Crocuses have sprung, new season lamb is on its way, and...the Chancellor has delivered his Spring Budget.
Whilst the tone of the Budget was generally more positive than expected, the changes affecting employers, employees and self-employed workers were a bit of a mixed bag.
To summarise the key changes:
1. Personal allowance increase: The personal allowance will be raised by £500 to £11,500. This increase exceeds the rate of inflation, and the new level means that the amount an individual can earn tax free in 2017/18 will be over 75% higher than in 2010.
2. Class 4 NICs rate increase: It has already been announced that Class 2 NICs will be abolished from April 2018. To compensate for the resulting loss of revenue, the main rate of Class 4 NICs will increase from 9% to 10% in April 2018 and to 11% in April 2019. (For those of you not lucky enough to have a stellar Tax team to consult on such matters, Class 2 and Class 4 NICs are those which are payable by self-employed workers only.)
The aim of this measure is to align the level of NICs paid by the self-employed with the level of Class 1 NICs currently paid by employees. From the response of the Press following the Budget, perhaps not surprisingly, this is clearly the most controversial aspect of it.
3. Dividend allowance reduction: The tax-free dividend allowance will be reduced from £5,000 to £2,000 from April 2018 with the aim of reducing the tax differential between the employed and self-employed on the one hand and those working through a company on the other.
4. Taxation of remuneration consultation: With a view (according to the Chancellor) to considering how the tax system in this area could be fairer and more coherent, the government will consult on:
- the taxation of benefits in kind generally;
- accommodation benefits provided to employees; and
- the taxation of employee expenses.
At this point, it may also be worth recapping previously announced changes taking effect this April and in April 2018.
1. 6 April 2017
The key change as of 6 April 2017 relates to the deduction of legal expenses for incurred by employees.
As things currently stand, if an employer pays for or reimburses an employee for legal costs incurred in connection with legal action relating to an employment matter, these are only deductible (ie not subject to tax as a benefit) if they relate to allegations against the employee personally. From April, legal support provided by an employer will no longer be taxable provided the expenses are incurred in connection with an employee (or former employee) giving evidence about matters relating to the employment or with a proceeding in which acts of the employee relating to the employment are considered.
2. 6 April 2018:
- With effect from 6 April 2018, where a termination payment (including a non-contractual PILON) is made to an employee, the employer will be required to identify, using a new statutory formula, the amount of basic pay that the employee would have received if they had worked their full notice period and treat that amount as earnings and subject to income tax and Class 1 NICs. The £30,000 exemption does not apply in respect of the amount calculated using this formula.
- Any excess of total payments made, and benefits provided, over the amount identified above, will be chargeable to income tax to the extent it is over £30,000. There will also be a change to the Social Security Legislation to make this excess also subject to Class 1A employer NICs.
- The current foreign service exemption will be abolished (except for seafarers). A new exemption will apply, however, where a termination payment relates to an employee's earnings for a tax year of non-residence.
PAYE Settlement Agreements (PSA)
PSAs are arrangements under which employers can, in a single payment, settle their employees' income tax liabilities for certain benefits and expenses. From 6 April 2018, the administrative burden currently involved in agreeing a PSA will be reduced. Employers will be able to submit a request at the year-end (as opposed to in advance of the year-end) and to make ad hoc requests during the year.
With thanks to Helen Reid in the Tax Team for her assistance in preparing this report.