On 29 October 2018, the Chancellor delivered the 2018 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 £11,850 in the 2018-19 tax year to £12,500 in 2019-20. The higher rate income tax (40%) threshold will increase from £46,350 in 2018-19 to £50,000 in 2019-20. Both increases will be maintained in 2020-21. The additional rate (45%) threshold will remain unchanged at £150,000.
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.
Capital gains tax
The current capital gains tax annual exemption will increase from £11,700 in the 2018-19 tax year to £12,000 in 2019-20.
Other employment taxation measures
Employment allowance reform
From April 2020, the National Insurance Contributions (NICs) Employment allowance will no longer be available to all businesses in the UK. Only businesses with an annual NICs bill of less than £100,000 in the previous tax year will be entitled to claim the allowance. The allowance will remain at £3,000 as it is currently.
The Budget has introduced reforms to the apprenticeship programme, effective from April 2019. Large businesses will be able to invest up to 25% of their apprenticeship levy to pay for apprenticeship training in their suppliers.
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 via their own limited company (personal service company), the limited company must assess whether the individual would be considered self-employed, or as an employee and therefore operate PAYE. From April 2020, the company receiving and paying for the services will need to assess whether the engagement falls inside IR35. This company will be responsible for operating PAYE when making payments to the personal service company.
The intention is that the changes will apply to medium-sized and large organisation only, with the existing IR35 rules continuing to apply to small organisations.
Details of how this will work in practice have not yet been announced; however, it is likely to be similar to the rules in the public sector currently. Moreover, while The Budget states that these rules will not apply to small businesses, there have not been any details as to what constitutes a small business in this case.
Short term business visitors
From April 2020, there will be two tax and administrative changes in the reporting of short term business visitors (STBVs) from overseas branches. 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. These rules will also now apply to STBVs from overseas branches of UK companies, not just from overseas companies. The deadline by which companies must report PAYE special arrangements for STBVs and make payment to HMRC will be extended to 31 May.
The lifetime allowance for pension savings will increase from £1,030,000 in 2018-19 to £1,055,000 to 2019-20.
The introduction of employer NICs on termination payments over £30,000 has been delayed until April 2020. Employer NICs (but not employee NICs) will be introduced on termination payments 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.
Other relevant taxation measures
Principal private residence relief
Principle 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 9 months. Lettings relief applies when a property that qualified for 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.
The government has published draft legislation to require payment of CGT on account for residential property gains for UK residents. 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 on assignment overseas or returning to their home country after an assignment as they will have less time to sell their UK property before they become liable to CGT and 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 which qualify for ER are taxed at a rate of 10% (rather than the top capital gains tax rate of 20%) up to a lifetime limit of £10 million. One of the qualifying criteria for the relief to be available is that the individual shareholder holds ordinary shares in the capital of the relevant company which have a nominal value of at least 5% of the total nominal value of all ordinary shares in the company, and confer the right to at least 5% of votes. The budget has added two additional 5% tests. In order to qualify for ER, the shareholder’s shares must now also entitle the shareholder to at least 5% of distributable profits and 5% of net profits on a winding-up. These changes were effective immediately on 29 October. Many incentive structures for employees have in the past used classes of shares designed to satisfy the 5% of nominal value and 5% of votes tests, but which have not generally conferred rights to participate in distributions or on a winding up. Those arrangements will, in consequence of the budget changes, no longer be eligible for ER.
The budget has also extended the length of time for which shares must be held in order to be eligible for ER from one year to two years. This change will apply to sales of shares from 6 April 2019.
There is, though, one piece of good news about ER. As announced when the draft finance bill legislation was published in the summer, individuals whose shareholdings qualify for ER will not be penalised when their shareholding is diluted below the 5% qualifying threshold because a new investor has subscribed for shares. Under the current law, a shareholder qualifying for the relief would cease to be eligible for it in the event that his or her shareholding was diluted below 5% by a new investor subscribing for shares. From 6 April 2019, a shareholder will be able to elect to crystalise a gain immediately before his or her shareholding is diluted below 5%, with the gain be calculated by reference to the value of his or her shareholding immediately before it was diluted below the 5% qualifying limit. The gain so crystalised will qualify for ER. The shareholder will then be able to make a second election to postpone payment of the tax arising from the crystalised gain until the shares are eventually sold. Any future increase in the value of the shares would not benefit from ER.
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, without the employee having to satisfy the 5% tests that usually have to be satisfied for ER to apply (explained above). The only condition which must be satisfied is that the total period of time between the grant of the option and the sale of the shares is at least the minimum period specified in the legislation. As mentioned, that period will increase from one year to two years, with the result that ER will, from 6 April 2019, only be available in relation to shares acquired on the exercise of EMI options where at least two years have elapsed between the grant of the EMI option and the sale of the shares.