In last week’s Autumn statement the Chancellor announced a number of changes which are of relevance to Employers. In this week’s article, we take a look at those changes and what they will mean for employers.
1. Abolition of Tax Benefits for Employee Shareholders
The Employee Shareholder Scheme (ESS) allows employees to choose to sign away some of their employment rights (including the right to claim unfair dismissal) in exchange for shares from their company. ESS shares enjoyed significant Income and Capital Gains Tax exemptions and the intention was to encourage flexibility in the workforce, as well as to incentivise employees by giving them a stake in their employing company.
However, take up of ESS was limited and research showed that, rather than being used to increase flexibility in the labour market, they were being used as a tax planning tool for directors and senior executives. As a result tax benefits for those ESS entered into after 1 December 2016 will be removed. Due to the lengthy cooling off requirements, any ESS schemes not already in train are likely to miss this deadline.
The intention is to close ESS to new applicants altogether in the near future.
Those employees currently on ESS schemes (or who get in before the cut-off point) will continue to retain their tax benefits, at least for now.
2. Changes to Taxation of Termination payments
The rules on the taxation of termination payments are convoluted, with some types of payments considered taxable but others not. One of the areas of confusion is in distinguishing between contractual and non-contractual Payment In Lieu of Notice (“PILON”) clauses.
Following a review with the aim of simplifying and clarifying the treatment of termination payments, the Chancellor announced the following changes:
- The distinction between contractual and non-contractual PILON’s will be removed so that all PILON’s will be treated as taxable earnings and subject to Income tax and National Insurance contributions. Income Tax and NICs will only be deducted from an employee’s basic pay where they have not worked their notice. The deemed taxable payment will not apply to payments in respect of compensation for bonuses, benefits in kind etc.
- The £30,000 tax-free allowance for termination payments will be retained, but from 6 April 2018, any taxable sums in excess of £30,000 will also be subject to employers NI contributions in addition to Income tax.
Draft legislation is expected on 5 December 2016, so watch this space!
3. Changes to taxation arrangements for some salary sacrifice schemes
The Income tax and employer NI advantages of salary sacrifice schemes will be removed in April 2017 so that sacrificed pay will be subject to tax and NI.
Those schemes created before April 2017 will continue to keep their tax advantages until April 2018.
Arrangements for school fees, accommodation and cars will continue to benefit from the tax advantages until April 2021.
The tax advantages for salary sacrifice schemes relating to childcare, cycle to work, pensions savings (including pensions advice) and ultra-low emission cars schemes will be exempt from the changes so will continue to benefit from current the tax advantages.
4. Updates to National Minimum and Living wage rates
The Chancellor also announced the new National Living and National Minimum wage rates which will apply from April 2017:
- For workers aged 25 and over, an increase from £7.20/hour to £7.50/hour (an increase of 30p/hour)
- For workers aged 21-24, an increase from £6.95/hour to £7.05/hour (an increase of 10p/hour)
- For workers aged 16-17 (who are not apprentices), an increase from £4.00/hour to £4.05/hour (an increase of 5p/hour)
- For apprentices in first year of apprenticeship or aged under 19, an increase from £3.40/hour to £3.50/hour (an increase of 10p/hour)
The Government is planning to invest an extra 4.3 million per year on the enforcement of NMW/NLW rates. With increased enforcement, fines and the “naming and shaming” of companies who fall foul of NMW rates, this is an area for employers to make sure they are complying with.
Although the changes to employee shareholders will be relevant to a limited number of companies, those relating to the changes to termination payments and national living wage will be of universal relevance. With some sectors already feeling under pressure with increasing workforce costs, this increase in wages is likely to be unpopular. However, the clarification on termination payments is generally seen as beneficial, and certainly not as bad as was initially feared from the original government reports.
Employment and HR Training
Want to understand more about these changes? Need a refresher on how to treat termination payments? Our Employment and HR Academy run courses focusing on termination issues for both HR teams and business managers. Our “Difficult Conversations” course looks at the issues that are hard to manage – including negotiating exits. We also run courses focusing on disciplinary and dismissal. Courses can be run as full or half-day sessions at your place of work. For more information about our training courses for managers or refresher courses for HR, please email [email protected].
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.