Last reviewed 11 June 2018

Every year tax and National Insurance rates and thresholds change. Most will be dealt with in payroll accounting software but, as John Davison outlines below, it is sensible to ensure that you are using the correct rates and thresholds and that you understand which codes to apply to employees to ensure the correct rate of tax is applied.

Payrolls and software

Payrolls can be run by the business or through an agent or agency. Software can record employee details, calculate the tax and National Insurance (NI) due and report in real time to HM Revenue & Customs (HMRC). A business with 10 employees or fewer can access free software, larger businesses need to pay for software and there are a number of packages recognised by HMRC, although it does not recommend any particular software package. Details of where to find these providers is provided at the end of this article.

There are also other adjustments or factors that need to be taken into account, and these also frequently change each year. These will be outlined in this article. In addition, at the end of this article, a number of web addresses are given to enable the rates and thresholds to be checked. See also the Pay and Benefits topic.

Tax payable

The amount of tax payable by employees will depend on the individual’s tax code and how much of their taxable income is above their personal allowance. It is important to understand what the numbers and letters of a tax code mean; a link is given to HMRC website detailing this information. The personal allowance is £11,850 per annum. Rates and tax bands differ for Scotland and the rest of the UK. It should also be noted that there are separate tax-free allowances for savings interest, dividends, self-employment and property rental income. In addition, there are reliefs for pension contributions, charity donations, maintenance payments and time working on ships outside the UK.

National Insurance

National Insurance (NI) is fairly complex and there are various different classes of NI. NI is only payable on amounts above the Lower Earnings Limit. The 2018/19 thresholds for Class 1 NI are:

Threshold

Weekly

Monthly

Annual

Lower Earnings Limit (LEL)

£116

£503

£6,032

Primary Threshold (PT)

£162

£702

£8,424

Secondary Threshold (ST)

£162

£702

£8,424

Upper Secondary Threshold (under 21) (UST)

£892

£3,863

£46,350

Apprentice Upper Secondary Threshold (apprentice under 25) (AUST)

£892

£3,863

£46,350

Upper Earnings Limit (UEL)

£892

£3,863

£46,350

NI is paid by both employees and employers. The rates are as follows.

NI category letter

Earnings at or above LEL up to and including PT

Earnings above the PT up to and including UEL

Balance of earnings above UEL

A

0%

12%

2%

B married women and widows entitled to reduced NI

0%

5.85%

2%

C employees over the State pension age

Nil

Nil

Nil

H apprentice under 25

0%

12%

2%

J employees entitled to defer NI

0%

2%

2%

M under 21

0%

12%

2%

Z under 21 — deferment

0%

2%

2%

Employer (secondary) contribution rates in 2018/19 are:

NI category letter

Earnings at or above LEL up to and including PT

Earnings above the PT up to and including UEL

Balance of earnings above UEL

A

0%

13.8%

13.8%

B married women and widows entitled to reduced NI

0%

13.8%

13.8%

C employees over the State pension age

0%

13.8%

13.8%

H apprentice under 25

0%

0%

13.8%

J employees entitled to defer NI

0%

13.8%

13.8%

M under 21

0%

0%

13.8%

Z under 21 — deferment

0%

0%

13.8%

Most employees will be in category A.

Class 1A NI is payable on work benefits (such as cars, health insurance, entertainment and childcare) at the rate of 13.8%.

A PAYE Settlement Agreement (PSA) allows one annual payment to be made to cover all tax and NI on minor, irregular or impracticable expenses or benefits. Details are provided at the link below. Class 1B NI is payable on PSAs at 13.8%.

Class 2 contributions are payable by self-employed people at £2.95 a week.

Class 3 are voluntary contributions that are paid to fill or avoid gaps in NI contributions to ensure entitlement to benefits and pensions.

Class 4 contributions are payable by self-employed persons earning over £8424. 9% is paid on profits between £8424 and £46,350 and 2% on amounts above £46,350.

For more details on NI, see the National Insurance Contributions (NICs) topic.

National Minimum Wage

The minimum wage varies from £3.70 to £7.83 depending on the age of the employee and whether or not they are an apprentice. The rate is £7.83 an hour for those aged 25 and above, £7.38 for those aged 21–24 and £5.90 for 18–20-year olds.

For more details, see the National Minimum and Living Wage topic and use the Croner-i National Minimum Wage calculator here.

Statutory Maternity, Paternity, Adoption, Shared Parental Pay and Statutory Sick Pay

HMRC has also provided a calculator to calculate the pay employees are entitled to, their qualifying week and leave periods. The rate payable in 2018/19 is 90% of the employee’s average weekly earnings for maternity pay and adoption pay for the first six weeks. After six weeks, and for paternity pay and shared parental pay (from week 1 onwards) the rate is £145.18 or 90% of the employees average weekly earnings, whichever is the lower.

Employers can reclaim a proportion of the amounts paid (except for sick pay) from HMRC. This is 92% if the total Class 1 NI contributions (employee and employer) is above £45,000 for the previous tax year. 103% can be reclaimed if the Class 1 NI was £45,000 or lower.

Use the Croner-i Maternity Pay and Leave, Adoption Pay and Leave, and Ordinary Paternity Pay and Leave calculators here.

The Statutory Sick Pay and Leave calculator here calculates the amount payable to employees depending on the number of days the employee is off from work and the number of qualifying days they work each week.

For more details on these areas, see the Maternity and Family Rights and the Pay and Benefits topics.

Student loan recovery

Where employee earnings are above the earnings threshold student loan deductions need to be recorded in the payroll software. This will calculate the repayments due; the deduction for student loans is 9%. The thresholds are:

Employees on Plan 1 £352.50 per week (£1525.50 per month, £18,330 annually)

Employees on Plan 2 £480.76 per week (£2083.33 per month, £25,000 annually)

Company and employee cars

Advisory Fuel Rates (AFRs) are used to work out the mileage costs where a company car is provided to employees. These are the amounts that can be paid to employees to reimburse them for business travel or to require a payment from the employee for private mileage. When these rates are used there will be no NI or tax charge on the employee or the employer for the fuel costs. There will remain a benefit provided for the use of the car to the employee that will be taxed through the P11D process.

The rates that apply for AFRs from 1 June 2018 are:

Engine size

Petrol — amount per mile

LPG — amount per mile

1400cc or less

11p

7p

1401–2000cc

14p

9p

Over 2000cc

22p

14p

Engine size

Diesel — amount per mile

1600cc or less

10p

1601–2000cc

11p

Over 2000cc

13p

Mileage Allowance Payments (MAPs) are amounts that are paid to employees for using their own vehicle. These can be paid to employees without having to report them to HMRC. To calculate the approved amount, multiply the employee’s business miles for the year by the rate appropriate to their vehicle.

Type of vehicle

Rate per business mile 2018/19

Car

45p for the first 10,000 miles (for tax)

25p for subsequent miles (for tax)

45p for all business mileage (for NI)

Motorcycle

24p for business miles for tax and NI

Cycle

20p for business miles for tax and NI

For more information, see the Car Usage – Private and Company topic.