Budget updates impacting the payroll provision

Tax rates and thresholds

Income tax

The tax-free personal allowance will increase in April 2017 to £11,500, £300 more than was announced previously, which accelerates progression towards the £12,500 target for April 2020. It will mean 1.3 million people will have been taken out of the tax regime altogether since the start of this parliament. To ensure the benefits of the personal allowance increase is passed on to higher rate taxpayers, and to encourage individuals to progress, the point at which higher earners start to pay 40% tax will increase to £45,000 in 2017-18. This is much higher than the £43,600 level announced in the Summer Budget 2015.

Company cars, vans and fuel

The Budget confirmed previous announcements that the appropriate percentage list price subject to tax will increase by 3% for cars with CO2 emissions greater than 75 grams per kilometre in 2019-20, with a 3% differential between the lower emissions bands. The maximum company car tax (CCT) will remain at 37% into the 2019-20 tax year and the 3% diesel supplement remains in place until April 2021.

There was very little said about National Insurance contributions, which may be a welcome relief to businesses after recent structural changes introduced new thresholds and rates first for under-21s, then for apprentices under 25 years old, and not forgetting the impact of the end of contracting-out. The period of calm may be short-lived, however: potential future reforms are mentioned below under tax administration and simplification.

Expenses and benefits

The Government will introduce a package of measures to further simplify the tax administration of employee benefits and expenses by:

  • Extending the voluntary payrolling framework to allow employers to account for tax on non-cash vouchers and credit tokens in real time from April 2017
  • Consulting on proposals to simplify the process for applying for and agreeing PAYE Settlement Agreements
  • Consulting on proposals to align the dates by which an employee has to make a payment to their employer in return for a benefit-in-kind they receive to ‘make good’
  • Legislating to ensure, if there is a specific statutory provision for calculating the tax charge on a benefit-in-kind this must be used (Finance Bill 2016 and Finance Bill 2017).
National Minimum Wage/National Living Wage

The Government will set the main rate of the NMW, which applies for workers aged between 21 and 24, at £6.95 from October 2016, in line with the Low Pay Commission’s recommendations. This increase means the main NMW rate will reach its highest ever level in real terms. The Government has also accepted the LPC’s recommendations for the youth and apprentice rates. October 2016 will see:

  • a 3.7% increase in the rate for 21 to 24 year olds (from £6.70 to £6.95 per hour)
  • a 4.7% increase in the rate for 18 to 20 year olds (from £5.30 to £5.55 per hour)
  • a 3.4% increase in the rate for 16 to 17 year olds (from £3.87 to £4.00 per hour)
  • a 3.0% increase in the rate for apprentices (from £3.30 to £3.40 per hour)
  • a 12.1% increase in the accommodation offset (from £5.35 to £6.00 a day).

Please also note the Government plans to align the National Minimum Wage and National Living Wage cycles so that both rates are amended in April each year. This will take effect from April 2017. So no more increases in October.

Salary sacrifice

Clearance requests for salary sacrifice arrangements from employers to HMRC have increased by over 30% since 2010. It will therefore come as no surprise the Government is considering limiting the range of benefits that attract income tax and NICs advantages when they are provided as part of salary sacrifice schemes. However, the Government’s intention is that pension saving, childcare and health-related benefits such as Cycle to Work should continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements.

Tax administration and simplification

Alignment of NICs and income tax

The OTS recently produced a lengthy report on income tax and NICs alignment. While announcing that the Government will respond in due course, it has nevertheless commissioned the OTS to review the impacts of proceeding with two specific proposals:

  • Moving employee NICs to an annual, cumulative and aggregated basis, and
  • Moving employer NICs to a payroll basis.
Tax-Free Childcare

As we know the Government will introduce Tax- Free Childcare in early 2017 and it will be gradually rolled out to children under 12, in a managed way. Parents of the youngest children will be able to enter the scheme first and it will be open to all eligible parents by the end of 2017. The existing scheme, Employer-Supported Childcare, will remain open to new entrants until April 2018 to support the transition between the schemes.

Termination Payments

The Chancellor announced the Government will be legislating in Finance Bill 2017 to tighten and clarify the rules on which types of payments will be treated as salary and which will be subject to the termination payment rules. This will ensure that the rules are applied consistently and fairly. These changes, due to come into effect from April 2018 include:

  • Clarifying that all payments in lieu of notice (regardless of whether they are contractual or not) will be subject to income tax and National Insurance Contributions (NICs) in the same way as other payments of earnings
  • Tightening the rules to ensure that certain contractual payments cannot be paid as damages, instead such payments will be treated as earnings and subject to tax and NICs
  • Removing the exemption for foreign service.

Additionally, the Government will be aligning employer NICs with the income tax treatment, so the elements of a termination payment over £30,000 will be subject to employer NICs if they are subject to income tax.

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