Employment tax changes in Spring Budget 2017
The Chancellor’s Budget announced a small number of employment tax related measures.
Several measures announced before the Budget will also be taking effect over the next few years.
Announced in the Budget
Personal Allowance and Higher Rate Threshold
The Chancellor confirmed the Personal Allowance at £11,500 for 2017/18 and that it will reach £12,500 by the end of this Parliament. In addition, the Higher Rate threshold has been raised to £45,000 (as opposed to the Scottish Income Tax Higher Rate threshold which is set at £43,000).
Employed and Self-employed tax bills to be aligned
The overall tax bills of the employed and self-employed are to be more closely aligned, in line with initial findings from the Taylor review, which is due to be published in the summer.
This follows on from the Office of Tax Simplification’s reports of 2016 which recommended the closer alignment of income tax and NICs on the earnings of employed and self-employed workers.
This was highlighted by the Chancellor in his speech when he stated that a self-employed person earning £32,000 per annum would pay just £2,300 in National Insurance whilst an employed person would generate £6,170 in employees and employer’s NICs on the same income. As such, Class 4 NICs are to be raised to 10% from 2018 and again to 11% from April 2019 – raising £1.4bn of funds for the exchequer.
Parental Benefits Review
A consultation is due to be launched in the summer on the issue of parental benefits, so this is one to watch to see which way the Government wants to go.
Whilst not income from an employment, we note that in addition to the changes to intermediaries’ legislation already announced, the tax-free dividend allowance will be cut by more than half from £5,000 to £2,000 from April 2018, which could act as a disincentive to people wishing to set up and work via intermediary companies and paying themselves a small salary at or just above the Personal Allowance and topping it up with a dividend. A TIIN was published on 8 March 2017.
Calls for evidence and a consultation
The Chancellor announced two calls for evidence would be issued on 20 March: on the taxation of benefits in kind and employee business expenses. Also on 20 March a consultation document will be published on employer-provided accommodation.
Other employment-related announcements
HMRC will publish guidelines in spring 2017 for employers who make payments for image rights to their employees, to improve the clarity of the existing scheme.
National Insurance Employment Allowance
HMRC is actively monitoring compliance with the employment allowance, following reports of some businesses using avoidance schemes to avoid paying the correct amount of NICs. The government will consider taking further action if this avoidance continues.
NIC time limits
As announced in the Autumn Statement last year, the government will align the time limits for the recovery of NICs debts with those for tax. To allow time for a full consultation on the draft legislation, it will be introduced in a future NICs Bill.
Qualifying recognised overseas pension schemes (QROPS)
The government will legislate in Finance Bill 2017 to introduce a 25% transfer charge on pension transfers made to QROPS. There will be exceptions, allowing transfers to be made tax free in certain specified circumstances. There will also be legislation in the Finance Bill to apply UK tax rules to payments from funds that have had UK tax relief and have been transferred, on or after 6 April 2017, to a QROP. UK tax rules will apply to any payments made in the first five full tax years following the transfer, regardless of whether the individual is, or has been, UK resident in that period.
Not announced in this Budget, but coming in anyway
Income Tax and NICs – aligned or misaligned?
As we know, Scotland has announced its rates and bands for 2017/18 and has decided to set its Higher rate threshold at £43,000. However, the NIC threshold, which is a UK matter and not devolved, is aligned with the UK tax Higher Rate threshold of £45,000. This not only means Scottish taxpayers’ Income Tax and NICs are misaligned, but that all UK taxpayers will pay more NICs as they will now have to pay NICs at 12% on the first £45,000 of their income – a measure which has slipped in unannounced.
Optional Remuneration Arrangements (Salary Sacrifice as was)
From April 2017, what we once called Salary Sacrifice or Exchange is now to be termed ‘Optional Remuneration’. From April 2018, optional remuneration will be closed to all new schemes unless they are specifically created to cater for the provision of pensions, cycle to work and child care. Existing schemes which cater for the provision of cars, vans and fuel; living accommodation; school fees are allowed to continue until they are phased out in April 2021, with the exception of ultra-low emissions cars, with emissions not exceeding 75g CO2 per kilometre. All other types of salary sacrifice arrangements must cease from April 2017.
Termination payments – all PILONs taxable from April 2017
Budget 2016 and Autumn Statement 2016 set out the power for the Government to legislate in Finance Bill 2017, to “tighten and clarify the tax treatment of termination payments”. All PILON payments are, from April 2018, taxable as earnings and employers are required to tax the equivalent of an employee’s basic pay if notice is not worked, using a prescribed calculation.
Also, to complement the Government’s Income Tax and NICs alignment programme in line with Office of Tax Simplification recommendations, employer NICs will be payable on any elements of a termination payment exceeding £30,000 on which Income Tax is due. The first £30,000 of a termination payment will remain exempt from Income Tax and NICs. Foreign Service Relief is also to be abolished from the same date.
Gig Economy – to be tackled as it represents a £4bn cost to HMT
The tax challenges presented by the Gig Economy, where workers generally have a series of short-term, self-employed or zero hours contract-based working arrangements are costing the Government £4bn, according to the Chancellor and the OBR. This is mainly due to lower National Insurance receipts. However, changes in the way people work have also given rise to some high profile employment tribunal cases and VAT concerns. Following the Office of Tax Simplification’s December 2016 report, the Chancellor now wishes to tackle these arrangements – watch this space for more news.
IR35 – new rules for Public Sector bodies from April 2017
The so-called “off-payroll rules” for workers engaged to work through intermediaries across the UK where IR35 would have applied to the contractual arrangements are changing from 6 April 2017. The Public Sector body, agency or other third party paying an individual’s personal service company or partnership will be responsible for operating the off-payroll working rules, and deducting any tax and NICs due.
The Public Sector body, agency or other third party engager can choose whether to account for any expenses when calculating the tax. The individual’s right to claim tax relief on employment related business expenses is unaffected by the measure. An updated TIIN was published on 8 March 2017.
Changes to the tax treatment of foreign pensions
As announced in last year’s Autumn Statement, the government will legislate in Finance Bill 2017 to more closely align the treatment of foreign pensions with the UK’s domestic pension regime. Following consultation, the legislation has been revised to set out the position for defined benefit specialist pension schemes for those employed abroad (section 615 schemes) and clarify that all lump sums paid out of funds built up before 6 April 2017 will be subject to existing tax treatment. These changes will have effect from 6 April 2017.
Find out more about the latest issues affecting employers
An update on employment issues will be given at the ICAS Tax Conference 2017, which takes place at the Radisson Blu Hotel, Edinburgh on Tuesday 23 May. Cost: Members and Students: £192 Non-members: £234 CAPS Firm: £174. All prices include VAT.