Thanks for reading…

The E&P blog is saying goodbye. We’ve had fun setting up the blog and the magazine but have decided to step back from the back room stuff that goes with running a company and focus on doing things for other people instead!

Our enews and magazine subscribers aren’t being deserted though. The recently launched Purely Payroll will be taking over the job of keeping you up-to-date with what is going on in payroll and HR. You’ll recognise some familar faces from Employ&Pay as Adrian Hobbs will be taking over as editor of the magazine and Kate Upcraft and Tim Kelsey will still be writing for the title.

We’re in the process of finalising the hand over and once that is done Purely Payroll will be in touch with you. You can find more on Purely Payroll at their website or follow payroll news at Adrian’s blog.

If you have any editorial queries or suggestions please email Adrian on: editor@purely-payroll.com

Subscriber or advertiser queries for the magazine should go to: melanie@purely-payroll.com

Thanks for your support!

Rich and Cat!

Comprehensive spending review: The IPP’s summary of the results

The Comprehensive spending review (CSR) lacked detail on matters of particular interest to payrollers according to the Institute of Payroll Professionals (IPP).

As a result the IPP’s policy team is asking the government for further information on the following:

• PAYE is mentioned with the emphasis on Real Time Information but no real detail, so what is next. What will be stakeholder involvement from this point on?
• Childcare Vouchers have not been mentioned. Is tax relief to stay in the form of
• the new Technical Note? And when will we see guidance?
• One benefit for all! HMRC will need to police any changes that the DWP make, therefore can they comment on interaction with this review?
• Payrolling lends itself to Real Time Information so what next?
• VAT on benefits via Salary Sacrifice (Astra Zeneca v HMRC case). When will we see guidance?
• Student Taxation – the chancellor did not mention the increase in threshold to £21000, when is the expected implementation date?
• Report mentioned Child Maintenance Enforcement Commission but no real detail.
• NEST was briefly mentioned but with no detail. When will we know the final details of the automatic enrolment process?

The IPP has also picked out the areas of the CSR that will be of interest to payrollers…

The Independent Public Service Pensions Commission (IPSPC) led by John Hutton published an interim report on 7 October. In response to the Commission’s interim recommendations, the government will:

• commit to continue with a form of defined benefit pension;
• await Lord Hutton’s final recommendation before determining the nature of that benefit and the precise level of progressive contribution required;
• carry out a public consultation on the discount rate used to set contribution rates in the public service pension schemes;
• implement progressive changes to the level of employee contributions that lead to an additional saving of £1.8 billion a year by 2014-15, equivalent to three percentage points on average, to be phased in from April 2012;
• exempt the armed forces from this increase in employee contributions; and
• seek engagement with all stakeholders including trade unions

Education

• A new system of graduate contributions will ensure that students will only pay once they have graduated and can afford to do so. The graduate contribution system will be progressive and protect the lowest earning graduates.
• Increases in adult apprenticeship funding by £250 million a year by 2014-15 relative to the level inherited from the previous government.

Automatic Enrolment

The government have confirmed that they will provide funding for the introduction of auto enrolment from 2012 and the establishment of the National Employment Savings Trust (NEST), to help individuals save for their retirement and encourage high quality pension provision by employers.

State Pension

• Increasing longevity and demographic change pose challenges over the longer term. In response, the government will speed up the pace of State Pension Age equilisation for women from April 2016 so that Women’s State Pension Age reaches 65 in November 2018. The State Pension Age will then increase to 66 for both men and women from December 2018 to April 2020, six years earlier than planned. Following the faster increase to 66, the government is also considering future increases to the State Pension Age and will bring forward proposals in due course.
• The Basic State Pension will be uprated by a triple guarantee of earnings, prices or 2.5 per cent, whichever is highest. Bringing forward the date at which the State Pension Age will start to rise to 66 to 2018 will ensure this is fiscally sustainable.

Welfare reforms

• Over the next two Parliaments the current complex system of means tested working age benefits and tax credits will gradually be replaced with the Universal Credit, an integrated payment that will ensure work always pays, with less scope for fraud and error. £2 billion has been set aside in DWP’s DEL settlement over the next four years to fund the implementation of the Universal Credit. Further details will be set out in DWP’s forthcoming White Paper.
• Withdrawing Child Benefit from families with a higher rate taxpayer from January 2013 so that people on lower incomes are not subsidising those who are better off, saving £2.5 billion a year by 2014-15.
• Changing the eligibility rules so that couples with children must work 24 hours a week between them, with one partner working at least 16 hours a week in order to qualify for the WTC, saving £390 million a year by 2014-15.

HMRC

• In order to focus resources on frontline tax collection, HMRC will invest in new technology to improve risk assessment capability, better join up taxpayer information and streamline internal processes. Savings will be maximized from IT and other procurement contracts and administration costs will be reduced by a third with reductions in the size of corporate services and back office support functions.
• HMRC will modernise tax administration and will improve and tailor services for taxpayers. £100 million has been budgeted to improve the operation of Pay As You Earn (PAYE) for both employers and individuals. All businesses will be filing their tax returns online by 2012 with at least 80 per cent of self assessments to be filed online by 2014-15. The Department will also modernise PAYE, moving towards more real time information so that people can be reassured that they have paid the right amount of tax throughout the year.

Scottish rate of Income Tax

The government is committed to the implementation of the devolution of Scottish income tax as laid out in the Calman Commission Report, and will introduce a Scotland Bill in the current Parliamentary session.

Other items of interest

• Migration fees will continue to be set above the cost of processing applications, ensuring that those visiting and working in the UK pay a contribution to managing the border.
• An increase in the portability of Criminal Records Bureau (CRB) checks by making greater use of electronic access for employers. As a first step, the government is reducing the number of CRB checks required for junior doctors, saving £1 million a year.
• The government is taking forward its announcement in the Budget of a Bank Levy as an additional and permanent tax on the industry and will publish draft legislation on 21 October, following a consultation with industry over the summer. Final legislation will follow before the end of the year.

Comprehensive spending review: Local government

Commenting on the impact of the CSR on local government Judith Barnes, partner and head of local government at law firm Eversheds, says: “Whilst redundancies make the headlines, and for obvious reasons, it presents just one means of cost reduction and needs to be carefully thought through in terms of maintaining service delivery particularly before allowing senior expertise and capacity to leave.

“Organisations will be, and are, asking fundamental questions about which services will be required, to what degree and by whom they should be provided. Such longer term strategies are likely to pay dividends over short-term responses. Increasingly also, we are finding that public sector employers are prepared to look beyond more ‘traditional’ measures to innovative approaches and wholesale service transformation. New approaches, such as strategic partnering arrangements between authorities and the private sector are key to this approach, for example the Cleveland Police project, Edinburgh, Bournemouth and others where we have direct experience of what is involved.

“Constructive and innovative approaches to spending are likely to prove the key for many, from reviewing job roles, terms and conditions of employment to hours of work and involving voluntary severance as well as compulsory redundancies.

“Alternative methods of service provision will also need to be examined and a recent survey of HR Managers by Eversheds LLP demonstrated that in local government 24% expect services to be outsourced in the forthcoming year compared to 11% in the previous year and 33% of managers are looking at shared service delivery.

“Further to this the Eversheds survey also revealed that even before any formal Government announcement of cuts in expenditure through the Comprehensive Spending Review, a large number of employers (our survey suggested 69%) have already taken steps to reduce staff headcount. Public sector HR professionals clearly need to stay close to forthcoming redundancy exercises to ensure that managers involved understand their legal responsibilities, not least since challenges to the fairness of redundancy selection methods and the adequacy of consultation have risen significantly according to recent Employment Tribunal figures.

“As each local authority is different then the solutions will be bespoke, however, the next budget round and council tax setting will be a challenging time for many authorities. It may be some comfort to know that this level of cuts whilst not seen since the war is anticipated only to bring local government spending back to 2006/7 levels.”

European Parliament votes to extend maternity pay

A majority of MEPs have voted to extend minimum maternity leave from 14 to 20 weeks with full pay (100% of their last monthly salary or average monthly salary). The proposal goes further than the European Commission’s plan to extend it to 18 weeks.

The move to extend maternity leave to 20 weeks was backed by 390 MEPs, with 192 voting against and 59 abstaining.

The resolution adopted by the Parliament does allow for some flexibility for countries which already have some form family-related leave, allowing them to introduce or keep existing rules that are more favourable to workers. Also, where family-related leave is available at national level then the last four weeks of the 20 can be paid at 75% or above rather than full pay.

Employment rights of pregnant employees were also covered in the resolution. Parliament voted to ban the dismissal of pregnant workers from the start of their pregnancy to at least six months after their maternity leave ends.

MEPs also approved an entitlement to at least two weeks of paid paternity leave.

Audrey Williams, partner and head of discrimination law at law firm Eversheds, comments: “Some employers will blanche at the thought of having to accommodate radically extended maternity rights at a time when many businesses are struggling to survive. But it’s important to bear in mind that the European Parliament’s proposal is a long way from becoming law. The next stage is for it to be put to a vote of national governments, where it will inevitably come under strong attack from some quarters, including the UK and Germany. There will be much lobbying from employers’ groups and there is every chance that, ultimately, the plans will be watered down considerably.

“If rights to maternity pay do end up being enhanced, one question on every employer’s lips will be ‘who is going to pay for it?’ At present, UK employers can recover from the public purse a large proportion of the amount they pay out in statutory maternity pay. The Government will have to decide whether the same rules will apply to any increased maternity pay and, if not, how the cost should be split between taxpayer and employer.”

Agency worker regulations to go ahead as planned

The Agency Worker Regulations 2010 will come into force as planned in October 2011, after the government confirmed on 19 October that it will not be amending them.

Draft guidance will be developed with agencies, hirers and agency workers and is due to be published early next year. This will allow time for the guidance to be amended in advance of October 2011.

In a written ministerial statement Edward Davey, Employment Relations Minister, said:

“The Agency Workers Regulations 2010, implementing the European Agency Workers Directive, were made by the previous Administration in January 2010 and are due to come into force in October 2011. The Government are aware of the different points of view that have been expressed by various stakeholders about certain aspects of these regulations and have been considering the way forward.

“The directive sets out the principle of equal treatment-that

“the basic working and employment conditions of temporary agency workers shall be, for the duration of their assignment at a user undertaking, at least those that would apply if they had been recruited directly by that undertaking to occupy the same job”.

“The default position in the directive is that this principle should apply from day one of an agency worker’s assignment. However, the directive also allows member states some flexibility as to how this principle is applied, including the possibility of a qualifying period before the right to equal treatment arises, as long as this is based on an agreement reached by “national level” social partners. Such an agreement was reached by the CBI and TUC, with the support of the previous Administration, in May 2008 and provides the legal basis for the legislation subsequently put in place, including its provision for a qualifying period of 12 weeks.

“Since the formation of the coalition, the Secretary of State for Business, Innovation and Skills and I have discussed the way forward on this issue with a wide range of stakeholders. Employers and their representatives have expressed a range of concerns regarding the regulations, arguing for amendments before their entry into force that might reduce the burden they place on business. The Secretary of State and I have both had considerable sympathy for some of the arguments we have heard, particularly proposals to simplify the definition of “pay” under the regulations (especially as far as the administration of performance-related bonuses are concerned) and the administrative requirements around the application of the qualifying period to patterns of infrequent, short-term assignments.

“However, the Government’s ability to make changes to address such matters is constrained by the fact that the regulations are based to a significant degree on the agreement brokered by the previous Administration between the CBI and TUC. Due to this unique legal situation, any amendments proposed to the regulations touching upon the subject matter of the CBI and TUC agreement, which did not have the agreement of those parties, would face the risk of being set aside in the courts in the event of a legal challenge.

“Were that to happen, the effect could be to call into question the very foundation for the fundamentals of the implementing legislation, crucially including the 12-week qualifying period itself.

“The Secretary of State and I have therefore discussed this matter on a number of occasions with both the CBI and the TUC, seeking agreement on changes that we consider would have improved the implementation regime, to the potential benefit of both employers and agency workers. Unfortunately it has not been possible to find a way forward that would be acceptable to both parties.

“This outcome is clearly disappointing. However, the Government have taken the view that the absolute priority must be not to take any steps that could put at risk the 12-week qualifying period, which significantly mitigates the burdens the legislation will place on employers. The Government will not therefore be proceeding with any amendment of the regulations themselves. We will instead now use the time that is still available before the regulations’ entry into force to develop the best possible guidance to help employers comply with their new obligations.”

Two age discrimination rulings from the Court of Justice

Automatically ending an employment contract when the worker reaches retirement age is not necessarily discriminatory, but depriving a worker of severance pay on the basis that they can draw an old-age pension is discriminatory. The two Court of Justice of the European Union rulings were both released on the 12 October.

The first case, referred from the Hamburg Labour Court, centred on Gisela Rosenbladt. She had worked as a cleaner for 39 years. According to the collective agreement for the commercial cleaning sector, at the age of 65, her employer gave her notice of termination of her employment contract.

The question for the Court of Justice was whether the collective agreement was justified.

Owen Warnock, partner at law firm Eversheds comments: “This decision is the latest in a line of cases in which the CJEU has displayed a markedly non-interventionist approach to the idea of compulsory retirement. That, together with the recent Court of Appeal decision in the Seldon case could be seen as an encouraging sign for those employers planning to retain a compulsory retirement age when the default retirement age is abolished next year.

“However, it should not be assumed that UK Employment Tribunals will be equally relaxed about forced retirement. The existence of the default retirement age means there have been very few cases on retirement to date but those that have emerged from the Employment Tribunals in England and Wales demonstrate that employers cannot be assured of an easy ride (see for example Baker v National Air Traffic Services Ltd and Martin and others v Professional Game Match Officials Ltd). Moreover, given the Government’s views about the need for employees to work longer, some of the arguments put forward in the Rosenbladt case, such as balancing work for younger generations, would appear to be harder to persuade a UK court on.”

The second case was referred from the Danish Courts. Workers who have been employed in the same undertaking for at least 12 years are entitled to a severance allowance, but the allowance is not paid if the worker is entitled to draw an old-age pension under an occupational pension scheme, even if the individual in question plans to carry on working.

Ole Anderson worked for the Region of Southern Denmark. He was 63 when he was dismissed in 2006. After registering as a job seeker he put in a claim for the severance allowance, but this was turned down.

Warnock says: “Although there is no direct equivalent to the Danish severance scheme in the UK, the case will be relevant to enhanced redundancy pay schemes that provide for a reduced entitlement to take account of employees’ pension entitlements, including those with tapering provisions where the pay reduces the closer to pension age one gets. The Employment Appeal Tribunal has previously ruled that it may be possible to justify such arrangements (Loxley v BAE Systems (Munitions & Ordnance) Limited [2008] ICR 1348). However, it is clear from the Andersen ruling that such schemes should be closely scrutinised by Tribunals, particularly those based on an assumption that workers of pension age will not want to remain in the workforce.”

Government limits pensions tax relief for high earners

Labour’s complex plans for limiting tax relief for high earners have been dropped by the coalition Government which has devised a simpler scheme.

“The Labour Government’s proposals would only have hit the highest earners but were horrifically complicated,” says Stephen Green, a senior consultant at Towers Watson. “The Coalition then proposed something much simpler but which could have led to large tax bills for long-serving members of final salary schemes earning £60,000 or so. Today’s proposals mean this will now be very rare.  However, the Government still wants to raise the same amount of money, so it is placing tighter restrictions on people who can afford to save large sums over the whole of their career.

“Not many people can afford to save £50,000 in the space of 12 months, especially not year-in, year-out. For those who can, the Government’s aim is to discourage them from saving so much in the first place and tax their salaries, rather than to claw back money after it has been saved in pensions.”

Towers Watson’s comments on the changes

Impact on long-serving members of final salary schemes: Few people save £50,000 into defined contribution schemes and limiting how much is saved into these vehicles is relatively simple. However, pay rises awarded to members of final salary schemes increase the value of benefits earned in the past. HM Treasury today confirmed that benefits accrued in the past will be ‘revalued’ to take some account of inflation before the tax calculation is performed, meaning that the first part of any pay rise will not create a tax bill. It also said that tax bills can be reduced where pension accrual was less than £50,000 in any of the years from 2008/09 to 2010/11.

Impact on the highest earners: Towers Watson says the new tax regime will still prompt widespread reviews of how companies reward their most senior executives. Green says: “Providing pension benefits worth over £50,000 will no longer be tax-efficient.  Our clients have been working on the basis that cash allowances are the obvious alternative, and the Treasury’s latest signal that it will clamp down on offshore alternatives to registered pension schemes will only reinforce this view.  The question then becomes whether employees with lower earnings will also be offered the same flexibility to receive cash alternatives to pensions, especially those with large debts from student fees to repay.”

No indexation until 2016 means real terms cut to £50,000 limit: The Treasury has said that the £50,000 annual allowance will not be indexed to reflect inflation until 2016 at the earliest. Green says: “The annual allowance is starting higher than expected but freezing it means its value will be cut to £44,000 in real terms by 2015. However, that is still at the top end of what had been expected given the previous proposals.”

What the new limits mean for defined benefit pensions: The new £1.5 million limit on tax-advantaged registered lifetime pension saving and the £50,000 limit to annual contributions reduce both the maximum annual pension that people can build up in defined benefit schemes and how quickly this grows. Green says: “The maximum annual defined benefit pension is being reduced from £90,000 to £75,000. Previously, the annual pension someone was entitled to could rise by £25,500 in one year without them having to worry about the taxman. This has now been reduced to £3,125 above inflation and so reaching the £75,000 threshold will be quite a challenge for all but those who have significant pension savings already.

“Those who have some scope within the £50,000 annual limit, after allowing for their benefits in a defined benefit scheme, may be tempted to use the allowance before they lose it by making additional voluntary contributions (AVCs).  However, with the proposed carry forward rules, they do need to be careful that they don’t use up any allowance that could be used to accommodate an employer funded increase in benefits derived from a significant pay rise in the following two years.”

Maximum pension pots: The Government intends to cut the lifetime allowance from £1.8 million to £1.5 million from 2012 but suggests people can apply for a personal lifetime allowance of £1.8 million on condition that they do no further pension saving. If a 50-year old aiming to retire at 60 has £1.1 million in their defined contribution pension pot and expects investment returns of 5% a year, this would take them to the £1.8 million limit.

Green says: “It looks like investment returns on money saved in the past will be protected unless these returns take the pot over £1.8 million in the future. Also, under the proposed new transitional protection rules, executives who believe they already have a pension pot that will grow above £1.5 million with future investment returns have a strong interest in persuading their employer to offer alternative benefits for their future service, because any further pension saving would cut their maximum tax-advantaged pension pot to £1.5 million from £1.8 million. They also have little incentive to pursue an aggressive investment strategy if any upside would be shared with the Exchequer.”

Impact on small pensions: Currently, pensions worth less than 1% of the lifetime allowance can be ‘trivially commuted’ – i.e., taken as taxed cash rather than an annual income. Towers Watson welcomes the Government’s decision to decouple the trivial commutation limit from the lifetime allowance; this means the current £18,000 level won’t be cut when the lifetime allowance falls from £1.8 million to £1.5 million. Green says: “The Government sees trivial commutation as a way out of the means-testing trap for the low earners who will be automatically enrolled into pensions after 2012, so it was important that tax changes aimed at high earners did not affect this limit.”

Immediate impact: The Government has announced that pension saving done from today will count against the £50,000 annual allowance, rather than the current £255,000 limit, where pension input periods end in 2011/12. Green says: “People earning less than £130,000 were not caught by the transitional measures in force before today so could have saved as much as 100% of their salary  alongside their employer’s pension provision before April 2011. This option has now been withdrawn from some of them in some of the most complicated parts of the new proposals. Given this complexity anybody considering making significant additional pension savings before 6 April 2011 really should seek independent financial advice before doing so.”