On 16 March 2016, the Chancellor delivered the 2016 Budget. This article provides an overview of the key developments relevant to HR practitioners.
Changes in tax rates and allowances
The tax free personal allowance for income tax will increase from £11,000 in the 2016-17 tax year to £11,500 in 2017-18, with further increases planned up to £12,500 by 2020. The higher rate income tax (40%) threshold will increase from £43,000 in 2016-17 to £45,000 in 2017-18.
The corporation tax rate will be reduced from 18% to 17% in 2020, making it the lowest of the G20 countries. This is part of the Government’s desire to promote the UK as an attractive place to do business.
Loans to participators
The Government will increase the corporation tax rate on loans to participators in close companies from 25% to 32.5% on all relevant loans made on or after 6 April 2016 (this is to match the increase in the dividend tax rate).
Capital gains tax rates
With effect from 6 April 2016, the higher rate of Capital Gains Tax (CGT) will reduce from 28% to 20%, and the basic rate will reduce from 18% to 10%. This will not apply to gains accruing on the disposal of residential property or to fund manager carried interest gains.
Also, from 6 April 2016, the 10% Entrepreneur’s Relief rate of CGT will be extended to external investors in unlisted trading companies. The shares will need to have been held for at least three years, and the relief is subject to a £10m lifetime cap.
These measures can be seen as part of the Government’s drive to promote investment in businesses, and to encourage investment in companies rather than residential property. The reduction in CGT rates will particularly benefit employees participating in tax advantaged employee share schemes such as the Company Share Option Plan and Savings-Related Share Option Plan. The widening differential between capital gains tax and income tax rates will also provide an increased incentive for unlisted companies to implement alternative forms of employee share schemes that can be structured to fall mainly within the CGT regime (such as growth shares and joint share ownership plans).
Employee share plans
Lifetime limit on employee shareholder status exemption
From 17 March 2016, a lifetime limit of £100,000 will be placed on the amount of gains from Employee Shareholder Status (ESS) shares that may be exempt from CGT. This will not affect ESS shares that were issued on or before 16 March 2016.
ESS arrangements have grown in popularity over the last few years, particularly in the case of private equity firms looking to incentivise senior management. Although politically it would be difficult for the Government to abolish ESS entirely, it was inevitable that it would seek to reduce some of the tax advantages once it became clear how ESS was being used. Nevertheless, ESS remains an attractive tax efficient alternative for some companies, particularly given the reduction in CGT rates mentioned above.
Technical changes to tax advantaged share plans legislation
The Budget included some technical changes to the Enterprise Management Incentives (EMI) legislation, the effect of which is, broadly, to extend CGT Entrepreneur’s Relief to rights issue shares where the original shareholding was acquired on the exercise of an EMI option.
There are also certain other technical changes to the tax advantaged share schemes legislation that will come into force on 6 April 2016 that had previously been announced in the 2015 Autumn Statement.
Tax avoidance measures
Contrary to speculation that salary sacrifice arrangements might be abolished entirely, the Government has confirmed that benefits such as pension saving, childcare, and Cycle to Work schemes will continue to benefit from income tax and National Insurance Contributions (NICs) relief through salary sacrifice arrangements. However, the Government is still considering a possible restriction on the range of benefits that can be provided under salary sacrifice.
Disguised remuneration schemes
The Government will be introducing measures to crackdown on the continued use of Employee Benefit Trusts (EBTs) and Employer Funded Retirement Benefit Schemes (EFRBS) in a way which enables remuneration to be paid free of income tax and NICs (so called “Disguised Remuneration” schemes).
Although very wide ranging legislation was introduced in 2010 in order to prevent the use of such schemes, the Government believes that further anti-avoidance measures are required. The fact that the Government expects the changes to generate over £2bn of additional tax revenue over the next 5 years is an indication of how widespread the use of such schemes has been.
Other employment taxation measures
Employer arranged pensions advice
From April 2017, the value of independent pensions advice that an employer can arrange for its employees free of tax and NICs will increase from £150 to £500 per year.
From April 2018, there will be changes to the tax and NICs treatment of payments made to individuals on termination of their employment. Currently, certain termination payments are only subject to income tax over £30,000 and are not subject to NICs at all. The Government is proposing to impose employer NICs (but not employee NICs) on termination payments over £30,000.
In addition, the Government is proposing to limit the types of termination payments that can benefit from the £30,000 income tax exemption and make changes to the foreign service relief rules. Further details are expected in a consultation document later this year.
These changes are likely to change the way in which termination packages are structured and may increase the overall cost of terminations. However, any clarification of the current areas of uncertainty surrounding the taxation of termination payments will be welcomed.
Off-payroll working in the public sector
From April 2017, where an individual is working for a public sector body through their own personal service company (whether that is through an agency or other third party), the public sector body (or agency/third party) will have responsibility for determining whether employment taxes should be deducted and accounted for under Pay As You Earn (PAYE). This is a change to the current rules where it is the responsibility of the personal service company under the “IR35” rules. There will be a consultation on the new rules during 2016, with legislation appearing in the Finance Bill 2017.
The new rules will not affect individuals working in the private sector through personal service companies.
In the 2015 Autumn Statement, it was announced that an apprenticeship levy will be introduced in April 2017. The Government announced in the 2016 Budget that employers will receive a 10% top up to their monthly levy contributions to spend on apprenticeship training. Further details are expected in the coming months.
Abolishing Class 2 NICs
From April 2018, self-employed workers will no longer have to pay Class 2 NICs. This will provide an annual saving of £134 on average to approximately 3.4m self-employed workers.
Currently, self-employed individuals working abroad are able to make voluntary Class 2 NI contributions in order to protect their State Pension and benefit entitlement, so it remains to be seen how they will be affected by this change.
Restriction of employment allowance on illegal workers
Regulations will be introduced that exclude employers from claiming NICs Employment Allowance for 1 year if they have received a civil penalty from the Home Office for employing illegal workers. Exclusions will come into force from 2018-2019 following the first period under assessment (tax year 2017-2018).
Previously announced measures coming into force on 6 April 2016
Changes in tax rates and allowances
From 6 April 2016, the following previously announced changes to tax rates and allowances will come into effect:
- Pension’s taxation: The lifetime allowance for pension contributions will be reduced from £1.25m to £1m, and the tax free annual allowance for pension contributions (currently £40,000 per year) will be reduced for those earning over £150,000 per annum by £1 for every £2 earned above that threshold, down to a minimum of £10,000.
- Employment Allowance: The Employment Allowance, which currently provides a £2,000 reduction in an employer’s NICs liability, will be increased to £3,000 per year. Where a company’s sole employee is a director, the Employment Allowance will no longer be available.
- Dividend taxation: There will be a new tax regime for dividends, involving an annual tax free dividend allowance of £5,000, the abolition of the 10% tax credit, and new tax rates on dividends of 7.5%, 32.5% and 38.1% (for basic, higher and additional rate taxpayers respectively).
Employee benefits and expenses
The following measures affecting benefits and expenses will come into effect from 6 April 2016:
- Abolition of the £8,500 threshold for benefits in kind.
- Allowing voluntary payrolling of taxable benefits.
- A tax exemption for qualifying business expenses.
- An exemption from tax for trivial benefits (less than £50 per employee).
- Restrictions on tax relief for travel and subsistence expenses of workers engaged through employment intermediaries, such as an umbrella company or a personal service company.
If you have any queries on how these changes will impact your business please get in touch.
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