Burden after burden: relentless changes to employment taxation

Photo of Justine Ricccomini By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)

15 June 2017

Employers and agents may be forgiven for being out of breath when it comes to employment tax and employment law – keeping up with the changes is currently requiring considerable stamina.

Year upon year, there seems to be numerous changes involving employers or employees, each of which is implemented at the earliest opportunity.  Yet the consequences of this can manifest themselves in the form of bad legislation, increased administrative and cost burdens for employers, complication and that other thing no-one wants – uncertainty.

At the same time, HMRC needs adequate resources to cope with the implementation of vast swathes of new legislation, and to be able to fully support employers with these changes, but the way in which it is being handled at the moment is causing concern amongst stakeholders.

One of the things that is often forgotten in the chase is HR.  Everything that happens in an employment tax context has an impact on employees and the HR department also has to absorb the changes.  

A good employment tax practitioner will always consider the employment law side of things and the impacts those changes are likely to cause.  However, some of the changes HMRC is making currently clash directly with the HR agenda.

Salary Sacrifice

The announcements in the 2017 Spring Budget put paid to many different types of salary sacrifice scheme, and the details of this are still being worked out between employment tax experts and HMRC.

Businesses must decide whether they still wish to continue with what they originally offered their employees (which will involve a significant tax cost) or whether to revert back to gross pay.  Either way, there will be a NICs cost involved for the employer, and employees will pay higher tax bills as a result.  HR managers will also need to understand the contractual implications inherent in these changes.

The following table shows the timeline for the transition of salary sacrifice schemes as we knew them to OPRA – Optional Remuneration Arrangements.  

April 2017

April 2018

April 2021

All schemes continue to earliest of next trigger point, or April 2018, unfettered

Existing schemes for Cars, Vans, Fuel, Living Accommodation and School Fees (set up prior to 6 April 2017) can continue to April 2021.  

Pensions, Cycle to Work, Child Care and Ultra-low low CO2 Cars (75g/km) continue indefinitely

Prepare for 2018 & 2021 phasing out/ transitional arrangements

All other new & existing schemes must be closed except Pensions, Cycle to Work and Child Care

Schemes for all other Cars, Vans, Fuel, Living Accommodation phased out

Expenses consultation

The ongoing employee expenses call for evidence which was due to close on 12 June now closes on 10 July as a result of the election – so there is still time to consider submitting a response.  ICAS has prepared a response which will be submitted to HMRC in June and which will be publicly available.

Employee shareholders

The tax incentives originally conceived during the last coalition Government have been shelved and are no longer open to new entrants, as they were found to only being used by companies to reward top executives rather than be more evenly available across all workers.  

As far as HR departments were concerned, the legislation meant issuing revised employment contracts and the need to make participating employees aware that they were trading their £2,000 of shares for certain employment rights – something which could have cost them a lot more than £2,000 had they then been unfairly dismissed.

This idea is yet another example of too-hurriedly introduced ‘vanity project’ legislation that does not have the desired effect.

Termination payments

The legislation drafted for the Finance Bill on the new method of calculating termination payments is another case in point.  ICAS submitted a response to the recent consultation  on termination payments pointing out that the proposed new section 402D of ITEPA 2003 would result in disproportionately high tax bills for people whose pay goes down in the period before the ‘trigger date’, for example, due to short time working, reduced hours, sickness or pregnancy.  

Scottish Income Tax

The income tax computation for a Scottish taxpayer with anything other than PAYE earnings is a whole lot more complicated.  

Because the Scottish Income Tax rates and bands apply only to non-savings, non-dividend income, this results in a computation which has to be done in many parts to work out the income which still remains taxed at UK rates and those taxed at Scottish rates.

Some distortions with pensions tax relief, Marriage Allowance, Child care vouchers (Basic Earnings Assessment) have also arisen, so care needs to be taken.

Misalignment of Income Tax and NICs

Now that Scottish ministers have introduced the first divergence in income tax rates since PAYE began, we find ourselves in the opposite position to what the Office of Tax Simplification recommended in its two 2016 reports on Income Tax and NICs alignment.

Scottish taxpayers earning between £43,000 and £45,000 (assuming they are entitled to the personal allowance of £11,500) are now Higher Rate taxpayers unlike their English, Welsh and NI counterparts, and yet they still pay NICs at the rate of 12% up to £45,000 worth of earnings instead of stopping at £43,000.  This, of course, is due to the non-alignment of UK NIC upper threshold and devolved Scottish Income tax higher rate threshold.

ICAS calls upon the incoming government to be mindful of the burdens that changes in tax legislation bring: constant changes result in complexity and increase the compliance burden for business and taxpayers.

Topics

  • Tax

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