Autumn Statement 2016: Employment Tax
One of the biggest headlines as far as employment tax is concerned – although it was not altogether unexpected – was the demise of tax advantaged salary sacrifice schemes. These will remain effective for items HMRC approve, but otherwise the tax advantages of these schemes will be lost. In addition, there are changes to the National Insurance treatment of termination payments (although not until April 2018), the scrapping of the Employee Shareholder Status and confirmation that individuals providing their services to public sector bodies through personal service companies may find that they suffer tax deductions in the same way as employees. There is a lot for employers to consider and a raft of consultations which are expected to result in more changes in the coming year.
The tax and employer’s National Insurance advantages of salary sacrifice schemes will be removed from April 2017, except in respect of arrangements relating to pensions (including advice), childcare, Cycle to Work scheme and ultra-low emission cars. Arrangements in place before April 2017 will be protected until April 2018 and arrangements for cars, accommodation and school fees will be protected until April 2021.
KS Comment: It is good news that the most popular items included in salary sacrifice arrangements will be excluded from these changes. However, subject to the transitional rules, it will no longer be possible to provide other benefits – such as mobile phones – in this way from April 2017.
This measure risks creating an uneven playing field, as new recruits will be able to negotiate their salary and benefits package without entering into a salary sacrifice, whereas existing employees will have lost the flexibility to vary their salary and benefits packages in order to achieve the same outcome in a tax efficient way.
From April 2018, termination payments over £30,000 that are subject to income tax will also be subject to employers’ NICs. The first £30,000 of a termination payment will remain exempt from both income tax and National Insurance.
KS Comment: This measure will remove the long-standing National Insurance advantage for employers making large termination payments. Employers should consider whether they can bring forward any large termination or redundancy payments forward in order to achieve a 13.8% saving on termination payments above £30,000 before the rules change in April 2018.
Update – 5 December 2016: It has also now been confirmed that from April 2018 all payments in lieu of notice (whether contractual or not) will be subject to tax and NICs in the usual way. In addition, foreign service relief, for employees who have spent time working outside the UK, will be removed.
Employee Shareholder Status
The Employee Shareholder Status scheme involved employees giving up certain employment rights in exchange for shares which would be exempt from capital gains tax. In Budget 2016, the benefit of this scheme was limited to a capital gains tax exemption of £100,000 – due to perceived abuse of the previously uncapped exemption. The Chancellor today announced that the tax advantages linked to shares awarded under ESS will be abolished entirely for arrangements entered into on or after 1 December 2016.
KS Comment: When introduced, the scheme had a mixed reaction as many individuals were nervous about the surrendering of certain employment rights. However, the capital gains tax exemption ultimately proved very popular and many businesses used this scheme to benefit their key executives with tax exempt equity awards. The restriction of the CGT exemption earlier in 2016 was thought to be the only tinkering the scheme would suffer but the Chancellor has decided that the action of his predecessor was not enough, so has scrapped the scheme entirely.
Off-payroll working rules
The Government will reform the off-payroll working rules in the public sector from April 2017 by moving responsibility for operating the rules – and for paying the correct tax – to the body paying the worker’s company. This means that those working in a similar way to employees in the public sector will pay the same taxes as employees.
KS Comment: There is no indication yet that these rules will be extended to businesses outside of the public sector, but HMRC can more effectively police Personal Service Companies by visiting the businesses using them rather than the individual companies themselves, and so this extension could be an inevitable development.
Valuation of benefits in kind
The Government will consider how benefits in kind are valued for tax purposes, publishing a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget 2017.
KS Comment: The general rule for valuing benefits, in the absence of special rules in place for company cars, employer loans and accommodation, is to use the cost to the employer of providing the benefit. This rule works very well for employees where benefits with a high market value can be provided at a low cost to the employer – for example an energy company providing free gas to employees, or an independent school providing free schooling to children of the faculty – and we can probably expect the value of taxable benefits in these circumstances to increase.
National Insurance thresholds
The thresholds for employers’ and employees’ National Insurance will be aligned from April 2017, meaning that both employees and employers will start paying National Insurance on weekly earnings above £157.
KS Comment: Consistency between these thresholds is sensible but as most payroll systems are computerised and given there was only £1 per week of difference between the thresholds in 2016/17, in practice this is a very minor amendment.