Consultation document Helping users of HMRC s Basic PAYE Tools undertake automatic enrolment calculations March 2015
Introduction This consultation document presents a proposal for mitigating the risk that small and micro employers, who use HMRC s Basic PAYE Tools (BPT), will not have access to adequate software to be able to carry out their automatic enrolment duties. It summarises the evidence of this risk and goes on to describe the proposal and rationale behind it in more detail. The final section explains how to give feedback. What is the risk? The BPT is free payroll software for small and micro employers which assists them in complying with the income tax and national insurance requirements. The BPT will not be updated to provide automatic enrolment functionality. HMRC s website and the BPT will refer users to, and/or provide web links to, The Pensions Regulator s website for assistance on this matter. There is a risk that small and micro employers (or their agents) who are users of the BPT will not have access to adequate software to support their automatic enrolment duties. Whilst there is no legal requirement to have software, our experience to date indicates that software supports an employer s compliance. In particular there is a risk that without adequate software they may not know how to assess their workers or calculate contributions. In addition, they are likely to have no automated mechanism to keep statutory records. This presents an increased risk of both initial and ongoing non-compliance amongst BPT users. Evidence Approximately 200,000 PAYE schemes used by employers due to take on their automatic duties before August 2017 are managed using the BPT. These employers (or business advisers using it on their behalf) have demonstrated an unwillingness to purchase or utilise free payroll software available in the market to submit their income tax and National Insurance returns. Our research indicates that half (54%) of employers with less than nine workers would be unwilling to pay to upgrade their payroll software for automatic enrolment 1. Given their behaviour to date this figure is likely to be higher amongst BPT users. Even though we anticipate that as they get closer to their staging dates the number of employers willing to pay will increase, the evidence nevertheless suggests that there will remain a group of employers who will not pay for automatic enrolment software support. 1 Automatic enrolment employer research 2014. 2
Evidence At present we are aware of one free-to-use commercial payroll software package that supports both automatic enrolment and PAYE. There are several more low-cost payroll products where no additional charge is made for automatic enrolment functionality. However, the level of automatic enrolment support offered by these products varies. An alternative source of support for BPT users might be via their pension scheme. A number of the pension schemes available to micro employers offer software that calculates eligibility and contributions. However, this is not always free of charge and is not a standard offering across the market. Those that do not have access to payroll software, or equivalent functionality from their pension scheme, will be required to undertake a range of manual calculations, decisions and actions in each pay reference period (PRP) in order to comply. For some BPT users, for example employers with workers whose earnings do not fluctuate, a lack of software may not result in a high risk of error. However, those with more complex workforces, such as those with fluctuating pay and/or pension schemes requiring contributions on banded earnings, are at greater risk of making mistakes. For these types of employers, even if they were initially compliant, a lack of ongoing support could lead to compliance breaches in the longer term (eg they may find it difficult to keep track of when a worker becomes eligible for automatic enrolment for the first time). While there are a number of encouraging developments in the market that might reduce the risk of non-compliance among BPT users, our analysis is that unless there are significant further developments on both the supply and demand side of the market there will continue to be a reasonably large group of BPT users who do not access free-to-use third party software and attempt to comply with automatic enrolment without software support. This proposal seeks to address this residual gap. 3
Proposal In the light of the evidence and risk identified, we propose to publish on our website a range of options an employer typically has when considering how to carry out the assessment and contribution calculation processes. We will present the options in order of which we consider to best support employers in complying quickly and easily with automatic enrolment. The options will be to: 1. use commercial payroll software/services to comply with automatic enrolment. 2. use a third party (non-payroll) provider (including a pension provider that offers assessments), which will mean ensuring pensions contributions are input into the BPT in each pay cycle. A third option, to use a tool provided by us, is the subject of this consultation and would only be undertaken if we consider there to be insufficient coverage in the market for BPT users. The concept of a basic assessment tool is that it could be used by employers, particularly BPT users, who choose not to undertake options 1 or 2 above. The tool, whilst proposed and positioned for BPT users, would be available for any employer to use. To be consistent with the BPT, the proposed tool would calculate up to nine employees in a pay reference period. An employer with more than nine employees would need to create multiple reports in order to assess all of their staff. The proposed tool would be separate from basic contribution/worker calculators we already provide on our website. As a minimum the proposed tool under consultation would include some basic functionality to be used before staging and for each subsequent pay cycle to: assess all workers each pay cycle calculate pension contributions for workers based on qualifying earnings allow the user to store worker information so they only have to enter the pay-related data each cycle be based on pay data entered and inform the employer what actions are needed for different categories of worker (eg whether they are an eligible or non-eligible jobholder or an entitled worker) 4
In addition to the basic functionality described above, more advanced functionality could also be considered, such as: Output files: the tool could expect the user to 'cut and paste' the results and/or manually input them into the pension provider s required submission format. A more advanced version could include a data output function to allow the employer to upload/submit the results in a electronic file to the major pension providers in the micro employer market and/or used by third party software. Record-keeping duties: the tool could provide a function such as a printable or storable report to fulfil ongoing record-keeping duties. The full tool functionality for consideration is described in the appendix to this document. The tool, if developed, would sit alongside and link to generic educational material aimed at helping employers understand, plan and comply with their duties. If a tool were provided, to ensure users were encouraged to consider alternative software on an ongoing basis, we may also consider the possibility of providing links to the web pages of industry-representative bodies that provide educational information about the wider payroll and automatic enrolment software market. We welcome the industry s view on suitable methods of supporting BPT users to consider market solutions. Rationale A tool is being considered because BPT users have already chosen not to use software available in the market for tax/payroll purposes. Regardless of our preferred options which encourage take up of existing market solutions, there is likely to remain a proportion of BPT users who choose not to. Without support to assess workers or calculate contributions there is an increased risk that BPT users may be non-compliant with automatic enrolment duties. The basic tool under consideration aims to address this risk while creating no or minimal impact on the automatic enrolment software and related markets. In attempting to address the risk we also need to be mindful of the end to end process for these users, including: how and when the user would enter the data into the tool how the user would enter the calculated pension contributions into BPT how the user would get the enrolment/contribution data to a pension provider each cycle 5
If we find evidence that there are sufficient free-to-use/low cost software products or services available to BPT users in the market (that have similar or better functionality than the tool we are considering), then we would take this into account when making a decision whether to develop a tool. As part of any decision we would need to understand how BPT users could find these free software/services and whether meaningful numbers would in fact make use of them. If, as a result of the consultation, we publish a tool, it would only be available for a temporary period whilst there is a justifiable need for it. The tool s effectiveness and impact on the market would be monitored and a review of its suitability would be conducted at least annually. If a tool is published the level of functionality included could be phased in over time. Your feedback We welcome feedback on this proposal, in particular the views of payroll software providers, pension providers, firms in automatic enrolment software-related markets and employer representative bodies, on the following questions: 1. Is there a need for us to develop a tool for BPT users? 2. Is the proposed tool a proportionate response to the risk identified? 3. What kind of functionality for the tool strikes the right balance between supporting BPT users with automatic enrolment compliance and at the same time maintaining an incentive for them to seek a better automatic enrolment solution from the marketplace? Please comment in particular on both the basic functionality proposed and the more advanced options that could be considered 4. How might the proposal affect the marketplace? 5. What more could be done to encourage BPT users to switch to a system which provides integrated support for automatic enrolment? Closing date This consultation will be open until 19 May 2015. Once the consultation period has closed, we will take into account the responses received when finalising our proposal. We intend to publish our response in summer 2015. 6
Responding to the consultation Responses may be made by email to: Pension_Reforms_for_Software_Developers@tpr.gov.uk Our preference is for responses in electronic format. But, alternatively, you can submit your response by post to: Neil Esslemont The Pensions Regulator Napier House Trafalgar Place Brighton BN1 4DW If you have any queries about this consultation, please contact Neil Esslemont at neil.esslemont@tpr.gov.uk. We may need to share the feedback you send us within our own organisation or with other government bodies. We may also publish this feedback as part of our response to the consultation. If you wish your response to be kept confidential, please make this known and we will take the necessary steps to meet your request. However, please be aware that, should we receive a formal request under Freedom of Information legislation, we may be required to make your response available. When responding, please advise whether you are responding as an individual or on behalf of an organisation (and if the latter, which organisation). 7
Government consultation principles For the purpose of this consultation paper, we are following the government s consultation principles, found at www.gov.uk/ government/publications/consultation-principles-guidance. The key consultation principles are: Departments follow a range of timescales rather than defaulting to a 12-week period, particularly where extensive engagement has occurred before. Departments need to give more thought to how they engage and consult with those who are affected. Consultation should be digital by default, but other forms should be used where these are needed to reach the groups affected by a policy. The principles of the compact between government and the voluntary and community sector continue to be respected. As part of developing the consultation, we considered our responsibilities under the accountability for regulatory impact (ARI) principles in terms of how the proposal would impact on affected employers. At present our proposal is not finalised and therefore we have not undertaken a full business engagement assessment (BEA). We will review our ARI position depending on the solution we choose to develop following the consultation responses. Feedback on the consultation process We value your feedback on how well we consult. If you have any comments on the process of this consultation (as opposed to the policy issues raised) please contact our consultation co-ordinator at the email or postal address listed on page 7 (separately from your response to the consultation). 8
Appendix: Proposed tool Tool functionality If a tool is developed, the design and functionality would be reviewed based on the feedback received. For the purpose of the consultation we have separated tool functionality into basic and advanced levels. The design principle for a basic tool would be to offer a solution to calculate worker status and contribution requirements to enable BPT users to comply with their duties. However, additional functionality beyond this design principle would be limited. It is proposed that a basic tool could perform the functions listed in the following table. Function Basic functionality Scope Support a single employer with up to nine workers Contribution calculations Worker information Support a single pay frequency, based on a single tax-based PRP, with the start/end of the PRP derived from the pay frequency and date of pay day Assess worker category, using the appropriate and current automatic enrolment thresholds and state pension age (SPA) for each worker Calculate pension contributions for members of a single automatic enrolment pension scheme, which may either be a: a. legal minimum banded qualifying earnings (QE) based pension scheme, or b. pension scheme type of other to enable an employer to pay more than the minimum (where the user will have to input the monetary value of pensionable earnings per member each cycle) Allow appropriate worker contribution, expect the user to specify whether the pension scheme uses net pay arrangement or tax relief at source in its handling of tax relief Support for opt-ins Manual entry of joining requests and opt-outs Store the date a worker becomes a member, opts out or ceases membership of the pension scheme Hold other appropriate worker information (eg employment start and end dates) 9
Appendix: Proposed tool Function Basic functionality Action notifications Based on pay data entered, inform the employer what actions are needed for different categories of worker (eg whether they are an eligible or noneligible jobholder or entitled worker) Link any relevant automatic enrolment resources, eg listing any statutory letters, which may need to be issued Data storage No data will be permanently stored on the behalf of the employer on our systems At the end of each pay cycle the tool will save all data into a file on the user s computer Output The user would be able to cut and paste the contribution results and/ or manually input them into the pension provider s required submission format Generate a printable report each pay cycle More advanced functionality under consideration, in addition to the basic functionality described above, might include the following. Function Advanced functionality Output Generate a data output file, in one or more industry compatible formats, containing all of the tool s data. The output could, for example, be used to submit pay cycle contributions to the pension scheme being used The output file would be in a format based on one or more open industry standard where possible (any data fields not available in this standard will be in a format published by us) By storing the output data file generated each pay cycle in one or more open (published) industry data formats, provide a mechanism for any third party supplier to provide additional services (eg worker communications and/or send enrolment/contribution information to a pension provider) Recordkeeping Generate report suitable for record-keeping purposes Allow the user to input additional data (not explicitly used by the tool) for the purposes of record-keeping, such as the Employer Pension Scheme Reference (EPSR) Re-enrolment Allow the user to set a (valid) re-enrolment date (or will default to staging date + 3 years) and notify accordingly those workers to re-enrol 10
Appendix: Proposed tool Any tool developed would have to update pension contribution rates in line with increases to the legal minimum in Oct 2017 and Oct 2018 and any changes relating to qualifying earning thresholds. Regardless of the basic or more advanced functionality under consideration, we propose that the tool will not support the following. Function Not supported General Contribution calculations Calendar-based PRPs (it will use tax based PRP) Postponement Calculation of refunds Calculation of pro-rated contributions (members joining part way through a PRP will be deemed to have a zero contribution for that period, whilst leavers will always make a full contribution based on their pensionable pay in their final PRP) Salary sacrifice Calculation of entitled workers contributions, unless they are members of the same qualifying pension scheme (ie it will calculate the contributions for an entitled worker on the assumption they are in a qualifying scheme, so there will be an employer contribution) Output Automated integration with the BPT Generation of letters (but the report will show the user when a letter is required) 11
Appendix: Proposed tool User experience The tool, if developed, would be as similar as practical in its look and feel to the BPT, whilst bearing our visual brand. Where necessary, the user will be directed to other tools (eg staging date and planning tool) and other appropriate information (eg letter templates) on our website. Prior to staging, the user would be able to: set up the tool carry out worker assessments and calculations for test/planning purposes At staging, the user could: input any employer, pension scheme and non-pay related worker data not already entered (depending on final tool functionality) the employer will have to input the worker pay related data each pay cycle Each pay cycle: The user would load the file created by the tool in the previous pay cycle, which would retrieve any worker information entered (depending on final tool functionality). The user would have to manually input the pay related worker data into the tool and other data changes eg details of new workers. The tool would calculate the worker and employer contributions. The tool would save all data into a file on the user s computer at the end of the pay cycle (for re-import next cycle). The user may have to: a. manually enter the pension contribution amounts of any members and, when a worker needs to be enrolled, the enrolment information into their pension provider s system b. use the worker information to manually create any statutory letters required (unless the pension provider generates all worker communications), and/or c. if it is decided that the tool would create an output file in a suitable industry format, use a third party supplier for value added services (eg worker communications and/or upload the data file to the pension provider) The user would then have to take our tool s calculated pension contributions for any existing or new members and manually type them into the BPT before completing their gross to net calculation and RTI return. 12
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