HMRC have certainly been busy over the past week, announcing or updating no less than 17 consultations on 9 and 10 August alone.* On the face of it they seem fairly benign but they belie some very significant changes to a number of areas in UK tax.
We’ve set out a summary of three of the more significant areas below. If you require assistance or advice on any of these points then please do not hesitate to contact your regular FBA consultant, or give us a call on 0161 464 7162.
A termination payment is a payment made to an employee upon the termination of their employment. The definition of a termination payment is quite broad and captures a number of different types of payment. The most common are contractual payments – golden goodbyes, or payments made in lieu of a notice period (PILONs) – and non-contractual or ‘ex-gratia’ payments, to which the employee was not entitled contractually. A non-contractual payment is generally used as part of a ‘severance package’.
Broadly speaking a contractual payment is subject to both income tax and National Insurance. Note that the treatment under both tax and social security is the same.
The treatment for non-contractual payments differs however. For income tax purposes they are exempt up to a total of £30,000. However, for National Insurance purposes they are completely exempt, with no upper limit. This was particularly beneficial for employers, as it meant they did not suffer an Employers’ National Insurance contribution of 13.8% on the payment.
The proposed legislation removes this exemption for employers. It is now proposed that non-contractual payments are exempt from income tax and Employer’s National Insurance only up to the previous limit of £30,000. This adds a cost of 13.8% to employers where payments exceed this limit. Interestingly however, the full amount of the payment remains exempt from Employee’s National Insurance.
Other important proposals include changes to prevent the manipulation of PILONs in an attempt to take them out of tax and the removal of foreign service relief – important for those who have worked abroad with an employer.
The changes are due to take effect in April 2018.
Stamp Duty Land Tax
Stamp Duty Land Tax, or SDLT, is paid on the acquisition of land and property where the value fits within specified brackets. The government has proposed some minor changes to the administration of this tax.
The most important, to be introduced from 6 April 2017, is reduction in time available after a transaction to pay the SDLT due and file the appropriate return. Previously this was 30 days, the proposals would reduce this to 14 days.
Salary sacrifice is a popular scheme used by many employers of all sizes to provide employees with benefits. Broadly speaking it involves an employee and employer agreeing to reduce an employee’s salary paid in cash in lieu of another benefit, such as a mobile phone or a car. In doing so, the employee will benefit from a reduced cost (as they are paying out of gross pay, not net) and the employer will enjoy amongst other advantages significant savings in Employers’ National Insurance.
HMRC have come to the view that the cost of such schemes to the Exchequer is becoming significant. Whilst we would defend the advantages of salary sacrifice schemes, HMRC does raise good points of discussion regarding lower paid employees who often cannot access salary sacrifice schemes on the one hand, or may enjoy inflated benefits such as Universal Credit as a result of the artificially reduced salary that is a result of salary sacrifice.
Broadly the government is proposing to limit the scope of benefits that can be provided in a tax-efficient manner via salary sacrifice to: employer pension contributions, employer provided pension advice, employer supported childcare and cycle-to-work schemes. Any other benefit which is, on its own, exempt from income tax and National Insurance will now be caught if provided via salary sacrifice.
This is a complex area with a wide range of implications. If you operate a salary sacrifice scheme, or have been considering whether to do so, then you should seek advice urgently.
* Consultations are launched by government departments to seek the views of interested parties on proposed new laws. The law that is finally introduced may look very different from the original proposal, may only be tweaked slightly or may not make it through the consultation process.