Budget Alert 2013: Employment Tax
This section looks at the main changes to employment tax law announced in the Chancellor's Budget.
- Office of Tax Simplification: Review of tax-advantaged and unapproved share schemes
Finance Bill 2013 will include legislation to benefit certain tax approved share plans. Such legislation includes widening the range of circumstances in which tax advantages for share incentive plans, SAYE and company share option plans are available on a cash takeover of a business. In addition, the Government will move away from pre-approval for these schemes to a system of self-certification.
In respect of unapproved share schemes, the Government will consult on a number of recommendations of the Office of Tax Simplification (OTS).
The OTS has reviewed both tax advantaged and unapproved share plans and has made certain recommendations. The Government has previously indicated that it will review and adopt many of the recommendations. Today's announcement is part of this review of share plans.
Simplifying and removing certain anomalies (particularly around cash takeovers) in relation to tax-advantaged share plans is welcome. We wait to see the Government's approach to unapproved schemes.
- Enterprise Management Incentives (EMI): Extension of entrepreneurs' relief
Following the announcement in the last Budget of the extension of entrepreneur's relief to EMI options, the legislation has been changed following consultation.
In general, to qualify for entrepreneurs' relief, a person must hold 5% or more of the share capital in the company for at least 12 months. Budget 2012 removed the requirement for a person to hold 5% or more if shares are acquired though the exercise of a qualifying EMI option. Following consultation, the legislation will be revised to allow the period during which the unexercised option is held to count towards the 12-month holding period.
Relief will also apply to the disposal of shares following a replacement of EMI shares due to a reorganisation of a company and to certain shares following an exchange of shares in another company.
The increased availability of entrepreneurs' relief is a welcome change, allowing small and medium-sized companies to further attract and retain high-calibre employees.
- Changes to car and van fuel benefits
Company car taxation
From 6 April 2015, for company cars emitting less than 75g CO2/km, the appropriate percentage (AP) used to calculate the company car benefit will increase from 0% to 5% for 0 – 50g CO2/km and to 9% for 51-75g CO2/km.
In addition, following the announcement in Budget 2012 the remaining APs are increasing by 2% to a new maximum of 37%.
From 6 April 2016, the APs will increase by a further 2%.
Company vans benefit and the fuel charge for company cars and vans
Company vans benefit and the fuel charge for company cars and vans will increase by RPI from 6 April 2014. This will be brought into law in time for changes to PAYE codes in January 2014.
As previously announced, the van fuel benefit will increase by RPI for 2013/14.
- Employer-provided benefits in kind: Beneficial loans
From 6 April 2014, the exemption threshold for small loans will be increased from £5,000 to £10,000.
Currently, where an employer makes a loan to an employee and the interest charged is less than the official rate of interest, a beneficial loan charge will arise, unless the total balance of all outstanding loans does not exceed £5,000 at any point during the tax year.
We welcome the increase in the beneficial loan exemption threshold. With the cost of rail travel rising significantly each year, for example, the increase should ensure most employees with an employer-provided season ticket loan will not suffer a benefit charge.
- Tax relief for employer expenditure on health-related interventions
The Government will consult in relation to a targeted tax relief for health-related interventions up to £500. This was recommended by the Health and Work Assessment and Advisory Service as part of an employee's return to work following a sickness related absence to remove the potential benefit in kind charge.
Currently, healthcare expenditure in the UK by an employer that is not covered by existing exemptions is taxed as a benefit in kind for the individual, with a Class 1A NIC charge for the employer.
This targeted relief will incentivise employers to assist their staff who have been on sick leave to return to work, without creating a cost which would typically be settled via a PAYE Settlement Agreement. This incentive is likely to be a welcome addition to an employer's suite of health and well-being policies.
- Tax-free childcare scheme for working families
The Government has announced a new scheme of taxpayer subsidy for childcare by providing up to 20% of working families' childcare costs, subject to a maximum of £1,200 per child under the age of 5 (increasing over time to the age of 12). A qualifying child includes a disabled child aged up to the age of 16.
The new Employer Supported Childcare (ESC) scheme will only be available to parents who each earn less than £150,000 a year and do not receive support through any form of tax credits.
The new scheme will be phased in from Autumn 2015 and the current ESC scheme will be phased out. Current members of an ESC scheme will have the option to join the new scheme or remain in the current one.
Details of how the scheme will be implemented have yet to be published. However, we welcome the increase in the availability of childcare support to the wider employee population.
- Avoidance of employment taxes
Following a review of offshore employment intermediaries, HMRC is considering whether to legislate to ensure that the correct tax and national insurance liabilities (NIC) are met by the offshore intermediary. A consultation on the details is to take place.
Offshore intermediaries have been used to employ individuals in the UK. As the offshore intermediary does not have a place of business in the UK, there is no liability to pay employer's Class 1 NIC, therefore reducing the amount of NIC to be paid. The individual can also be affected under these arrangements as there is no entitlement to statutory benefits such as SSP/SMP. Income tax payable by the individual is normally met by voluntary PAYE arrangements.
We await the outcome of the specific details as current NIC legislation provides for the UK host employer to meet the secondary NIC. We also await to see whether the current Government policy that allows for offshore manning arrangements to assist the UK shipping industry will be excluded from the consultation.
- New Employment Allowance for employers
An ‘Employment Allowance’ from April 2014 will reduce employers’ annual Class 1 national insurance contributions (NIC).
Employers pay Class 1 NIC on payments of earnings to employees that reach or exceed the secondary threshold. The new Employment Allowance will reduce the total annual liability by £2,000.
- Proposed changes to PAYE
The Government has announced proposed changes to Payroll Giving, and the coding out of tax debts.
On 24 January 2013, the Government published a consultation on improving payroll giving and outlined a range of options to increase the amounts received by charities, including opening up the market to non-charity participants. Additionally, the Government will also consult on improving the collection of tax debts through the PAYE system to make the process fair and more equitable. This will include increasing the size of debt that can be recovered through the ‘coding out’ of the debt from employees with higher incomes. Secondary legislation will be introduced in due course to put these changes into effect.
Payroll giving is a tax-efficient way for employees to make regular and one-off payments directly to charity from their pay. Currently, HMRC allow only £3,000 of tax debt to be ‘coded out’.Improvements to payroll giving are a welcome measure and the consultation period closes on 19 April 2013. With regard to the coding out changes, consultation will hopefully include appropriate safeguards in respect of such adjustments.
- Restricting pensions tax relief
From 6 April 2014 the lifetime allowance will be reduced from £1.5mn to £1.25mn and the annual allowance will be reduced from £50,000 to £40,000.
Individuals who have or believe they will have pension savings above £1.25mn at retirement will be able to apply for fixed protection so that the old limit of £1.5mn applies. There will be conditions attached to the application of fixed protection, including that pension savers will no longer to be able to make contributions or accrue defined benefits above a defined percentage after 5 April 2014.
The Government will consult on the detail of an individual protection regime, as an alternative to fixed protection. Based on previous announcements, it is expected that this will only apply to individuals with pension savings valued at over £1.25mn at 5 April 2014 and it may allow them to make further pension savings until the value of their pension rights exceeds £1.5mn
The reduction in reliefs is aimed at high earners. However, the reduction in the annual allowance will be likely to have a wider impact for individuals in defined benefit arrangements. The valuation factor used to calculate the annual increase in defined benefit rights would, ignoring some relief for inflation, result in a pensionable salary increase of just £2,500 using all of the annual allowance.
- Pensions drawdown policy
From 26 March 2013 the drawdown limit for pensioners of all ages with drawdown arrangements is increased from 100% to 120% of the value of an equivalent annuity.
The legislation will be revised to ensure that there is no need to recalculate the maximum drawdown pension after a pensioner with transitional protection from Finance Act 2011 rules transfers to another scheme.
This is a minor change to ensure that transfers do not affect the capped drawdown limit.
- Pensions tax: abolition of contracting out
The closure of contracting out of the State Pension for defined benefit schemes has been brought forward to 6 April 2016.
This will increase employer and employee NIC for members of defined benefit schemes.
This aligns the position with defined contribution schemes for which contracting out ended on 5 April 2012.
- Legislating Statement of Practice (SP1/09)
Highlighted in the 2012 Budget, this impacts employees who qualify for overseas workday relief (OWR) and carry out duties both in the UK and overseas under a single contract of employment. As confirmed in the draft Finance Bill clauses, measures will be introduced to allow the basis for apportioning earnings in respect of duties performed in the UK. This will be determined on a just and reasonable basis and so retain the apportionment approach of SP1/09. The new rules will have effect from 6 April 2013.
- NIC administration for the self-employed
The Government is to consult on options to simplify the administrative process for the payment and collection of Class 2 national insurance contributions (NIC).
The self-employed currently pay Class 2 NIC by monthly or six-monthly direct debit. HMRC is to consult on the simplification of the payment process including an option to pay using self-assessment.