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Budget: Payroll changes

Bid for fairness means more tax tinkering

Chancellor Phillip Hammond wanted this to be the ‘upbeat’ Budget, but in reality employers were already impacted by previously announced changes before he rose to the dispatch box.

Mr Hammond talked much about creating a ‘fairer’ tax system, reiterating the Government’s ongoing commitment to increasing the National Living Wage for over 25s, and targeting the perceived preferential tax treatment available to contractors operating as self-employed or through a limited company.

The increase in the National Living Wage to £7.50 per hour from April 2017 is likely to bring an expected benefit to working families, but ultimately increased costs for businesses.

Employers and employees will see no changes to the rates of Class 1 National Insurance, but those employers who are sole traders or partnerships will see their main rate of Class 4 National Insurance increase from the current 9% to 11% by 2019.

Owner managed businesses operating as limited companies will also see a hit to their ability to extract profits in a tax-efficient way, through a reduction in the dividend allowance – cash they can take out at a 0% tax rate – from the current £5,000 to £2,000 per year from April 2018.

Larger employers hoping for a delay to the introduction of the Apprenticeship Levy may be disappointed as this will go ahead as planned from April 2017.

The 0.5% levy, which is anticipated to affect 2% of employers, applies to employers paying earnings subject to employer’s Class 1 National Insurance in excess of £3 million. This levy applies across all sectors, irrespective of whether the employer engages apprentices.

There remains a disparity between England and the rest of the UK in terms of accessing funds raised from the Apprenticeship Levy. For employers south of the border, their levy is paid into an online system from which apprenticeships are funded, allowing them to get their money back directly, whereas elsewhere funding is only available to certain employers under a pre-existing system. Employers outside England may therefore view the levy as a further cost to their bottom line.

Further to changes previously announced on salary sacrifice schemes, the Chancellor has turned his attention to benefits in kind more generally, announcing a consultation on the valuation rules for calculating taxable benefits in kind and specially the rules on employer-provided living accommodation. The rules for claiming tax relief for expenses (including those that are not reimbursed by their employer) are also under review.

Against the backdrop of the new off-payroll rules affecting those providing services to the public sector from April 2017, the Chancellor pledged to reduce the differences in the tax and National Insurance payable by workers operating as self-employed individuals and using limited companies, and those who are employees of a business.

Public sector agencies will be responsible for identifying and reviewing the employment status of all workers engaged through personal service intermediaries such as limited companies and it would be no surprise if the off-payroll rules were extended to the private sector in future.

Richard Britten is Partner and Head of Employer Solutions at Johnston Carmichael

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