Pay rise for employees, more burdens for employers
The Chancellor announced increases to the National Living Wage and National Minimum Wage hourly rates from April 2017.
The increase from £7.20 to £7.50 per hour for employees aged 25 and over will undoubtedly be helpful to low-paid workers, especially at a time of such economic uncertainty.
However, whilst this will provide a welcome pay rise to more than one million workers, only minimal increases will apply to younger employees and apprentices.
The flipside to this coin is the additional costs these increases will present to employers.
Small businesses, especially those who have plans to expand their workforce, may have concerns about rising costs.
Larger employers will also bear the cost of the Apprenticeship Levy of 0.5% on payroll costs in excess of £3 million per year which is due to bite from April 2017.
Class 1 National Insurance thresholds will be aligned from April 2017 at £157 per week. Employees should broadly be unaffected, with the maximum additional cost for employers expected to be £7.18 per employee per year.
As previously announced, any termination payment above £30,000 will be subject to Employer’s Class 1 National Insurance from April 2018. The first £30,000 of the qualifying element of a termination payment will continue to be exempt from Income Tax and National Insurance.
Changes to the tax rules on salary exchange schemes will affect arrangements where an employee waives salary in return for a non cash benefit in kind (such as a mobile phone or private medical insurance).
The current rules achieve savings for both employer and employee, as the benefit may either be non-taxable or taxed less than the salary given up.
Benefits in kind are generally subject to Class 1A National Insurance (employer only). From April 2017, benefits provided under many salary exchange schemes will be taxed in the same way as salary, where a cash alternative is available.
Restrictions on the use of salary sacrifice means that employers will have fewer ways to supplying efficient remuneration to their workforce so again, another challenge is presented to employers.
It was not all bad news though as pensions, pensions advice, childcare vouchers, Cycle to Work and ultra-low emission cars will be unaffected by the new rules.
In all other cases, arrangements in place before April 2017 will be protected for up to a year and arrangements in respect of cars, accommodation and school fees will be protected for up to four years.
Other changes affecting employers include simplifying the PAYE Settlement Agreement process from 2018/19, the withdrawal of the tax advantages of Employee Shareholder Status schemes and the calculation of some benefits in kind.
Public sector bodies paying for workers who are not on the payroll will be responsible for ensuring the correct tax is paid from April 2017. This will affect arrangements potentially caught by the IR35 rules, which involve the use of a limited company to disguise what would otherwise be an employee-employer relationship.
The use of limited companies is common in the Oil and Gas sector, therefore it will be a case of ‘watch this space’ in terms of any extension of these new rules to the private sector.
The changes to salary sacrifice, as well as the phasing out of childcare vouchers for new entrants from 2018, provide a limited window of opportunity for employers to set up new arrangements before April 2017.
Our advice to employers is to look at how these changes will impact your bottom line; we predict more change in the near future and given we’re seeing increased costs being borne by the employer, now is the time to make sure you manage your cash flow accordingly.
Richard Britten is Partner & Head of Employer Solutions, Johnston Carmichael