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Autumn Statement 2016: Personal tax and employment taxes

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  • Publish date: 26 October 2016
  • Archived on: 01 January 2019

ICAEW Tax Faculty provides analysis of the announcements relating to personal tax and employment taxes in the 2016 Autumn Statement.

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National living wage and national minimum wage

The national living wage (NLW) will rise from £7.20 to £7.50 from April 2017.

The following national minimum wage (NMW) rates will apply from April 2017 (the rates were last increased in October 2016):

  • 21 to 24 year olds £7.05 per hour (from £6.95),
  • 18 to 20 year olds £5.60 per hour from £5.55),
  • 16 to 17 year olds £4.05 per hour (from £4.00), and
  • apprentices to £3.50 per hour (from £3.40).

NMW enforcement will be strengthened, with HMRC teams proactively reviewing those employers considered most at risk of non-compliance. The government will also provide additional support targeted at small businesses to help them to comply, and will run a campaign to raise awareness among workers and employers of their rights and responsibilities.

National insurance: class 1 thresholds

The national insurance secondary (employer) threshold and the national insurance primary (employee) threshold will be aligned from April 2017, meaning that both employees and employers will start paying NIC on weekly earnings above £157.

We welcome this alignment which we believe is long overdue.

National insurance: abolition of class 2

As previously announced, class 2 NIC will be abolished from April 2018.

Following the abolition of class 2 NIC, self-employed contributory benefit entitlement will be accessed through classes 3 and 4 NIC. All self-employed women will continue to be able to access the standard rate of maternity allowance.

Self-employed people with profits below the small profits limit will be able to access contributory employment and support allowance (CESA) through class 3 NIC. There will be provision to support self-employed individuals with low profits during the transition.

Statute of limitations no longer to apply to NIC

From April 2018, the time limits and recovery process for national insurance debts will be aligned with other taxes and the Limitation Act 1980 (and Northern Ireland equivalent) will no longer apply to NIC. The government will consult on the details.

Termination payments

From April 2018 termination payments over £30,000, which are subject to income tax, will also be subject to employer NIC. Tax will only be applied to the equivalent of an employee’s basic pay if they do not work their notice. This is intended to make it simpler to apply the new rules. The first £30,000 of a termination payment will remain exempt from income tax and NIC.

Off-payroll working rules

The off-payroll working rules in the public sector will be reformed from April 2017 by moving responsibility for operating them, and paying the correct tax, to the body paying the worker’s company. At the moment, the responsibility rests with the worker’s company. The reform is intended to ensure that those working in a similar way to employees in the public sector will pay the same taxes as employees. This effectively reverses the IR35 rules for public sector contracts.

In response to feedback during the consultation, the 5% tax-free allowance will be removed for those working in the public sector, reflecting the fact that workers no longer bear the administrative burden of deciding whether the rules apply.

There is no mention of this reform being extended to the private sector.

From April 2017, all employees called to give evidence in court will no longer need to pay tax on legal support from their employer. This is intended to level the playing field, as presently only those requiring legal support because of allegations against them are entitled to tax relief.

Salary sacrifice

The government proposes to take action to make the taxation of employer-provided benefits-in-kind and expenses fairer and more coherent. This action will be taken in three areas: salary sacrifice, valuation of benefits-in-kind, and employee business expenses.

Salary sacrifice allows employees to give up part of their salary in exchange for a benefit-in-kind, which itself may be exempt from tax and NIC. At present, if the benefit-in-kind is not exempt, the employee is taxed on the value of the benefit and the employer is charged to class 1A NIC on the value of the benefit, rather than the employee and employer being taxed and liable to class 1 NIC on the salary foregone. This can generate tax and NIC savings for employee and employer.

From April 2017, most benefits-in-kind received by employees by way of salary sacrifice schemes will be subject to the same tax as cash income and the NIC saving will be restricted.

This will affect types of salary sacrifice differently:

  • pensions, pensions advice, childcare, cycle to work and ultra-low emission cars will be unaffected;
  • other arrangements in place before April 2017 will be protected up to April 2018; and
  • arrangements in place before April 2017 for cars, accommodation and school fees will be protected up to April 2021.

Valuation of benefits-in-kind

The government will consider how benefits-in-kind are valued for tax purposes, and will consult on employer-provided living accommodation and call for evidence on the valuation of all other benefits at Budget 2017.

Employee business expenses

The government proposes to call for evidence at Budget 2017 on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer.

We welcome this as we have long felt that there is inconsistency between the ability of employees to get relief for (for example) training costs incurred by employees but not reimbursed, as compared to equivalent costs paid by employers.

Company car tax bands and rates for 2020/21

To provide stronger incentives for the purchase of ultra-low emission vehicles, new and lower bands will be introduced for the lowest emitting cars. The appropriate percentage for cars emitting greater than 90g CO2/km will rise by 1%.

Dates for ‘making good’ on benefits-in-kind

From April 2017, 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.

Assets made available without transfer of ownership

Where assets belonging to employers are made available to employees or their family, the annual tax charge on the benefit is usually valued at 20% of the market value of the asset when first made available, plus any expenses incurred in connection with its provision. Currently, where assets are provided for only part of the tax year, no apportionment of the benefit charge is made.

From 6 April 2017 employees will be taxed on business assets only for the period that the asset is made available for their private use. We welcome this change, which gives much fairer treatment.

Simplifying the PAYE settlement agreement process

PAYE settlement agreements (PSAs) are annual agreements made in writing between employers and HMRC. They provide a mechanism for employers to pay on behalf of their employees the tax liability on certain benefits-in-kind and expenses which would be disproportionately costly to report via PAYE/P11D, or where the tax cannot be properly apportioned between the employees. Items accounted for in this way are subject to grossed-up tax and employer class 1B NIC.

Following consultation, which included a proposal to remove the requirement for upfront agreement, the process for applying for and agreeing PSAs will be simplified. This will have effect in relation to agreements for the 2018/19 tax year onwards.

Disguised remuneration

Disguised remuneration schemes generally involve an employer paying a contribution to a third party, often an employee benefit trust (EBT) or, latterly, an employer-financed retirement benefit scheme (EFRBS), instead of paying remuneration directly to the employee. The third party then usually provides the money to the employee in the form of loans, often interest-free and on terms that mean the loans are never repaid during the employee’s lifetime.

The government has been tackling these schemes and intends to widen the scope of the legislation as follows:

  • Company deduction: tax relief will be denied for an employer’s contributions to disguised remuneration schemes unless tax and NIC are paid within a specified period.
  • Extension to self-employed: the scope of the Budget 2016 changes for employees will be extended to tackle the use of disguised remuneration avoidance schemes by the self-employed (normally individual contractors).

Employee shareholder shares: new shares

Employee shareholder shares (ESS) were introduced in 2013. The rules allow employees to receive shares worth at least £2,000 in exchange for giving up some of their statutory employment rights. No income tax charge arises under the employment-related securities provisions on the first £2,000 of value. On the ultimate sale of the shares, which can include a company purchase of own shares, the employees are exempt from capital gains tax (CGT) on the first £100,000 of gains.

In changes which apply from 1 December 2016, income tax reliefs on the receipt or buy-back of shares issued to an employee under an employee shareholder agreement and the CGT exemption relating to shares received as consideration for entering into an employee shareholder agreement will no longer be available. This applies to shares acquired in consideration for an employee shareholder agreement entered into on or after that date.

The delay until 1 December is to allow any individual who has received independent advice regarding entering into an employee shareholder agreement before 23 November 2016 the opportunity to enter into an ESS before 1 December and still receive the income and CGT tax advantages that were known to be available at the time the individual received the advice. Where advice was received on 23 November before 13:30, the deadline for entering into an ESS is extended to 2 December.

Shares received under agreements made before the aforementioned dates and corporation tax reliefs for the employer company are not affected.

Non-domiciled individuals: status

The removal of permanent non-domicile status from April 2017 is confirmed. The changes mean that from April 2017 anybody who has been resident in the UK for 15 out of the past 20 years will be deemed UK-domiciled for all taxes. In addition, anybody with a UK domicile of origin will be immediately UK-domiciled if they return to the UK.

It was also confirmed that if an individual set up an offshore trust before becoming deemed domiciled, they will not be taxed on income and gains arising outside the UK and retained in the trust.

Non-domiciled individuals: IHT on UK residential property

Also confirmed was the charge to inheritance tax (IHT) for UK residential property where it is owned indirectly by a non-domiciliary via an offshore structure. It is likely that the annual tax on enveloped dwellings (ATED) charge will also be payable on these properties but there is no indication that relief will be available to allow structures to be unwound.

Business investment relief

The consultation during summer 2016 on non-domiciliaries asked for suggestions to improve the business investment relief scheme to attract more capital investment into the UK from non-domiciliaries on the remittance basis. Reforms are promised along with a commitment to continue to consider improvements.

Inheritance tax and political parties

Gifts made to qualifying political parties are exempt from IHT. A political party qualifies for exemption if, at the last general election (ie, by-elections are ignored) preceding the gift either two members of that party were elected to the House of Commons or one member was elected and at least 150,000 votes were cast for candidates who were members of that party.

With effect from Royal Assent of Finance Bill 2017 the relief will be extended to parties with representatives in the devolved legislatures as well as parties that have acquired representatives through by-elections.