Holiday Pay Schemes

MartinC · Posted: Fri Jun 16, 2006 9:07 am Post subject: Holiday Pay Schemes

I have recently joined a new employer who has announced that a "Holiday Pay Scheme" will commence for all employees which will allow payments of holiday pay to be made free of NIC's. Some quick research by me found out that such schemes are common in the Construction industry but do not seem to be popular elsewhere (certainly not with any of my previous employers.) The basis is that "holiday pay" is funded from an independently managed central fund to which more than one employer contributes. While there are NIC savings, it can mean additional admin costs in recording holidays in order to ensure that the correct amount of NIC-free holiday pay is made each pay period.

Is anyone else familiar with operating such a scheme, and why haven't they been more widely taken up if there are asvings to be made by both employees and employers? Or am I missing something?!

Thanks for any help or information.

Martin

Ian Congreave · Posted: Fri Jun 16, 2006 10:34 pm Post subject: Holiday Pay Fund schemes

Coincidentally I am in the middle of researching holiday pay funds as a suitable alternative to rolled-up holiday pay arrangements. Yes, there are no NICs due on payments out of such funds, but the funds have to be independent of the employer. They can operate by the employer paying the holiday pay and then claiming the money from the fund, or the fund can pay the money direct but with tax deducted.

I hope to be able to put together a more detailed coverage of these schemes but I am waiting for a reply from HMRC on some of the issues that I have not been able to resolve.

In the meantime, HMRC's main guidance is in the CWG2 booklet, page 28, and in the National Insurance Manual from page www.hmrc.gov.uk/manuals/nimmanual/NIM02200.htm
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MartinC · Posted: Tue Jun 20, 2006 11:04 am Post subject:

Ian,

Thanks for the reply. It will be useful to see what you produce!

Questions among some of our concerned (and suspicious) staff include a concern about the effect on their state pesnion/benefit entitlements of paying reduced contributions (albeit for an equivalent of about 30 to 40 days a year - but could be over a career lifetime). Responses such as "it will represent only a small difference" haven't allayed fears yet. Have you anything you can add to this question?

Thanks

Hugo Fair · PayPerShop Regular Joined: 22 Jul 2004 Posts: 73

Any clarification that Ian can obtain from HMRC will be greatly welcomed since, in the light of the recent EC ruling, this is a question raised by an ever increasing number of our clients.

As he says, my understanding is that the NIC savings only apply IF the scheme is managed by a TRULY independent company (e.g. not a parent/group company).

The potential down-sides are that:
a) such a company will make a charge for administering the scheme (which may consume at least 50% of the envisaged savings);
b) your company will incur additional administration costs (e.g. various further records, depending on whether it is the employer or employee who requests funds from the scheme administrator);
c) by removing this pay from the employee's NIable Pay, there may be an impact on any statutory entitlements which are related to NIable Pay - e.g. SMP/SSP (if the employee is low paid) or the State 2nd Pension (if the employee is contracted-out) and so on.

I believe that it has been a popular methodology in certain sectors (e.g. mariners as well as construction) where it is part of outsourcing all HR & Payroll administration - rather than simply a cost-saving device.

For organisations already spending considerable time & money on managing their employees/resources, it is more likely that such a scheme will lead to additional costs - and so is less attractive.

carolyn.walsh · Posted: Wed Jul 12, 2006 6:22 pm Post subject: Holiday Pay Schemes

I have operated the holiday pay scheme that you mentioned as we pay construction workers.

The only provider I know about is the B&CE Benefit Scheme.

You can find out more about this scheme at http://www.bandce.co.uk/corporate/intro.asp

I should imagine that any scheme in any other industry would operate along the same lines.

Carolyn
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marksalter · PayPerShop Newbie Joined: 12 Jul 2006 Posts: 5

Ian Congreave · Posted: Thu Jul 13, 2006 7:01 am Post subject: Holiday Pay schemes

I don't think such a "beast" exists, Mark. There are so many different variables involved. For example, whether or not a holiday pay scheme that provides relief from NICs would affect your pension scheme would depend very much on your pension schemes rules, and what constitutes pensionable pay differs widely from scheme to scheme.

Just a point on your NICs - they are not "capped" above the UEL, you pay a 1% contribution on earnings above the UEL. As you say, the employer pays full contributions and would be the principal beneficiary of a scheme in your case.

You are right to question the implications of any new benefits scheme on other benefits and your employer should provide full, clear and honest information to help you decide on the value of the benefit to you.
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marksalter · PayPerShop Newbie Joined: 12 Jul 2006 Posts: 5

marksalter · PayPerShop Newbie Joined: 12 Jul 2006 Posts: 5

Two more small questions if I may...

Can anyone advise me on the order of deductions and tax calculations?
I would particulary like to confirm that I will pay income tax on the the 'holiday scheme' NIC that is not paid.

In terms of impact to my pension payments, does the NIC payment saved by my employer make a large dent in my pension? I wonder how much their saving will cost me in later life. Is there a direct 'conversion rate' for translating NIC payments into pension payments?

Ian Congreave · Posted: Fri Jul 14, 2006 7:02 am Post subject: Employer's NICs and pensions

My understanding of this is that only your personal NICs count towards your state pension and any additional state pension. If you are paying employee NICs up to the UEL, you are making the maximum contribution possible to the state second pension - the top up pension that the government currently provides.

The employer's contributions go towards the overall funding of the state pension scheme and second pension scheme, not towards your personal entitlements. That is why, for employees who are in an occupational pension scheme, where the employer will provide the second pension instead of the state, both employer and employee pay a lower contribution.

The only exception to what I have just stated is where the employer provides a money purchase scheme. The employer and employee pay lower contributions, but some of the employer's NICs are paid back by the government into the employee's pension fund in the form of an age-related rebate.

A bit complicated, but I can't, at the moment, see that a holiday fund scheme would have any significant effect on your future state pension rights.

No, there is no direct conversion formula between NICs and pension payments. State pension is currently a fixed amount, not related to anything and reviewed each year. The state second pension is a complex formula based on your earnings between the lower earnings limit and upper earnings limit, with annual inflation adjustments.

If, under the holiday pay scheme, the employer pays the holiday pay to you, it will be taxed as normal but no NICs deducted. You would see it as a separate entry on your payslip. For example, if your gross pay, including �500 holiday pay, is �2000, you would pay tax on �2000 but NICs on �1500.

If the scheme provider pays you the holiday pay direct, they will deduct the tax (as 22%) before you receive it and you can recover any overpaid tax by a reclaim at the year end.
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marksalter · PayPerShop Newbie Joined: 12 Jul 2006 Posts: 5

Ian Congreave · Posted: Sat Jul 15, 2006 6:43 am Post subject: Holiday Pay Schemes

Mark,

You may not have understood the last point, you may pay 40% tax on your holiday pay under the scheme, but you are already paying 40% tax under your current arrangements. If you are currently paying 1% NICs on earnings over the UEL, you would pay �15 less NICs in my example than at present.

You will certainly pay less under the holiday pay scheme, but only marginally in your case.
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marksalter · PayPerShop Newbie Joined: 12 Jul 2006 Posts: 5

stirfry · Posted: Thu Jul 20, 2006 12:55 pm Post subject:

Just to add another complication, what about 'legal deductions'.
They are calculated on the NIC pay, thus in Ian's example should �1,500 figure be used instead of the �2,000 to arrive at any % (or band) based deductions?

Andrew

Ian Congreave · Posted: Fri Jul 21, 2006 7:05 am Post subject: Holiday pay schemes

What kind a "legal deductions" are we talking about? Court orders? student loan deduction? voluntary deductions?
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