This is a very interesting duscussion, as we have also just been 'invited' into a holiday pay fund system at work. The benefits for the company seem to be two-fold, both in that it saves itself the employer NICs and can keep better track of employee annual leave. My problem (if you can call it that) is that the scale of savings seems to be pretty imbalanced, those at or around the UEL benefiting the most. The example provided to us states that savings for employees on, say, £50k per annum would represent only 1pc of contributions, i.e. an annual saving of less than £70. An employee at £30k, close to the UEL, would be saving nearly £400 a year.
I've tried to research this over the internet, but, like the person who started this thread, was able to find little concrete information, the HMRC sites being particularly uninformative. Has our HR department got the right end of the stick here? It seems unusual that a 'benefit' of this kind would suddenly disappear at a certain level rather than being on a scale as most others are...
Posted: Wed Aug 09, 2006 7:22 am Post subject: Holiday Fund scheme savings
Let's try some examples - your figures suggest that you are talking about six weeks' holiday per year - but let's just look as the savings for a single week. Readers can them multiply it up to their own situation.
The employee NICs standard rate is currently 11% of earnings that fall between the earnings threshold (£97 pw) and the upper earnings limit (UEL) (£645 pw). On earnings above £645, the employee NICs rate is 1%.
In a holiday fund scheme that meets the statutory requirements, there are no NICs due on the holiday payments. So, if you receive one week's holiday pay and there are no NICs due on that payment, the employee savings would be, for example
on holiday pay of £300: £22.33, ie (£300 - £97) x 11%
on holiday pay of £500: £44.33, ie (£500 - £97) x 11%
on holiday pay of £700: £60.83, ie ((£645 - £97) x 11%) + (£55 x 1%)
on holiday pay of £900: £62.83, ie ((£645 - £97) x 11%) + £255 x 1%)
So, the more you earn, the more you save but, hopefully, you can see that, as soon as earnings exceed the UEL, the relative level of NICs savings starts to fall because the savings are only 1% of earnings instead of 11%.
The NICs rates for employees in occupational pension schemes are a little lower than those rates, so the savings from a Holiday fund scheme are also lower.
The employer NICs standard rate is currently 12.8% on all earnings above the earnings threshold (£97 pw). The employer's savings per week of holiday is therefore a little higher than the employee's, but does not drop, relatively speaking, when earnings exceed the UEL. _________________ Ian Congreave, PayPerShop owner
Thanks very much, Ian. All forwarded to my benefits department! They have received a lot of questions, apparently, but no-one has been able to answer them. Their adviser is going to give me a call shortly, it seems.
The methodology you lay out looks entirely logical to me, not that that means anything in the UK tax jurisdiction. I'll let you (and the thread) know the result, as it is clearly of interest to many.
Posted: Wed Aug 09, 2006 2:25 pm Post subject: Holiday Pay Schemes
In addition to all the discussions on calculating NIC savings, and the morality of who gets the most benefit (low-paid employees, high-paid, employees or the employer), there are also the practical issues that I raised a while back - namely:
1. Although there is a well-established precedence for these schemes in the Construction sector, can any of the Scheme providers show evidence of it being operated in other sectors? And, if so, for how long?
2. Depending on how long these (non-Construction sector) Schemes have been in operation, is there any guidance from HMRC as to whether an expansion to other sectors will be allowed - or is there a danger that it will be seen as an 'avoidance' scheme that has to be registered by HMRC and for which registration may be refused?
3. What charges are typically applied by Scheme providers (who have to be a TRULY independent company) for managing a Scheme? - and what additional record-keeping is required of the employer in order to take part? Both of these will be additional costs that should be set-off against any forecast savings.
Does anybody have any actual examples from specific Scheme providers or written guidance from HMRC?
Posted: Thu Aug 10, 2006 7:14 am Post subject: Holiday Pay Schemes - HMRC view
Hugo sums up all of the issues - if any readers can tell us about their experiences in setting up or considering these schemes, your views would be much appreciated.
Yesterday I received a statement from HMRC on the use of holiday pay schemes. Here it is, as provided:
Quote:
We would not normally expect employees outside of "construction work" to be included in such schemes, because the legislation was introduced to cater for payments made to workers within that industry. However, there is nothing in the legislation to prevent employers in other industries using these provisions.
The first point of contact for such an enquiry would be the employer's HMRC office. We naturally monitor the operation of the exemption to ensure that the legislation is meeting its objectives. We are reviewing the operation of the legislation by reference to its original policy intention, and changes since it was first introduced.
I will be discussing this reply, and the statutory NICs exemption, in some detail in a coming PayPerShop newsletter. _________________ Ian Congreave, PayPerShop owner
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