Budget 2016 – implications for employers
Key changes to the taxation of termination payments are on the horizon following today's budget.
In the latest budget on 16 March, Chancellor George Osborne put forward his budget for "working people" which "puts the next generation first". From an employment and pensions perspective there weren't too many surprises or big announcements. The main headlines are:
- Termination payments in excess of £30,000 that are not already taxable as 'earnings' will attract employer's National Insurance Contributions from 2018, and the Government is proposing to make other changes to "tighten the rules" on termination payments – see further information which we have received from HMRC on this below, notably a change to the position in relation to PILONs.
- Insurance premium tax will go up 0.5% - this puts up costs for insured benefits, e.g. life assurance, private medical, long term disability particularly as the increase announced last year is still to take effect.
- Class 2 NICs will be abolished for the self-employed from 2018, which may potentially encourage more self-employment.
- A "Lifetime ISA" will be introduced from April 2017 for everybody under the age of 40. This is aimed at removing the "agonising decision" that young people have to make between saving for their retirement and saving to buy a home - and is said to be a way in which they can do both. Up to £4000 can be saved each year and savers will receive an extra £1 from the Government for every £4 they put in. This could be a potential alternative to pensions.
- From April 2017 the tax free personal allowance will be increased to £11,500, and the higher rate tax band will be increased to £45,000 from the same date.
- The decision as to whether the 'intermediaries legislation' on tax applies will no longer be down to Personal Service Companies (PSCs) working on engagements in the public sector – instead the responsibility for ensuring that the correct taxes are paid will move to the public sector employer, agency or third party that pays the worker's intermediary. This is in response to public debate over some workers in the public sector, including many BBC media personalities, who have substantially reduced their tax liabilities by being paid through PSCs rather than being employed directly.
- Fuel duty remains frozen.
- Employer costs for public sector pensions will rise.
The Government's announcement that employer's NIC contributions will become payable on termination payments in excess of £30,000 (that are not already taxable as 'earnings') from 2018 is not the only change it will be making to the taxation of termination payments. Blake Morgan responded to the Government Consultation on this topic last October, and today received an email from HMRC outlining its further plans in this area. According to HMRC:
"…the government will be legislating in Finance Bill 2017 to tighten and clarify the rules on which types of payments will be treated as salary and which will be subject to the termination payment rules. This will ensure that the rules are applied consistently and fairly. These changes include:
- clarifying that all payments in lieu of notice (regardless of whether they are contractual or not) will be subject to income tax and National Insurance Contributions (NICs) in the same way as other payments of earnings;
- tightening the rules to ensure that certain contractual payments cannot be paid as damages instead such payments will be treated as earnings and subject to tax and NICs; and
- removing the exemption for foreign service.
Additionally, the government will be aligning employer NICs with the income tax treatment, so the elements of a termination payments over £30,000 will be subject to employer NICs if they are subject to income tax.
These changes will come into effect from April 2018. The government will be publishing a technical consultation setting out the detail of these changes over the summer."
We therefore have to wait some time until we know what the details of these proposals will mean, but it is clear that fewer payments will be tax/NIC-free, and in some cases it may be employees who indirectly bear the burden of this. Many employers and employees will be relieved that, for the time being, the principle of and the level of the tax free exemption (£30,000) is here to stay. We will continue to keep you updated in this area.
Many had thought that salary sacrifice would be a target for the Chancellor in today's budget, but there was no such announcement. In the Budget papers, there is a brief comment suggesting that it is still under review for certain areas, but not the key ones such as pensions, childcare vouchers etc:
"The government is therefore considering limiting the range of benefits that attract income tax and NICs advantages when they are provided as part of salary sacrifice schemes. However, the government’s intention is that pension saving, childcare and health-related benefits such as Cycle to Work should continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements."
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