The much-loved P35 is one of a host of forms on their way out under reforms of the Pay As You Earn (PAYE) system next year. Here, former Association of Colleges finance specialist Robert Russell looks at the issues those who hold the purse strings should be aware of.

Finance directors have to budget for all the “knowns” and “unknowns” as referred to by former United States Secretary for Defence Donald Rumsfeld, who said: “There are known knowns — there are things we know that we know.

“There are known unknowns — that is to say, there are things that we now know we don’t know. But there are also unknown unknowns — there are things we do not know we don’t know.” And it is the unknowns which so often cause finance departments angst.

Crossing the chairman of the board’s palm with silver might provide a short-term solution, but many find creating a contingency fund more pragmatic and less risky.

The following are changes to existing procedures which may affect budgets for the coming year, and ones that all finance directors should be aware of.

Her Majesty’s Revenue and Customs (HMRC) has determined that the existing PAYE system wasn’t operating as intended and it will be introducing Real Time Information (RTI) from April.

The reforms, with all employers using the new system from October 2013, will result in monthly reconciliation of pay records, replacing the annual reconciliation and potentially-affected cashflow.

The new system will see the abolition of the P35, P14, P46, P38a and P38. New forms coming in their place include full payment submission, employer alignment submission, employer payment summary, National Insurance verification number and earlier year update.

The move to RTI seems innocuous, but results in some surprising changes, including the introduction of reporting of payments below the National Insurance threshold, and HMRC state, “even if the amount is less than £20 a-month”, and the removal of P38s for students.

There will be an additional cost of £150m to £200m a-year across the college sector”

With regards auto enrolment, from October, the Pensions Act 2011 and The Automatic Enrolment Regulations have established new deadlines for employers.

These were stretched for the smallest companies, but most colleges will have to comply at some point in 2013 — this staging is determined by payroll size.

The necessity of enrolling all eligible staff onto the local government pension scheme (LGPS) or teachers’ pension scheme (TPS) is likely to cost colleges quite a bit.

When auto enrolment was introduced in the US in 2006, pension take-up increased to 90 per cent from the previous 50 to 75 per cent.

Colleges, with about 60 per cent uptake of pensions currently, increasing to about 80 per cent, would see an additional cost of £150m to £200m a year across the sector.

Pension contributions increase in April; colleges should be aware that most of their TPS staff will face the second round of increases in their contribution rates from that date.

Those TPS members in colleges with pay freezes will have less take-home pay at the end of April. Most LGPS members will face increases from April 2014.

It should also be noted that in the longer term, employers may well face increases in their contributions from the current 14.1 per cent.

The Department for Education states the employer contribution cap will be set “at 2 per cent above the employer contribution rate calculated ahead of the introduction of the new scheme in 2015”.

Another issue relates to employer’s national insurance contribution rebate for contracted out staff — that is, those enrolled on the TPS and LGPS.

The Treasury has stated it will remove the 5.3 per cent existing contracted-out rebate which public service pension scheme members and their employers enjoy — 1.6 per cent rebate for employees and 3.7 per cent rebate for employers.

The Treasury has not issued a date for the closure, but the rebate will close when the new higher state pension is introduced, which may not be for a few years yet.

The abolition of this would result in additional costs to the sector of between £120m and £160m a year.