector pensions. For further information visit www.cipp.org.uk