Employers face a challenging time in the coming months to get ready for a raft of new and updated employment regulations. Our employment tax and incentives team highlights below some of the key income tax and National Insurance (NI) changes and action points.
Optional Remuneration Arrangements (including salary sacrifice)
HM Revenue and Customs (HMRC) is restricting the number of benefits that employees may receive with both income tax and National Insurance (NI) advantages through various arrangements, including salary sacrifice, cash alternatives and flexible benefits. From 6 April 2017 any new arrangements will be liable to income tax and employers’ NI on the higher of the cash foregone and the taxable benefit (using the normal calculation basis).
These new rules will not apply to certain “favoured benefits”, such as pension arrangements, childcare vouchers and cycle to work schemes. Transitional rules will apply for any arrangements in place on or before 5 April 2017.
What can you do: Review how employee benefits are provided. If an employee has an option to receive salary instead of the benefit then it is likely that the new rules will apply.
PAYE Settlement Agreement (PSA) – Trivial benefit exemption
From 6 April 2016 non-cash gifts and staff entertaining costing up to £50 per occasion (including VAT) will be exempt from income tax and NI if:
- They are not part of a salary sacrifice arrangement; and
- They are not a reward for, or in recognition of, work undertaken by the employee.
Non-cash vouchers of up to £50, such as store vouchers are also now exempt. Historically vouchers have always been taxable and liable to NI. There is no limit to the number of gifts an employee may receive (with the exception of some employees of close companies where there is an annual limit of £300).
What can you do: Prepare your PSA calculations carefully. The exemption could significantly reduce the liability for 2016/17 onwards, if the benefits satisfy all the rules.
From 6 April 2017 an Apprenticeship Levy of 0.5% of the employment pay bill will be payable through monthly PAYE. Each employer will receive an allowance of £15,000 to offset against their levy payment. As a result of the allowance, it is employers with total gross pay bills exceeding £3 million that will be subject to the charge, though those below this level with variable pay bills over the year may be required to pay the levy and claim a refund. Special arrangements apply to groups and associated employers.
What can you do: Consider whether the levy will apply and ensure your software is ready to help you make any payments that are due.
Off-payroll workers/Employment status
This is a very hot topic both in terms of employment tax and law. In the event of a reclassification HMRC may seek tax, NI, interest and penalties from the employer or end user.
HMRC introduced new rules from 6 April 2017 in relation to payments for off-payroll workers in the public sector. Under the rules, if a worker provides their services via a personal service company or other intermediary, the engager will be responsible for deducting tax and NI from payments where the worker would have been regarded as an employee if they provided their services directly. If these new rules work for HMRC they may well be rolled out to non-public sector engagements.
What can you do: Review the employment status of any workers not paid through the payroll to ensure that your businesses’ tax and NI obligations are correctly dealt with.
From 6 April 2018 HMRC there will be two major changes:
- All Payments In Lieu Of Notice (PILON) will be liable to tax and NI; and
- Any payments eligible for the £30,000 tax exemption for termination payments will be liable to employers’ NI on the excess (currently if a payment is eligible for the exemption there is no NI).
What can you do: review the income tax and NI treatment of your businesses termination packages. Overcautious treatment of payments (in particular PILONs) in the past could potentially result in refunds of employer’s NI going back up to six years.
Rewarding and incentivising employees – Enterprise Management Incentives
The Enterprise Management Incentive scheme (EMI) is a flexible, discretionary, tax advantaged share option scheme that can enable full time employees to benefit from a 10% tax rate on future share sales, without incurring any tax liabilities until the value is realised.
An employee only acquires the shares when they exercise the option, even though they can benefit from share price growth from the date of grant. When the employee exercises the option, they pay an amount to acquire the option shares. This exercise price is often set at the market value of the shares at the date of grant (although the exercise price is at the discretion of the company).
To obtain the full benefits available from this scheme, it is advisable to consider how it can be structured to work in the best way for the employer and their employees. Our employment tax specialists can discuss this in more detail.
What can you do: Consider the possible implications of making available a portion of your company’s equity interests to key staff. Aligning employees’ interests with the business’s own interests can have a significant positive impact on total shareholder value. Allocating a share of the equity to key staff is often used to achieve this, particularly where fast growing entrepreneurial companies may not have the capacity to match salaries paid elsewhere.
Smith & Williamson LLP
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.