Understanding Payroll and Off-Payroll Taxes in the UK

24th November 2021


Tax on payroll is defined as taxes paid by employers, employees and the self-employed. This is either as a proportion of payroll or as a fixed amount per person. Off payroll tax, on the other hand, is a classification of tax for service providers who are not paid by payroll, and whose income comes from different sources.

In this blog, we break down the different kinds of payroll and off-payroll taxes that will affect you – whether you’re a business owner or an employee.


Off payroll working

The off payroll working rules can apply if a UK worker provides their service through their own limited company or a “personal service company”, or as an independent contractor.

The off payroll working tax rules effectively work as anti-avoidance provisions. The rules ensure that individuals who work like employees, but through a limited company (typically their own), pay broadly the same Income Tax and NICs as other employees.


Changes in legislation

With a change in legislation earlier this year, medium and large employers are now required to determine the employment status of contractors.

The rules are an extension of the existing tax regime known as IR35, under which the contractor or intermediary (rather than the end company) decides the status of the worker and accounts for any tax and NICs due.

Companies that do not meet the conditions for the updated regulations for two consecutive financial years fall outside the regime. If this is the case, determining the tax status of the employee will remain with the contractor or intermediary.

However, it is important for such entities to have systems in place to identify when they may be caught so that they can act accordingly, avoiding penalties.


What do the changes in legislation mean for employees?

Off payroll worker rules apply to:

  • A worker who provides their services through their intermediary/ company
  • A client who receives services from a worker through an intermediary
  • An agency providing workers services through their intermediary

Companies employing contractors must now decide whether the worker would be regarded as their direct employee for income tax purposes. If the worker is to be regarded as an employee, then the company must deduct income tax and NIC’s from the fees paid as if they were payments of a salary.


National Insurance Increases

The increased National Insurance Contributions from April 2022 will affect all those over the age of 16, but below state pension age, who earn more than £184 per week through employment or with profits more than £9,568 per year.

Whilst the NIC increase will impact all individuals, the tax hike will also have widespread effect on businesses and investors. The 1.25% increase applies to employer contributions separately. Employers pay a percent of Class 1 National Insurance for each employee, depending on how much they earn.


National Minimum Wage Increase

As announced in the Chancellors Autumn Budget, from April 2022 the minimum wage will increase across all age ranges. The current rates are:

  • Apprentice – £4.30
  • Age 21-22 – £8.36
  • 23+ – £8.91

The new rates will be:

  • Apprentice – £4.81
  • Age 21-22 – £9.18
  • 23+ – £9.50

The 9.8% increase for those age 21-22, and 6.6% increase for those over 23, is more than twice the current rise in cost of living, at 3.1%.


Working From Home Reliefs

While many have chosen to work from home either permanently or in a hybrid fashion since the easing of government restrictions, for some, working from home is part of their job.

For those who must work at home on a regular basis, there are tax reliefs available to cover household costs such as gas, electricity, water, and business phone calls.

Those who work from home are not able to claim all of the taxes – only the ones that relate to their work. They can claim relief at the same rate of tax they pay usually. For example, if they pay the basic 20% tax rate, they can apply for 20% tax relief on household costs.


Christmas Bonuses

Christmas is a time for giving, with many employers offering their employees cash bonuses around the holidays. Any money given to employees as a bonus counts as earnings, and so employers need to report it for it to be taxed.

Employers should add the value to their employees’ other earnings, so that they can deduct and pay the PAYE tax and Class 1 National Insurance through payroll.

There are, however, a few circumstances in which employers do not have to provide details of Christmas bonuses to HMRC. One such circumstance is if the value is £50 or less, for example. This is known as a trivial benefit, so National Insurance and tax do not apply.


How can Edwards Accountants help?

As experienced chartered accountants and taxation experts, we would be delighted to help or advise on related matters.

Interested in discussing your options with one of our expert team?

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