Philip Hammond delivered his first Autumn Statement last week and the first financial statement of Theresa May's leadership.
Alongside the usual announcements about the governments successes there were important clarifications and statements made that will have significant impact on employers.
Following on from its technical consultation over the summer the government has announced that it will continue with its proposed simplification of the termination payment regime, retaining the £30,000 exemption but subjecting amounts in excess of £30,000 to employer’s national insurance with effect from April 2018.
In an attempt to simplify the proposed changes it has also been announced that tax will only be applied to amounts (that would otherwise have fallen to be taxed as termination payments) which equate to an employee’s basic pay if their notice period is not worked. This is a welcome change as the draft legislation released during the summer went much further than this, taking into account benefits in kind and potential bonus income, resulting in a mechanism that was both complicated and uncertain for employers to apply.
Despite this simplification, employers should be aware that the changes will still likely make terminations costlier. The reasons for this are twofold. Firstly, the changes to the treatment of PILONs and compensation payments above £30,000 will increase liability to employer NICs. Secondly, increased financial packages may have to be offered to exiting employees to counter the lower net figure the employee is likely to receive under the new regime.
As the employee's liabilities to income tax and employee NICs will also expand following the changes, employers will wish to take extra care that a robust tax indemnity is put in place on termination.
You can find our blog on all of the proposed changes to termination payments here - http://blog.aab.co.uk/termination-payments-termination-of-complex-tax-and-national-insurance-treatment
A Fair Sacrifice?
Confirmation has been received that the tax and employer national insurance advantages of salary sacrifice schemes will be removed with effect from April 2017, save for arrangements relating to pensions, childcare, cycle to work and ultra-low emission cars.
Successive governments have expressed concern about the cost to the Exchequer from the use of arrangements where employees give up an amount of cash salary for one or more benefits that may be subject to less tax and/or NIC and the original proposals included all cars being caught by the changes to the rules.
Arrangements that are already in place before April 2017 will be protected until April 2018, with arrangements for cars, accommodation and school fees benefitting from protected status until April 2021.
It is questionable whether this change will be fair to all employees as there will, for example, still be some employers who offer benefits outside of a salary sacrifice arrangement and some who do not. While we welcome the change to allow ultra-low emission cars to continue to be taxed on the current basis we remain concerned that the impact on the UK car industry in particular – and therefore the UK's economy – may be more profound than any perceived fairness that the change brings about.
Nevertheless, it is good to see that pensions will be exempt from the changes given that many employers are using this as a way to fund what was another substantial drain placed on them by Auto Enrolment, and we would encourage any employers set to auto-enrol in the next few years to consider the advantages of salary sacrifice for pensions in this regard.
Tax Planning or Tax Avoidance?
Employee shareholder status (ESS) was introduced to allow employees to obtain shares in their employer's company under favourable income and capital gains tax (CGT) terms in return for giving up certain employment rights.
The Chancellor announced in the Autumn Statement that the income tax and CGT advantages would be withdrawn on the basis that ESS is being used primarily for tax planning by high earning individuals.
The change will be effective for employee shareholder agreements made on or after 1 December 2016 where the employees have been offered, but have not accepted, employee shareholder status as at 23 November 2016. This is said to meet the government's objective of sustainability and fairness in the system of tax reliefs.
Not surprising, but welcomed news from the Autumn Statement is that the Government has confirmed it will simplify the PAYE Settlement Agreement (PSA) process, as outlined in the September 16 consultation document.
The Government consulted on whether or not the PSA process could be made easier. This didn’t include changing the PSA legislation, only the process by which employers apply for a PSA.
So what does this mean? From the scope of the government consultation we expect to see:
- Removal of pre-agreement of items included in the PSA
- Online submission
- Removal of the criteria of “minor”
- Alignment of Class 1B NI payments with the Class 1A payment dates
We will of course keep you updated as this one progresses.
Time to Make Good
It has now been confirmed that employees who want to make good on benefits in kind will need to make the payment by 6 July each year, rather than 30 April as previously suggested.
The government will include, in the Finance Bill 2017, a measure, previously consulted on, that will ensure an employee who wants to ‘make good’ on a non-payrolled benefit in kind will have to make the payment to their employer by 6 July in the following tax year. ‘Making good’ is where the employee makes a payment in return for the benefit in kind they receive; this reduces its taxable value. This will have effect from April 2017.
Living Wage Pressures
It was also announced that the National Living Wage (NLW) will increase to £7.50 from April 2017.
The Chancellor used the rise to £7.50 for the National Living Wage to demonstrate how the Conservative Government does give pay rises to low income, working households. Whilst obviously good for employees at lower income levels, another increase will only put further pressure on businesses.
Alignment does actually mean Simplification!
The Office of Tax Simplification (OTS), as part of their many reports of late, have recommended a very quick and easy simplification measure. The government have accepted this recommendation and will from April 2017 align the employer and employee NI thresholds. This will mean, from April 2017, both employees and employers will start paying NI on weekly earnings above £157.00.
If you’re concerned about how any of these changes could impact your business and how to prepare for them, please contact Charlotte Stewart, Integrated Employment Solutions Manager (Charlotte.Stewart@aab.uk), or your usual AAB advisor.