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Real Time Information (RTI) - A Practical Guide

Introduction

RTI came into effect from 6 April 2013 for most employers. RTI is mandatory! It is the biggest change to payroll since PAYE (Pay As You Earn) was introduced in 1944. It affects any business running a PAYE scheme for its employees and/or directors.

RTI is a new system for reporting pay, tax, National Insurance and other details to HMRC. It does not change how PAYE is calculated or payment dates, just how it is reported.

Only where no employee is paid above the lower earning threshold (LEL) and has enough tax-free allowance is no PAYE scheme required and so no RTI returns required. If there is a PAYE scheme in place, RTI is mandatory.

Employers will still be responsible for all tax deductions and calculations. However, the big change is that instead of collating figures at the end of the tax year through a P35/P14 return, they have to submit information about PAYE to HMRC on or before the pay date every time a payroll is run.

RTI was introduced in parallel with the Government's flagship policy, the new single welfare payment Universal Credit. The rationale is that people who are looking for work, are casual workers, or on a low income, will receive a monthly payment that reflects their present employment circumstances.

You will need payroll software in order to file the RTI returns or use a payroll service provider. The returns can also be made using HMRC Basic PAYE Tools which is free although it does have limitations such as not producing payslips, only works with up to 9 employees and won't handle more complex situations.

Registration for RTI

There is no specific need to register with HMRC for RTI but you need to be registered for online filing, so if you are already sending over P45's or P46's to HMRC electronically you should already hold a username and password. These details will be used when completing RTI submissions from your payroll software, not directly from the PAYE Online login. You can continue to send expenses and benefits returns [P46 (Car), P9D, P11D and P11D(b)] and receive tax codes and notices through the online login as well as receiving HMRC messages to employers.

Frequency of Reporting

Employers are required to submit records electronically to HM Revenue & Customs (HMRC) each time a payroll is run (be that weekly, monthly or quarterly), instead of annually at year-end.

The RTI Reports

Data quality is absolutely vital to ensuring your company's changeover to RTI is as smooth as possible. HMRC has said that 80% of data quality problems they encounter revolve around employers holding incorrect or inadequate employee names, date of births or NI numbers. Registering employees with dummy NI codes or birth dates is no longer allowed.

There are five new submission files which are part of RTI and all employers will need to understand these and include them in their payroll process.

Employer Alignment Submission (EAS)

This file is a one-off for each PAYE reference and enables HMRC to align the data held by an employer with the data held on their own systems. It is designed to be submitted before any further data is sent to HMRC. Once this has been submitted you have officially joined the RTI scheme. You only need to submit an EAS if the company has 250 employees or more or the payroll system is split into more than one company for the same PAYE scheme.

You will need to have payroll records for all employees you pay even if paid just once a year.

For smaller employers the alignment will be done as part of your first Full Payment Submission (FPS).

Full Payment Submission (FPS)

This file includes employee data, year-to-date and employee payment values and is sent every time a payment is made (be that weekly, fortnightly or monthly) on or before pay day. Employers can submit multiple files, so these can be sent independently of each other, for example if a single company has weekly and monthly employees.

Under RTI, any PAYE scheme with one or more employees earning above the lower earnings limit (LEL) NIC threshold must include all employees on the FPS, irrespective of whether they earn above the LEL NIC threshold or not. The only exception is where no employees are paid above the LEL.

In your first FPS you use for payroll alignment as well, you must include extra details. Also include all employees employed since the start of the tax year, even if they've left since the start of the year, not been paid yet such as irregular employees and those on unpaid leave or left at the end of the previous tax year but not been issued with a P45 yet.

Information included in an FPS includes...

  • Payment & YTD information
  • New Starter/Leaver details
  • Payment after leaving indicator
  • Irregular Payment indicator (use for irregular staff or someone taking unpaid leave so HMRC don't assume they've left your employment)
  • Hours worked
  • Employee name
  • Address - needed for a new employee, if NI number is blank, or if the address has changed
  • Date of birth
  • Passport number, if present (not mandatory but used for employees unable to provide a NI number such as foreign nationals).

Please note a real time submission will not update HMRC records re name, address, etc. of employees. It remains their responsibility to notify HMRC.

HMRC have provided examples of payrolls to ensure you submit your first FPS at the correct time at https://www.gov.uk/running-payroll/reporting-to-hmrc

Where an employee is paid an extra amount between standard paydays you must send another FPS on or before that payment. The same is applicable should you recover an amount from an employee such as to correct an overpayment.

Employer Payment Submission (EPS)

This file is used to notify HMRC of any reductions it is allowed to make to the monthly tax, NI and student loan values submitted via the FPS (statutory payments claimed, CIS deductions suffered etc.) If there was no reduction in a particular month to inform HMRC about the user may still submit an EPS if they want to but do not need to. The EPS can also be used to inform HMRC when there is no payment to be made for a specific period (e.g. a 'NIL Return').

If you operate say a weekly and a monthly payroll you would still send just one EPS.

The return must be filed by the 19th of the following month.

Payment date to HMRC remains unchanged - 19th or 22nd of the following month or special arrangement if in place (e.g.
quarterly payment).

Information in an EPS includes...

  • Employer references
  • Related tax year
  • Details of any Statutory Payments reclaim or compensation that is due in the month
  • Notification if no payment is due i.e. tax and NI liability is zero
  • Questions & Declarations

You can amend the values prior to sending the information to HMRC. For example this can be done if corrections are required for a previous month. You can edit the Current Month and final/last YTD rows.

National Insurance Verification Request (NVR)

This file can be sent by employers to trace a National Insurance number or to confirm if a supplied National Insurance number is correct. NVR's can include a bulk of up to 100 submissions per file, meaning companies with a high staff turnover can easily keep track of this information. You can view the reply to your request via your payroll software through PAYE online. Form CA6855 to trace or check NI numbers is no longer used.

Earlier Year Update (EYU)

Used after 19th April to amend details of any of the year to date details submitted in your final FPS for the previous tax year. Is only for use in years after you start to send in real time information.

Normal Hours Worked Per Week

This field in the FPS should contain the normal hours worked in a week by an employee. Normal hours aren't always the same as contracted hours and need to be calculated. An explanation of what counts as normal hours and how to calculate the figure can be found here - https://www.gov.uk/claim-tax-credits/working-hours.
This field will be used by HMRC to calculate eligibility for tax credits, so it is important you complete it. HMRC have defined bands for Normal Hours Worked per Week. The bands are: up to 15.99, 16 - 29.99, 30 or more and other (for example pension payroll). Therefore if an employee's hours fall within a certain band, it is not necessary to keep changing the calculated value unless they fall into a different band.

Hours worked are not being used for minimum wage purposes by HMRC.

Year End

The year-end process is different under RTI, with no P14s or P35s. Instead you have the FPS each time you pay employees and the EPS for any adjustments you owe.

P60s are still be issued to all current employees at year-end.

Starters

New starters are no longer reported separately to HMRC, they are reported via the Full Payment Submission. You can gather starter information in any form you wish but HMRC have a Starter Checklist [pdf] you can use but it is not sent to HMRC. Keep this information for 2 years. It's a bit like form P46 which is no longer used, neither are P38(S) forms for students (students now go on the payroll).

To make the first submission for the employee you will need to collect all the traditional information from their P45 where they have one and enter information into the payroll system. This will include details of the employees employment situation (statement A, B OR C from the former P46). Where you don't have this information from a new employee P45, use statement B (only job but may have received income from other sources).

Leavers

Leavers are no longer reported separately to HMRC, they are reported via the Full Payment Submission. P45s remain in place that you give to leavers (employee parts) but the P45 part 1 information for HMRC is no longer provided or submitted to HMRC.

You make an employee a leaver after you have done the payroll, but before the FPS. That way they are marked as a leaver on the FPS along with their final payment. If you make an employee a leaver after sending the FPS, they will appear in the next pay period's FPS.

Annual Schemes and Low Paid Directors

Many one-person companies may wish to pay the director just once a year and avoid monthly RTI reporting. If you want to do this, you must first check that your payroll software will cope with an annual payroll, as many main-stream payroll software packages do not.

The second stage is to understand what reports HMRC will require under RTI. An annual payroll must be registered with HMRC. If the payments on which tax and NICs are due are paid to employees annually in a single tax month, you can ask HMRC to treat you as an 'annual payer'. You have to use the same month each year, so if this changes or you start paying more frequently, you need to inform HMRC.

When you make the FPS submission you will need to indicate it is your final submission for the year and answer the end of year questions.

If you do not register the payroll as being annual you will need to submit an EPS to HMRC every month, which shows nil payments made to the employee.

If you want to pay yourself a regular amount every month, and minimise the RTI reporting hassle, your payroll software may allow you to prepare all the FPS returns for the entire year in advance. However, you must check whether your particular payroll software will do this. You won't be able to prepare monthly FPS returns for the entire year in arrears, those FPS reports must be done in advance or at the time of payment. If you do report in advance and then something changes you will need to file a revised FPS to replace the original.

For companies with the only directors being low paid directors paid above the LEL, even if no tax or NI is due, RTI submissions are still required.

HMRC believe the hours worked figure will be 30+ for most directors but as long as the director does not have a contract of employment there are not any minimum wage implications. Of course, if your hours are a lot lower that is what you should report.

If you pay less frequently, say quarterly, you will need to submit an FPS quarterly and an EPS in all other months to indicate nil payment is due.

Daily Paid Staff Concession

There is an "easement" in respect of daily paid staff where all of the following conditions are met...

  • payment is for work done on the day of payment
  • payment is made non-electronically (e.g. cash or cheque)
  • payment is made at a time or place where it would be impractical for it to be reported 'on or before' the time of payment
  • where the employer cannot know how much the payment will be in time to report the information in advance of the payment being made.

In such circumstances the return should be made at the earliest of the next regular return or 7 days following the day on which payment is made.

RTI Affect on BACS Payments

The new RTI legislation will have an effect on how the payments are submitted via BACS if that's how you pay your employees. That means you pay your employees directly into their bank accounts using your Service User Number (SUN) which is different to paying by internet banking. If you use bank software you will not be affected by the changes. However, if you use a BACS Accredited Software Supplier (BASS) or a BACS accredited bureau service you will be affected by the changes.

All PAYE and pensions BACS files will require an additional four characters entered into field 7 (spare field) in the BACS submission file, which will be used to identify the payment against the online submission.

Any other payments made by BACS will not be affected by these changes, only PAYE and pension's payments will be affected.

Construction Industry Scheme (CIS)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare 'CIS deductions suffered', to offset any liability due to HMRC.

Employing Carers in Your Home

If you use the Simplified Deduction Scheme on paper and you employ a carer in your home and you want to continue to file paper returns you must notify HMRC using form RTI 15. You can't do this if you file online or use the Simplified Deduction Scheme for other domestic help.

Correcting Errors

If you need to correct an error in a return, full information is available at https://www.gov.uk/payroll-errors

Penalties

Penalties for inaccurate returns will continue along the same lines as before RTI.

It is also worth noting that employees Universal Credit and State Pension could also be affected by incorrect or late returns which is unlikely to foster good workplace relations!

How We Can Help

For further advice about dealing with RTI please contact us.