What's the impact of the Autumn Statement for employers?
The Chancellor of the Exchequer, George Osborne, had many issues to deal with yesterday in the Spending Review and Autumn Statement, not least his U-turn on cuts to tax credits, so it is perhaps not surprising that the employment law headlines aren't as dramatic as they were in the Summer Budget. However, there are a number of important points employers should be aware of, some of which were not mentioned by the Chancellor and are hidden in the small print of the documents.
The Apprenticeship Levy on employers originally announced in the Budget in July got the biggest headlines yesterday and rightly so. In August, a Consultation was published to look at the implementation of the levy, but the rate and scope of the levy were to be announced later. It was to be applied to larger employers (with speculation that it might only apply to those with 250+ employees). Yesterday the Chancellor announced that the levy would be introduced for all employers, in April 2017, at an annual rate of 0.5% of an employer's wage bill. However, each employer would have a £15,000 allowance to set off against that sum, meaning that any business with a payroll of less than £3 million will not pay the levy at all.
How will this work in practice? Imagine that an employer has 250 employees all earning a gross salary of £20,000. The total pay bill is £5 million and applying the 0.5% levy to that amount gives a levy sum of £25,000. Deducting the £15,000 allowance means that the actual annual levy payment will be £10,000.
By contrast, if the employer has a wage bill of say, £2 million, applying the 0.5% levy to that amount gives a levy sum of £10,000 and deducting the £15,000 allowance means that there is no annual levy payment at all. The Government estimates that less than 2% of UK employers will pay the levy.
Whilst certain organisations will not pay the levy, the fact that it includes all employers and does not only apply to those with a minimum number of employees will come as a surprise to many. The idea is that all employers (whether they are within the scope of the levy or not) are able to access the funding it produces. It will be paid through PAYE, and by 2019-20 it is expected to raise £3 billion, allowing the Government to double its spending on apprenticeships from the level of 2010-11. This is potentially a very expensive 'tax' for some businesses, and might disproportionately affect, for example, professional service firms and the financial sector where the wage bill is likely to be one of the highest costs.
Yesterday, the Government published its Response to the Consultation. The Government has confirmed that HMRC will work closely with employers and providers of payroll services to minimise the burden of implementing these changes. It also recognises that the administrative burden on employers should be kept to a minimum and it will be providing “clear guidance” to employers on how the system will work.
The Government also announced its intention to set up an employer-led body, the Institute for Apprenticeships to set apprenticeship standards and ensure quality. The Institute would also help to advise on the level of levy funding each apprenticeship should receive and the Government intends to establish it by April 2017. Other measures supporting apprenticeships have already been announced, namely giving the term 'apprenticeship' the same legal protection as degrees so apprentices and employers can have full confidence in the brand, and from April 2016 abolishing employer National Insurance contributions for apprentices under the age of 25.
The Confederation of British Industry (CBI) has been clear, in public and private, that it does not support a levy model. It previously stated in its response to the Government’s proposal that "a levy system must work for all businesses and be proportionate; with all money ring-fenced and employers given real control".
Workplace pensions - minimum contribution increases delayed
Adrian Lamb, our Legal Director (Pensions) and Head of Trustee services observed, "The Chancellor confirmed yesterday that the increase in minimum contribution levels for Automatic enrolment (or workplace pensions) is being delayed by 6 months so that:
- the increase from 2% (overall) to 5% will now come into force in April 2018 instead of October 2017, and
- the further increase from 5% to 8% will now come into force in April 2019 instead of October 2018.
"So the minimum employer contribution, which is now 1%, goes up to 2% in April 2018 and 3% in April 2019. The rest of the increase will come from higher employee contributions which could increase pressure on wage inflation in due course – and it should be remembered that by the time these increases are in force the Government will be reviewing the contribution levels for the future. Commentators expect that these will have to rise considerably.
"The Autumn Statement also included:
- confirmation that the Government is considering the responses received on its Consultation on pensions tax relief, and will publish its Response as part of next year's Budget; and
- a comment that the Government "remains concerned about the growth of salary sacrifice arrangements", with confirmation that it will "gather further evidence …. to inform its approach"
So fundamental changes affecting pensions savings, including tax and national insurance treatment may still be the on the way."
The Chancellor announced that the commitment to fund 30 hours of free childcare for working families with 3 and 4 year olds, and tax-free childcare costs, would now only be available to parents with an income level equivalent to working 16 hours a week (at the National Living Wage) and an income of less than £100,000 p.a. per parent. Although no mention was made of the 30 hours free childcare being limited to England, it is presumed that that is still the case as set out in the Childcare Bill currently going through Parliament, but tax-free childcare is a UK-wide scheme. These measures will be introduced in 2017 and could see some employees looking to increase their working hours.
Employment support for people with health conditions and disabilities
Alongside the Chancellor's announcement yesterday of an increase to NHS funding for investment in mental health services, the Spending Review and Autumn Statement document also announces an increase in funding to expand the Fit for Work service supporting more people on long-term sickness absence with return to work plans, and "over £115 million of funding for the Joint Work and Health Unit, including at least £40 million for a health and work innovation fund, to pilot new ways to join up across the health and employment systems".
In addition to these measures, the Government wants to improve links between health services and employment support, recognising timely access to health treatments can help individuals return to work quicker. It pledges it will publish a White Paper in the New Year that will set out reforms to improve support for people with health conditions and disabilities, "including exploring the roles of employers, to further reduce the disability employment gap and promote integration across health and employment". We will have to wait and see the details next year.
Employment Intermediaries tax relief
Nothing was mentioned in the Chancellor's speech, but buried in the Spending Review and Autumn Statement papers the Government has confirmed that 'Following consultation, relief will be restricted for individuals working through personal service companies where the intermediaries legislation applies. This change will take effect from 6 April 2016.' This relates to the Government's consultation in July on 'Employment intermediaries and tax relief for travel and subsistence', looking at restricting tax relief for home-to-work travel and subsistence for those who are employed by an intermediary, such as an umbrella company or a personal service company (PSC). The intention, in relation to commuting costs, is to put on a level playing field those who are in a deemed 'employment relationship' even if they work through another company.
Oliver Weiss, commented "This could be a real blow to umbrella companies, as it seriously undermines the 'overarching contract of employment' (a concept developed by HMRC itself) and the benefits associated with working in this way. There are also a number of difficulties with the way the Government has suggested implementing the new rules, primarily because it has chosen a standalone test for determining whether the tax relief applies, namely by restricting it to individuals that are not under 'supervision, direction or control' of the end user client, rather than taking a more holistic approach and considering the various other factors that would normally be relevant in determining employment status. Furthermore, tax relief will not apply even if the end user client merely has 'the right' to supervision, direction or control, whether or not that is exercised in practice. Again, this is problematic and could be determined more by the industry or sector rather than the relationship itself. The Government's Response to the Consultation does not yet appear to be available, but we are expecting draft legislation in December".
Taxation of termination payments and personal service companies
Despite an announcement pledged in the Government's consultation on the 'Simplification of the Tax and National Insurance Treatment of Termination Payments', nothing was mentioned yesterday either in the Chancellor's speech or in the documents. The proposal is that the current £30,000 tax exemption for certain types of termination payment could be significantly reduced under a new system which is supposed to remove the distinction between contractual and non-contractual termination payments. However most commentators agree that the detail suggests it is likely to complicate rather than simplify the current rules. Many also perceive it as a way for HMRC to reduce the £30,000 tax exemption that is currently available, which has been frozen since 1988, and at today's prices should be at least £71,000.
Blake Morgan made representations responding to the Consultation, available in the download, and yesterday received a communication from HMRC that
"The responses have helped to highlight the complexities of this area and, as such, the Government wants to consider them further. More information on any changes to the taxation of termination payment will be published next year."
There was also no announcement of any big changes to personal service companies (PSC), despite recent speculation in the press. The Government is proposing changes to prevent the perceived unfair manipulation of the IR35 rules by those who work through their own limited company, but are not genuinely working for different clients and would otherwise be regarded as employees. Following the Summer Budget, HMRC published a discussion document suggesting that better compliance could be achieved by putting the onus on the engager of a PSC to consider whether IR35 applies and, if so, deduct the correct amounts of tax and NICs as they would for direct employees. Other options suggested by HMRC include aligning the test for determining if IR35 applies with the test used for temporary workers (again based on supervision, direction or control), and stipulating that an engagement lasting a certain minimum amount of time should be considered one of employment. Reports in the press were that the Government was considering obliging an individual engaged through a PSC to move on to the engager's payroll after one month. There was no mention of this yesterday, but that does not mean the issue has been buried.
Employers will need to be prepared for the significant extra costs and administration of the apprenticeship levy, at a time when implementation of the National Living Wage will already be causing some headaches. We will be watching closely for the further consultation responses and White Papers on some of the issues above which have yet to be published, and will keep you informed.