Paul Tew explains what the implications of the Chancellor’s annual Budget statement are for employment costs and employer-provided benefits in kind
Behind the headline announcements is a raft of detail that employers need to be aware of in budgeting and planning for the future. New and revised measures are to come into law that will impact on pay and benefit policy for UK employers over the next 12 months and beyond.
Pay is the foundation of employee reward packages, and organisations will need to take the time to set salaries at the right level for their business. When reviewing pay levels, bear in mind the level of the National Minimum Wage (which includes the National Living Wage) and the effect on net take-home income of income tax and National Insurance rates and thresholds.
New National Minimum Wage Rates
Employers must pay the revised National Minimum Wage (NMW) rates for certain apprentices and workers in respect of pay reference periods starting on or after Sunday 1 April 2018. The 4.4% increase in the National Living Wage (NLW) to £7.83 per hour, paid to workers aged 25 and over is considerably higher than the 2% pay rise that many employers expect to award their workers over the coming year. The proposed increases mean in many cases an uplift on employer National Insurance contributions.
The NLW must not be confused with the Living Wage rates, which are set independently of the Government and employers can choose to pay, unlike the NLW rate which is mandatory for all employers to pay, without exception. Failure to pay the NMW to all relevant workers could see severe penalties being imposed and even criminal prosecution.
The Government’s target is for the NLW to reach 60% of median earnings by 2020 (around £8.80 per hour), so any organisation thinking of paying this to younger employees, say from age 18 onwards, must consider the cost, as there will be steep increases to come in the next few years.
Revised Tax Rates and Allowances
The basic, higher and additional rates of income tax will not increase above 20%, 40% and 45% until at least tax year 2020/21. However, the basic rate tax limit is increased to £34,500 for 2018/19, with the tax-free personal allowance being set at £11,850. The higher rate tax threshold, the amount above which individuals pay tax at 40%, will therefore be £46,350.
Since April 2017, Scottish taxpayers earning around the higher rate 40% tax threshold pay around £400 per annum more income tax than their counterparts in the rest of the UK. This net pay differential is likely to continue and may even increase when the Scottish Parliament set the income tax rates and bands for 2018/19. So, HR teams wanting to move employees to Scotland should consider setting reward packages at a level to compensate for any net pay variance in employment earnings.
Employers do not have a National Insurance liability for employees aged under 21 or apprentices under 25, but this age exception is limited to earnings below the respective employer secondary threshold (which is the same level as the Upper Earnings Limit, £892 per week from 6 April 2018). However, the full employer rate of 13.8% on every £1 earned remains payable on all employee earnings that exceed the threshold in the employee’s pay period. Therefore, take care that the threshold is not exceeded for younger employees, to avoid extra employment costs being incurred.
Electric In, Diesel Out
The Government is still keen to promote environmentally friendly travel, as such two proposed revisions effective from start of tax year 2018/19 will see:
- The diesel supplement rate used in calculating the company car tax charge increased from 3% to 4% for cars which do not conform to the RDE2 standard for Nitrogen Oxide (NOx) emissions.
- No benefit tax charge on electricity that employers provide to charge employees’ electric vehicles in respect of electricity provided in workplace charging points for electric or hybrid cars owned by employees.
When considering company car drivers choose cars which are not subject to the supplement when the diesel car is next due to be changed. This will save the employee income tax and the employer National Insurance (the Class 1A contribution) and time spent checking whether the car falls within the RDE2 standard.
Administration Easements for Subsistence
From 6 April 2019, employers will no longer be required to check receipts when making payments to employees for subsistence using benchmark scale rates (which are cash amount approved by the Government). This reduction in the employer administrative burden applies to standard meal allowances paid in respect of qualifying travel. However, employers must still make sure any payment made to an employee is for qualifying travel, broadly these are journeys that are made by employees in the performance of their duties. Employers using bespoke scale rates or industry wide rates will still be required to check employee receipts.
For employers with workers overseas the existing concessionary travel and subsistence scale rates will be placed on a statutory basis on and after 6 April 2019, to provide greater certainty.
Employment Status Clarification
For those businesses operating in the private sector using contractors and freelancers through their own personal service company to undertake work on their behalf, the Government is thinking about moving the responsibility for deciding whether the intermediaries legislation applies from the individual to the end client, as it has already been done with public sector engagers. This has the potential to increase costs for business because it will have to understand how to apply any new rules and have in place processes to share information between procurement and HR sections to ensure the correct tax and National Insurance deductions are then applied through the payroll.
The Government is also considering reforms to make the employment status tests for both employment rights and tax clearer. The courts and tribunals have recently handed down rulings regarding employment status, particularly for those in the ‘gig’ economy, but there is still general uncertainty as to whether an individual is an employee, worker or genuinely self-employed.
The wording of the contractual terms and how these are applied in practice within the working relationship have been found to be all important in the judges’ decision making process. A draft Bill of Parliament, if passed into law, would introduce a ‘worker by default’ status, meaning employers would have to offer basic rights such as sick pay and holiday pay, thereby increasing the cost of the payroll bill.
Statutory Payments on the Increase
The flat standard rate for statutory maternity, paternity, adoption and shared parental pay is set to increase from £140.98 to £145.18. The increases normally occur on the first Sunday in April, which in 2018 is 1 April.
Although these payments can be recovered from the State, only small employers can recover 100%, with those larger companies not eligible for the relevant relief only able to recover 92%. Therefore, employers should budget for the increases and prepare amendments to their policies and other documentation on family-friendly benefits for April 2018.
The rate of statutory sick pay is also increasing from £89.35 to £92.05. This increase is expected to occur on 6 April 2018. Employers can no longer reclaim any statutory sick pay.
To be eligible to these statutory payments, the employee’s average earnings must be equal to or more than the National Insurance lower earnings limit. From 6 April 2018, this figure increases from £113 to £116 per week.
All Change for Childcare Vouchers
From 6 April 2018, childcare voucher schemes are closing to new entrants, although schemes can still run, but only where operating on that date. Childcare vouchers will gradually be replaced by a new scheme – Tax-Free Childcare. This scheme is not administered by employers, but through a Government sponsored online account.
Make sure that employees know of this impending change now because if the vouchers scheme is more financially beneficial, the relevant employee must join before start of 2018/19 tax year. However, which scheme is best, is a decision for the individual employee to make and not their employer.
Employers are not legally required to play any role in Tax-Free Childcare. However, employers can elect to pay into an employee’s childcare account, but this would create an additional financial cost and involve further administration.
Taxation of Notice Pay
Currently, Payments in Lieu of Notice (PILONs) that are included in the employment contract are treated as earnings are subject to income tax and National Insurance through the payroll, but non-contractual PILONs are not. Therefore, the tax and National Insurance consequences of a PILON can depend on how the employment contract is drafted or whether payments are structured in some other form, such as damages.
From 6 April 2018, all PILONs will be subject to tax and National Insurance, regardless of whether the payment is contractual or compensation given in recognition of an employer’s failure to serve proper notice on the leaving employee. All payments will be liable to tax and National Insurance on the amount of basic pay that the employee would have received if he or she had worked their notice in full.
What You Should Do Now?
In making future pay and benefits policy decisions consider the following 4 steps:
- Review the contracts that are in place with employees and benefit providers.
- Decide what payment terms and benefit provision are to be offered, taking into account the financial cost and administration implications of the proposed changes included in this latest Budget statement.
- Consider other affordable alternatives to the current pay and benefit package offered to employees.
- Communicate any decisions made regarding pay benefit strategy to all affected employees at the earliest opportunity, along with the impact these rules will have on income tax and National Insurance liabilities.