On 11 March 2020, the Chancellor delivered the 2020 Budget . There were a few measures around pension tax reliefs and national insurance affecting individuals. This article provides an overview of the key developments relevant to HR practitioners. Included below are also measures that were announced previously but came into law on 6 April 2020 as well as some considerations in respect of Coronavirus.
Changes in tax rates and allowances1
As announced at the Autumn 2018 Budget (https://www.gov.uk/government/publications/budget-2018-documents/budget-2018) the tax-free personal allowance for income tax will remain unchanged from £12,500 in the 2019-20 tax year to 2020-21. The higher rate income tax (40%) threshold remains at £37,500, and the additional rate (45%) threshold will remain at £150,000.
The corporation tax rate will remain at 19% for the Financial Years 2020-21 and 2021-22.
Capital gains tax
The capital gains tax annual exemption will increase from £12,000 in 2020-21 to £12,300 in 2021-22.
The government has increased the primary threshold and lower profits limit for employees and the self-employed respectively from to £8,632 to £9,500. This increase does not apply to employer contributions where the annual threshold has increased from £8,632 to £8,788.
Small businesses (those with an annual employer NICs bill of less than £100,000 in the previous tax year) will benefit from an increase in the Employment Allowance from £3,000 to £4,000.
The immigration health surcharge is set to increase from £400 to £624 per year with a rate of £470 for children. The new figure will apply for all surcharge liable non-EEA migrants (and their dependents) from October 2020, expanding to include EEA migrants from January 2021.
Other employment taxation measures
*Update 17 March 2020 – due to the COVID-19 pandemic, the government has confirmed that the introduction of the changes to IR35 will be postponed until 6 April 2021. This move will be welcomed by many employers. Employers who are advanced in their preparation will need to urgently review and reverse any cases where they were about to start operating PAYE and NICs from 6 April 2020 as they will no longer need to.
The IR35 rules which are currently in place for the public sector will be extended to cover those working in the private sector from April 2020. Currently, under IR35, where an individual is self-employed and provides services to another company (the “client company”) via their own limited company (their “personal service company”), the limited company must assess whether the individual would be considered to be an employee if he or she had contracted directly with the client company or is genuinely self-employed. If the individual is considered to be an employee, the personal service company is obliged to operate PAYE and to pay employer NICs.
From April 2020*, determining whether the individual would be an employee or is genuinely self-employed will become the responsibility of the client company rather than the individual’s own limited company. Further, if the client company considers that the individual would be an employee if it contracted directly with the individual, the client company will be responsible for operating PAYE when making payments to the personal service company and for paying NICs.
These changes will apply to medium-sized and large organisations only, with the existing IR35 rules continuing to apply to small organisations. The technical rules for determining whether an organisation is “small” for this purpose are borrowed from the Companies Act. These look at turnover, balance sheet and number of employees on a group-wide basis. It cannot therefore be assumed that, because an organisation has little presence in the UK, it will be “small” for this purpose, because the criteria look at the global group.
All organisations which receive services under a contract with an individual’s own limited company should determine whether they are affected by this change, i.e. whether or not they are a “small” organisation. If they are affected, they should review the arrangements they have in place with their contractors who provide services through their own personal service companies. Where an individual contractor is considered to be an employee if he or she had contracted with the organisation, the organisation should then start operating PAYE on payments to the personal service company.
This is a significant change of approach resulting from the shift in the status determination and compliance burden from the contractor to the end user. There will be a limited time between the publication of the finance bill on 19 March and the implementation date of 6 April 2020. It is important to note it is not the intention of the law to prevent individuals using a personal service company. Organisations using contractors will need to take ‘reasonable care’ in assessing their contractor populations. We therefore welcome the recent announcement of a light touch approach to implementation in the first year which should enable organisations to put in place strong risk assessment and governance processes.
Short-term business visitors
From April 2020, there will be two further relaxations in the reporting of short-term business visitors (STBVs) from overseas. Currently, UK companies must operate PAYE for individuals who come to work in the UK from overseas branches of UK companies, or if the individual is resident in a country that has not entered into a Double Tax Agreement with the UK. If such an employee spends fewer than 30 days in the UK during the tax year, the company can operate a special PAYE arrangement at the end of the tax year.
The new rules will extend this workday threshold from 30 days or less to 60 days or less. The deadline by which companies must report PAYE special arrangements for STBVs and make payment to HMRC will be extended from 19 April to 31 May.
HMRC has written to employers who they believe will want to sign up to the new scheme, called ‘Appendix 8’. Employers should respond to these letters before 6 April 2020.
The lifetime allowance for pension savings will increase from £1,055,000 in 2019-20 to £1,073,100 in 2020-21.
Changes are being made to the way tax relief claimed on pensions is calculated. In 2016 the annual allowance ‘taper’ was introduced which meant that high earners were entitled to a lower pension annual allowance. The effect of the taper was to reduce the annual allowance by £1 for every £2 of ‘adjusted income’ (broadly net pay before tax plus employer pension contributions or pension accrual) over £150,000 from £40,000 to a minimum of £10,000. This taper impacted certain NHS workers who had to pay significant tax charges on their pension accruals. As a consequence of a recent review of that impact the government has decided to increase the level of bandings of the taper so that it applies in cases where adjusted income is £240,000 or more. The minimum annual allowance has been reduced to £4,000.
This change to the taper will be welcomed by the many people who will be entitled to a higher annual pension allowance as a result. An individual with adjusted income of £210,000 will now have an annual allowance of £40,000 instead of £10,000. However, individuals earning more than £300,000 will see a reduction of the annual allowance from £10,000 to as low as £4,000.
Employers are therefore likely to see questions from their employees in the coming days and weeks. Employees who were impacted by the taper may have opted to receive a ‘pension cash allowance’ on which they pay tax in lieu of a pension contribution. They may now wish to revisit this arrangement because they can contribute more into their pension tax free. Employees earning more than £300,000 will need to consider reviewing their pension contributions before the start of the next tax year as they will have a lower annual allowance.
Global Mobility teams are also likely to see a mixed picture for their assignee populations and may want to assess the impact on both cost and their policies.
From April 2020, non-contractual “ex gratia” termination payments will be subject to employer NICs to the extent they exceed £30,000. Employee NICs will still not be charged on non-contractual termination payments even if over £30,000.
These changes are likely to change the way in which termination packages are structured and may increase the overall cost of terminations.
Non-taxable counselling services
The government will extend the scope of non-taxable counselling services to include related medical treatment, such as cognitive behavioural therapy, when provided to an employee as part of an employer’s welfare counselling services. The changes will take effect from April 2020.
Novel Coronavirus (COVID-19) measures
A new Coronavirus Business Interruption Loan Scheme, delivered by the British Business Bank, will enable businesses with a turnover of no more than £41 million to apply for a loan of up to £1.2 million, with the government covering up to 80% of any losses with no fees.
For businesses with fewer than 250 employees, the cost of providing 14 days of statutory sick pay per eligible employee will be refunded by the government in full. The government will be issuing further details setting out how the refund will be facilitated.
A dedicated helpline (0800 0159 559) has been set up to help businesses and self-employed individuals in financial distress and with outstanding tax liabilities receive support with their tax affairs. Through this, businesses may be able to agree a bespoke Time to Pay arrangement.
Travel restrictions are likely to have an impact of the UK tax residence status of some employees. There is a provision in the statutory residence test to exclude up to 60 days spent in the UK in any tax year for exceptional circumstances. HMRC has not made any definitive statement on situations where exceptional circumstances can be used in the context of COVID-19 and thus the facts and circumstances of each case will require assessment. There may well be further statements on this point as things develop.
Other relevant taxation measures
Principal private residence relief
Principal private residence (PPR) relief exempts sales of a person’s main or only home from Capital Gains Tax (CGT) on disposal. In the first instance, relief is available for the period of ownership during which the property was lived in. A number of reliefs and exemptions may be available for periods of allowed absences when calculating the amount which can be exempted from CGT.
From April 2020, the government intends to change two reliefs. Currently, the final 18 months of ownership are exempt from CGT if the property was the owner’s only or main home and qualified for PPR at some point. From April 2020, this final period of exemption will be reduced from 18 months to nine months. Lettings relief applies when a property that qualified as a PPR at some point is let out. Under the proposed changes letting relief will only apply if the owner is in shared occupancy with the tenant.
New filing and payment rules for UK residential property gains
New rules requiring the payment of CGT on account for residential property gains for UK residents are also coming into force from 6 April 2020. Under the new scheme for UK residents, a payment on account must be made and a return submitted to HMRC within 30 days of disposal of a residential property. The payment will be credited against the taxpayer’s income tax and CGT liability for that tax year when a self–assessment return is filed. The reporting requirements will not apply where a gain is not chargeable to CGT.
These proposed changes, along with the existing rules for non-residents disposing UK residential property, will impact employees who are on assignment overseas or returning to their home country after an assignment. This is because they will have less time to sell their UK property before they become liable to CGT and will subsequently have more admin to deal with.
Share incentives and entrepreneurs’ relief
The Budget contained no radical changes to the taxation of share options and other share incentives. It did, though, contain some changes to entrepreneurs’ relief (ER) which will impact the holders of Enterprise Management Incentive (EMI) options, as well as affecting certain employees who hold shares directly in their employing company.
Capital gains that qualify for ER are taxed at a rate of 10% (rather than the top capital gains tax rate of 20%). Currently this is subject to a lifetime limit of £10 million. From 11 March 2020 this lifetime limit is being reduced to £1 million. This will impact employees who hold shares which are eligible for entrepreneurs’ relief.
EMI options are perhaps the most tax-efficient of employee equity incentives. Provided an EMI option is granted with an exercise price of not less than market value at the date of grant, and the relevant statutory conditions are complied with between grant and exercise, there is no income tax or NICs payable when the option is exercised; when the shares are sold, the total gain (the different between the exercise price paid to exercise the option and the sale proceeds) is taxed as capital gain.
The capital gain is eligible for ER, provided that the total period of time between the grant of the option and the sale of the shares is at least two years. The reduction in the lifetime limit for entrepreneurs’ relief will impact those EMI option holders with very valuable EMI options, but the vast majority of EMI option holders are likely to be able to continue to benefit from entrepreneurs’ relief.
Stamp Duty Land Tax
From 1 April 2021 there will be a 2% stamp duty land tax surcharge on non-UK residents buying residential property in England and Northern Ireland. The surcharge for overseas residents is in addition to the typical stamp duty fees owed when buying a property, and on top of the 3% surcharge if they already own a home. It could mean an overseas buyer pays tax of up to 17% on any value above £1.5m.