The latest budget introduced some key measures that will impact on employment costs for business as well as influencing employers’ future pay and benefits policies. Paul Tew, small business consultant and freelance advisor, outlines what employers need to plan and budget for in the lead-up period to when these proposals come into force.
Changes to off-payroll working in the private sector
The Government wants to ensure that individuals who effectively work as employees are taxed as employees, even if they choose to structure their work through a company. Special tax and National Insurance contribution (NIC) rules apply where a worker provides services under a contract between a “client” and an intermediary (service company) and where the work would have been regarded as employment, but for the presence of a service company. Currently, in the private sector it is the intermediary who determines if PAYE and NIC is to be operated on a payment received.
However, from 6 April 2020, the burden of responsibility will transfer to the engager as it will be the end client who decides whether the rules should apply. If the rules do apply, the fee payer is then liable for employers’ NIC and must deduct income tax and employee NIC from the intermediary’s fee paid for the services of the worker. This has the effect of increasing on-costs for the engager and reducing net take home pay for the individual.
Small organisations will be exempt (so only large and medium-sized organisations will have to take action, and this is expected to be those with 250 or more employees). For those affected, this has the potential to increase costs for business as it familiarises itself with the new rules and puts in place processes to share information between procurement and payroll sections. There is also likely to be increased scrutiny placed on individuals acting as self-employed. Where the payments are made in a personal capacity to the individual, then the engager remains liable to account for all PAYE and Class 1 NIC liabilities in cases of employment.
Revised pay and tax rates impact on net pay
The budget set out to increase the tax-free personal allowance and higher rate threshold above which individuals pay tax at 40% to £50,000 from 6 April 2019, a year earlier than the Government planned. Therefore, the personal allowance will be set at £12,500 and basic rate limit at £37,500 for both 2019/20 and 2020/21 tax years.
Basic and higher rate taxpayers will be financially better off as a direct result of these increases. However, some of the gains will be offset by increased NIC, as the 12% band is linked to the higher rate threshold. In setting salary levels and applying any subsequent increases, these “net pay” gains to the employee should be taken into account.
The Government has announced an increase to the National Living Wage (NLW) (for those workers aged 25 or over) from £7.83 to £8.21 per hour, effective from April 2019. The Government’s target is for NLW to reach 60% of median earnings by 2020. Based on current forecasts, the rate will be set at £8.62 per hour from April 2020. The proposed increase means an annual pay rise of £690 a year for those working full time (35 hours a week) and in most cases an uplift on employer NIC liabilities.
The minimum wage rate for 21–24-year-olds increases from £7.38 to £7.70 per hour. The rate for 18–20-year-olds will rise from £5.90 to £6.15 per hour, with the rate for 16–17-year-olds increasing from £4.20 to £4.35 per hour. The apprentice rate is set to increase from £3.70 to £3.90 per hour.
All these rate revisions will represent another significant increase to the cost of employing people, and the increases will put pressure on all pay levels above the minimum wage. According to the Office for National Statistics, wage growth in the UK is at its highest since the financial crisis of 2008. The Bank of England forecasts total pay to be growing at a rate of 2.5% a year by the end of 2018, climbing to 3.5% by the end of 2020.
Employers should also ensure that they are focusing on compliance with the minimum wage rates to prevent any breaches, particularly for those employees paid at or just above the relevant rates, given the complexity of the legislation.
Employment allowance to be further restricted
From 2020/21, the Government will restrict access to the employment allowance to employers that have an employer NIC liability below £100,000 in the previous tax year. Where employers are connected under the employment allowance rules, the threshold will apply to their aggregated liability. The maximum employment allowance amount that can be claimed by employers to reduce their yearly NI bill is to remain fixed at £3000.
The Government estimates that 99% of micro businesses and 93% of small businesses will still be able to make a claim, but this of course means that 7% of small businesses will lose out financially by up to £3000 per tax year.
Incentives to use cleaner company cars
From 2020/21, the Government will continue to base the company car benefit on the carbon dioxide (CO2) emissions of cars but will refocus incentives on the cleanest cars. To provide greater financial incentives for the purchase of ultra-low emission vehicles, new, lower bands will be introduced for the lowest emitting cars. Some of the lowest CO2 bands are to be based on the “electric range” of the vehicle, as well as the CO2 emissions.
When the new ultra-low emission vehicle rates commence, the most tax-efficient cars will be those with CO2 emissions below 50g/km and there will be further financial incentives for those cars that can travel furthest in pure electric mode without recharging the battery. The changes bring additional levels of complexity to calculating the company car benefit charge, but the only sure way to reduce employee tax and NIC liability is by choosing an ultra-low emission vehicle.
Checklist for 2019
Check that all workers paid outside of the payroll, ie contractors operating through a personal service company, have had their employment status for tax determined correctly against what is happening in practice with their working arrangement.
Ensure that new rates of the minimum wage are applied to certain apprentices and workers in respect of pay reference periods starting on or after Monday 1 April 2019.
Establish if the employer NIC liability will be below £100,000 in 2019/20 so it can be planned ahead to find out if the employment allowance can be claimed in 2020/21.
Where providing company cars, choose cars that produce lower CO2 emissions and can travel longest on electric-only motivation to reduce the income tax and NIC burden.
If making high-value termination settlements after 6 April 2020, then where there is an employee income tax liability there will also be for the first time an employer NIC liability. So, if the taxable part of the termination package was £10,000, the employer would have to pay an additional £1380 in NIC costs.