While the introduction of PayDay reporting is the biggest of the proposed changes impacting employers there are two other changes which should be considered.
The first will impact all employers - "Tax treatment of holiday pay paid in advance"
Having said the proposed change will impact all employers, the reality is most employers would not have given the Tax treatment of holiday pay paid in advance any thought at all and they will have just taxed the advanced leave as one period unless their payroll system specifically handled it differently.
Under the proposed change employers will have the option to treat holiday pay paid in advance as a lump sum as if it was paid over the pay periods to which the leave relates, rather than as an extra pay.
If additional payments are subsequently made for a pay period to which the leave relates, employers will have to calculate PAYE based on all earnings for that period, less the PAYE already collected. This will apply to pay periods partially taken as leave and partially worked.
While this new option is more precise, it could increase compliance costs for employers not using payroll software. Therefore, it will not be mandatory and employers will be able to continue to use the existing extra pay method. For consistency, salary or wages paid in advance will be treated similarly.
The other change which not yet been finalised and given the change of government may be handled differently is the Removal of the Payroll - PAYE Intermediaries subsidy
In reality, most employers would not know the subsidy even exists but it has been in place for over 10 years. Under the scheme providers of PAYE management services, generally, payroll providers who manage some or all of the payroll process for the employer can receive a subsidy to cover the cost of providing this service.
As part of this package of proposals the payroll subsidy will cease from 1 April 2018.
Currently the Government subsidises the cost of eligible employers engaging a listed PAYE intermediary to meet the PAYE obligations on behalf of the employer. The subsidy is paid at the rate of $2 per employee, per pay run, for a maximum of five employees.
Because the subsidy incentivises only one model of payroll service the payroll subsidy may distort employers’ choices between a range of different types of payroll products and services.
In future, these services will include significantly improved electronic services from Inland Revenue which will enable employers who do not use payroll software to calculate PAYE and other deductions and provide PAYE information to Inland Revenue.
As mentioned most employers, especially small employers, who use this type of payroll service won't have known that the provider was receiving this subsidy. The question will be how will the removal of the subsidy impact the prices changed for providing the payroll service.
I have always believed the provision of this subsidy has always incentivised the wrong people. It was originally introduced as a way of trying to help the small employers who found the process of lodging a once monthly return and making their PAYE payments on time a problem ie reward bad behaviour. The employer who always lodged their IR348 return on time and paid the PAYE when due received nothing?
The reality is that this is not an onerous job, any more than managing GST is and most if nor all SMEs are capable of handling it.
The question you should be asking now if you are using a payroll service provider who manages your PAYE for you is - What will happen when the subsidy goes? and perhaps its time that you started handling the payroll process yourself given the fact you are doing most of it now anyway.
If you would like to read more about the proposed changes we have covered in this and our previous post you can read the full proposal document here: