Contractors taking a salary from their contractor limited company will be required to supply payroll information online starting from as early as April 2013. This is to conform with HMRC’s Real Time Information (RTI) initiative to improve the operation of Pay As You Earn (PAYE).
“Most contractors who use an accountant to process their monthly payroll won’t notice any change,” explains James Abbott, tax partner at contractor accountant Abbott Moore.
“However, contractors who don’t currently run a payroll or prepare their own payslips will be required to submit PAYE data online on a monthly basis. Most employers, which includes Limited company contractors, will be legally required to file online on a phased basis between April 2013 and October 2013. HMRC will tell employers which start date applies to them.”
Umbrella company contractors are likely to benefit from RTI as their umbrella company will implement the new processes, which will result in a more accurate tax position and less use of emergency tax codes when changing umbrella solutions provider.
Why HMRC is implementing RTI
“The UK’s PAYE system is no longer fit for purpose following the growth of the flexible workforce, because employees are more transient and stable, full-time employment is less common,” says Abbott.
HMRC has created its RTI initiative to improve the way that PAYE is operated, to understand individual taxpayers' tax positions in real time and to eliminate the requirement for costly and expensive adjustments at the end of tax years
James Abbott, Abbott Moore
“HMRC has created its RTI initiative to improve the way that PAYE is operated, to understand individual taxpayers’ tax positions in real time and to eliminate the requirement for costly and expensive adjustments at the end of tax years.”
Abbott notes that, while the operation of PAYE and salary reporting is moving to RTI, the underlying processes and calculations of income tax and National Insurance Contributions (NICs) remain changed.
HMRC’s RTI requirements
“RTI requires that employers file payroll data for employees paid a salary above the lower earnings limit on or before when the payment to the employee is actually made,” says Abbott.
“That means contractors paying themselves a basic small salary per month will be required to file payroll data before or on the day that they pay themselves this salary.”
Crucially, RTI is only concerned with salary and not with dividends, which means contractors need only report their salary on a monthly basis, using HMRC’s online tools or payroll software, and file corporation tax and self-assessment personal tax returns as normal.
Complications arising special rules for directors
As Abbott explains, there are special National Insurance rules for directors which can benefit contractors, but when RTI arrives these could also cause problems: “Company directors can choose to declare a single salary payment at the end of the tax year and be exempt from the lower earnings limit.
“This will cause no issues with RTI as the contractor can declare nil payments throughout the year and a single salary payment after year end. However, contractors who pay their non-director spouse or partner a salary can’t use this approach: they can only enjoy a 1/12 exemption of NICs for that month, so will incur an NIC charge if declaring their entire salary at the end of the tax year.”
The solution for non-director employees is to maintain and report regular payments throughout the year.
“The UK is the only developed nation to try this kind of real time tax reporting; it has never been done before and the rest of the world will be watching closely to see how it works,” says Abbott. “The new responsibilities for contractors need not be onerous as long as they are organised and put their own processes in place to report their salary each month.”