The second budget of 2015 in many ways continues previous trends as the UK government looks to incentivise people into work, reduce state benefit and deficit bills and promote the UK as “open for business”. However there was one major surprise announcement impacting employers with the introduction of a new National Living Wage. Aside from this headline grabbing measure we saw a continued focus on reducing tax reliefs for the highest earners and the crack down on tax avoidance.
Below we summarise the key measures that will impact HR practitioners.
Changes in tax rates and allowances
The tax free personal allowance for income tax will increase from £10,600 to £11,000 for the 2016-17 tax year.
The higher rate income tax (40%) threshold will increase from £42,385 in 2015-16 to £43,000 in 2016-17 and to £43,600 in 2017-18.
The corporation tax rate will be reduced from 20% to 19% in 2017 making it the joint lowest of the G20 countries. This is part of the government’s desire to promote the UK as an attractive place to do business, and continues successive reductions in the rate over the last few years from 30% in 2007.
From 2016, dividends will be taxed at 7.5%, 32.5% or 38.1%, for basic rate, higher rate and additional rate tax payers. The 10% dividend tax credit will be abolished and a new annual tax free allowance of £5,000 will be introduced for dividends.
These changes are something of a surprise and although they will be welcomed by individuals with relatively small investments, company owners looking to extract profits are likely to face a higher tax burden.
From April 2016, the tax free 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. There will also be changes to the rules on pension input periods to align them with the tax year.
The lifetime allowance for pension contributions will also suffer a further reduction from £1.25 million to £1 million from 6 April 2016.
The Employment Allowance, which currently provides a £2,000 reduction in an employer’s National Insurance (NICs) liability, will be increased to £3,000 per year from April 2016. However, where a company’s sole employee is a director the Employment Allowance will no longer be available.
As previously announced, legislation will be introduced to ensure that there can be no increases in income tax, Class 1 NICs or VAT rates for the duration of the Parliament.
Tax avoidance measures
Salary sacrifice arrangements
The government has said that it will be monitoring the operation of salary sacrifice arrangements, which can result in significant NICs savings for employers and employees. What this will mean in practice remains to be seen. However, given the likely increased focus from HMRC, companies operating salary sacrifice should ensure that their documentation and procedures are fully compliant.
Personal service companies
HMRC will be starting “a dialogue with business on how to improve the effectiveness of existing IR35 legislation”. What this means in practice is unclear, but anyone using a personal service company can expect even more scrutiny in the future.
Employee benefits and expenses
Simplification of expenses and benefits
The following measures will be introduced from April 2016:
- Abolition of the £8,500 threshold for benefits in kind
- Allowing voluntary payrolling of taxable benefits
- An exemption for qualifying business expenses
- An exemption from tax for trivial benefits (less than £50 per employee)
This continues measures taken by the previous government aimed at simplifying the taxation of expenses and benefits.
Employment intermediaries and tax relief for travel and subsistence
There will be a consultation on restricting tax relief for travel and subsistence for workers engaged through an employment intermediary, such as an umbrella company or a personal service company. These changes would take effect from 6 April 2016.
From April 2017, individuals who have been resident in the UK for 15 or more of the past 20 years will no longer be entitled to claim non-domiciled status in the UK (and therefore the remittance basis of taxation on their offshore income and gains). There are also other changes affecting the ability of individuals born in the UK to UK domiciled parents to claim non-domicile status.
Introduction of compulsory National Living Wage
In a surprise move the Chancellor announced a £9 compulsory National Living Wage to be introduced by 2020 for those aged 25 and over. It was billed as a new "premium" on top of the existing National Minimum Wage, which will continue for those under the age of 25. The first increase will be introduced in April 2016, when workers will receive £7.20 an hour, a large increase over the current £6.50 an hour minimum wage for over 21s. The Low Pay Commission will then be tasked with determining how the National Living Wage will reach the target of £9 by 2020.
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