Here is a full anaysis of yesterday's Budget statement from a payroll perspective.
Income tax
The Chancellor sprang a bit of a surprise in the Budget this year. On 8 July last year he announced that the Universal Allowance (previously Lower Personal Allowance) would increase to £11,200 from April 2017. Yesterday, he announced that the Universal Allowance would increase to £11,500 from April 2017, a further £300 which will be welcomed by many.
He further announced that the basic rate limit will increase to £33,500 from April 2017 which is a further increase of £100 above the figure announced on 8 July last year.
The net result is that the higher rate threshold (the combination of the Universal Allowance and the base rate limit) will be £45,000 from April 2017. In other words, anyone who has just the Universal Allowance will not pay any tax at 40% until their pay exceeds £45,000.
Personal Savings Allowance
Legislation is being introduced, effective 6 April 2016, to provide for a new tax-free Personal Savings Allowance (PSA) for individuals. This will apply on the following basis:
0% rate for up to £1,000 of savings income, such as interest, paid to an individual. 0% rate for up to £500 of savings for individuals with higher rate income. It will not be available to individuals with any additional rate income.Alongside the introduction of the PSA, banks, building societies and National Savings and Investments (NS&I) will cease to deduct tax from the account interest they pay to customers.
Because Scotland now has its own tax varying powers, legislation will have to be introduced to provide for the application of English Votes for English Laws in respect of income tax rates. The UK-wide savings rates of income tax will be renamed as:
savings basic, savings additional and, savings higher.The main rates of income tax will then apply to the non-savings, non-dividend income of any individual taxpayer that is resident in the UK and is not subject to the Scottish rate of income tax. A default rate of income tax will apply to the non-savings, non-dividend income of taxpayers who are not subject to either the UK main rates of income tax or the Scottish rates of income tax. These include trustees, non-UK resident companies and non-UK resident individuals.
Employment and benefits in kind
Cars
No changes have been made to the taxation of employer provided cars for 2016/2017 other than those already announced. In other words:
The 3% surcharge for diesel engine cars will remain until at least 2021 when it is hoped a more stringent testing regime will have been introduced to ensure there can be no manipulation of emission levels under test conditions. As announced at Budget 2015, legislation is being introduced in Finance Bill 2016 to increase the appropriate percentage of list price subject to tax by 3 percentage points for cars emitting more than 75 grams of carbon dioxide per kilometre (gCO2km), to a maximum of 37%, in 2019 to 2020. The 3 percentage point differential between the 0-50 and 51-75 gCO2km bands and between the 51-75 and 76-96 gCO2/km bands will remain. The legislation also modifies the appropriate percentage for cars which have no registered CO2 emissions figure. The appropriate percentage will be increased by two percentage point for each band, these changes apply to 2017 to 2018 and 2018 to 2019.Car and Van Fuel Benefit
The FBC multipliers for both company cars and vans will be increased in line with RPI with effect from 6 April 2017. The changes will be introduced by secondary legislation later in 2016, in time for the usual tax code exercise in January 2017
Vans
The van benefit charge for 2017/2018 will be increased by Retail Price Index (RPI). The increase will be based on the September 2016 RPI figure and will be introduced by secondary legislation later in 2016 in time for the tax code exercise in January 2017.
The government is also proposing to extend the van benefit charge support for zero emission vans so that from 6 April 2016 the charge will be 20% of the main rate in 2016 to 2017 and 2017 to 2018, and will then increase on a tapered basis to 5 April 2022.
The government intends to review the van benefit charge for zero emission vans again at Budget 2018.
Alignment of dates for 'making good' payments
Many employees receive benefits from their employer where they are required to make good the cost of the benefit. A simple example is an employer agreeing to provide family medical insurance cover to an employee but on condition that the employee makes good the additional cost of spouses/partners/children. Subject to consultation, the government are intending to align the dates by which an employee has to ‘make good’ the cost of their benefit-in-kind to reduce their tax liability. The aim of the proposals is to simplify and clarify the current range of dates for ‘making good’ payments.
The consultation will be published in the summer and will run for 12 weeks.
Salary Sacrifice for Provision of Benefits in Kind
The government are considering limiting the range of benefits that attract income tax and National Insurance contributions (NICs) advantages when they are provided as part of salary sacrifice schemes. However, the government’s intention is that the following will continue to be available:
pension saving, childcare, and health-related benefits such as Cycle to Work schemesMany people have expressed concern that the government would attack salary sacrifice schemes as part of their agenda of clamping down on tax avoidance. It is, therefore, reassuring to see that the core salary sacrifice schemes look as though they will be protected..
Specific methods of calculating a tax liability
Historically, there have been some very inventive and creative tax avoidance schemes introduced where advisers/employers have attempted to use different methods of calculating a tax liability compared with the specific statutory provisions, for example with employer provided cars and fuel for those cars.
The government intends to introduce preventative measures to ensure that if there is a specific statutory provision for calculating the tax charge on a benefit-in-kind, this must be used.
This will mean that where an employee gets something from their employer on the same terms as a member of the public, there will still be a taxable benefit based on the statutory provisions for calculating the charge.
Sporting testimonials
Legislation will be introduced in Finance Bill 2016 to confirm that income from sporting testimonials and benefit matches for employed sportspersons, irrespective of whether they are arranged by the sportsperson's employer or by an independent testimonial committee, is chargeable to income tax.
This legislation will apply to testimonials which are non-contractual or non-customary and where the testimonial has been granted or awarded on or after 25 November 2015 for income from events taking place on or after 6 April 2017. Testimonials granted or awarded under contract or custom are already subject to income tax and will not be affected by the new legislation.
Following consultation on the draft legislation, the exemption previously announced of £50,000 has been increased to £100,000. This applies from 6 April 2017 to an employed sportsperson against income from sporting testimonials which are non-contractual or non-customary. This will apply only to a single testimonial (which may consist of one or more events in a testimonial year).
Payrolling of benefits in kind
As readers will be aware, employers are able to voluntarily payroll benefits from April 2016 with certain exceptions. There are only three exceptions:
Loans Accommodation, and Non-cash vouchersIt is easy to see why loans and accommodation have been excluded, but it has always been difficult to explain why non-cash vouchers were because they have to be processed through the payroll for Class 1 NI in any case. Therefore, subjecting them to PAYE at the same time should not cause a problem for employers.
So, it is good to see that the government are proposing to permit the payrolling of non-cash vouchers from April 2017.
Termination Payments
We have known for some time that the Office for Tax Simplification (OTS) have been looking at simplifying the rules relating to termination payments. The government have announced that legislation will be introduced:
clarifying and tightening the rules about the taxation of termination payments. This will include introducing legislation to clarify that all payments in lieu of notice and certain damages payments are taxable as earnings and removing foreign service relief. Aligning the employer NICs and tax treatments of termination payments, so employers will have to pay NICs on the elements of termination payments that exceed £30,000. These changes will be legislated in Finance Bill 2017 and a future NICs Bill and will take effect from April 2018. A technical consultation will be published over the summer.In many respects, this is to be welcomed by employers because of the lack of certainty of how payments such as pay in lieu of notice (PILON) should be treated. However, with the upside is also a downside – termination payments will cost employers more. Of specific interest is the note that termination payments in excess of £30,000 will attract employer NI. We wait with baited breath to see if this is a slip and employees will also pay NI on the element above £30,000 – we hope not!
Also, it seems that the proposal to reduce the tax free sum to £23,000 has been abandoned.
Simple Assessment
Legislation will be introduced to provide a new power to allow HMRC to make an assessment of a person’s income tax or capital gains tax liability without them first being required to complete a self-assessment return and where it has sufficient information about that individual to make the assessment.
Following consultation on the draft legislation for Simple Assessment as published on 9 December 2015 legislation will provide for an increased the time limit for “customers” to dispute the amount due in their assessment to 60 days and have clarified the arrangements for interest and late payment penalties to bring these in line with interest and late payment penalties for Self-Assessment.
This measure will have effect on and after the date of Royal Assent to Finance Bill 2016.
Employee share schemes
As previously announced legislation will be introduced in Finance Bill 2016 to simplify tax-advantaged and non-tax-advantaged employee share scheme rules. The changes will:
non-tax-advantaged schemes - clarify the tax treatment for internationally mobile employees of certain employment-related securities (ERS) and ERS options; this will come into force on 6 April 2016. Any charge to tax will arise under the rules that deal with ERS options, rather than earnings Share incentive plans - reinstate rules for Share Incentive Plans (SIPs) previously repealed, to enforce the principle that shares with preferential rights cannot be issued to selected employees only. This will have effect from the date that the Finance Bill 2016 receives Royal Assent. Reasonable excuse - permit late notification of tax-advantaged share schemes where the taxpayer had a reasonable excuse. This will have effect in relation to notifications made on or after 6 April 2016.Travel and subsistence expenses rules
Following the consideration of travel and subsistence (T&S) rules by the Office of Tax Simplification (OTS), the government announced at Budget 2014 that it would conduct a review of the current tax rules for T&S.
The government published a discussion paper in September 2015 that outlined a proposed T&S framework for consideration. Responses received made clear that, although complex in parts, the current T&S rules are generally well understood and work effectively for the majority of employees. Revised guidance published in 2015 has improved understanding and application of the rules.
Therefore, as announced at Budget 2016, the government will not be taking forward the proposed framework for consultation and the broad T&S rules will remain as they are. The government will publish a summary of responses to the discussion paper shortly after Budget 2016.
The government will continue to look for simplifications and seek to improve employers’ reporting requirements for T&S.
Employment Intermediaries and travel expenses
As previously announced, the government will be introducing legislation in Finance Bill 2016 to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary.
However, following consultation, the draft legislation has been amended to allow grouped companies to second workers within the group, and to prevent the organised misuse of Personal Service Companies in order to avoid the restrictions.
There have also been minor amendments made to improve clarity and correct errors.
Pensions Advice Allowance
The government will consult over summer 2016 on introducing a Pensions Advice Allowance, permitting people to withdraw £500 tax free, before the age of 55, from their defined contribution pension to redeem against the cost of financial advice.
Disguised remuneration
The government will be bringing forward a package of changes to ensure that those who have used disguised remuneration tax avoidance schemes pay their fair share of tax and National Insurance contributions.
These schemes often involve individuals being paid in loans through structures such as offshore Employee Benefit Trusts.
Interestingly, the proposal is that the changes will not only tackle schemes in the future, but also in the past.
Due to its complexity, the issues will be addressed over two Finance Bills (2016 and 2017) with one type of scheme being closed down from Budget day, effectively 16 March 2016.
Include will be a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5 April 2019.
Apprenticeship Levy
The government have confirmed that the new Apprentice Levy will apply from April 2017. Minor amendments have been made to the draft legislation published on 4th February 2016 – watch this space.
Pensions
Various changes are being made to pensions taxation
Bridging pensions changes – the new single tier pension comes into effect on 6 April 2016. Following its introduction legislation will provide for the pension tax rules on bridging pensions to be aligned with Department for Work and Pensions legislation. Serious Ill Health Lump Sums - under 75 – Legislation is going to be introduced to enable a serious ill health lump sum to be paid out of remaining funds once pension savings have been accessed. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent. Serious Ill Health Lump Sum - 75 and over - Legislation is going to be introduced providing for the replacement of the 45% tax charge on serious ill-health lump sums paid to individuals who have reached age 75, with tax at the individual's marginal rate. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent. Dependant's Flexi-Access Drawdown – Currently, dependants with drawdown or flexi-access drawdown pension have to take one lump sum before age 23. Legislation will be introduced to enable these dependents to continue to access their funds as they wish. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent. Charity Lump Sum Death Benefits – Legislation is going to be introduced which will align the tax treatment of charity lump sum death benefits, whether they are paid out of drawdown and flexi-access drawdown funds or uncrystallised funds. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent. Trivial Commutation of Defined Contribution pensions in payment - Legislation is going to be introduced to enable money purchase scheme pensions in payment to be paid as a trivial commutation lump sum. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent. Top ups to Dependants' Death Benefits - Legislation will be introduced to enable the full amount of dependants’ benefits to be paid as authorised payments where there are insufficient funds in a cash balance arrangement when the member dies. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent.Other Budget matters
The following are a selection of some of the other Budget announcements which, although not directly payroll related, may be of personal interest to some of our readers
Lifetime Individual Savings Account – The government will be introducing legislation to provide a Lifetime Individual Savings Account (Lifetime ISA). The Lifetime ISA will be available from April 2017 for adults under the age of 40. They will be able to contribute up to £4,000 per year, and receive a 25% bonus from the government. Funds from the Lifetime ISA, including the government bonus, can be used to buy a first home at any time from 12 months after the account opening, and be withdrawn from age 60.
Annual ISAs
The annual ISA subscription limit will be increased to £20,000 from 6 April 2017. This applies to all savers.
Inheritance Tax
Downsizing and the residence nil-rate band – The government intends to introduce legislation to ensure that the residence nil-rate band will be available in cases where a person downsizes or ceases to own a home and other assets are passed on death to direct descendants. Following consultation, the draft legislation will be revised to clarify when a disposal has occurred, to ensure that certain disposals made by trustees will also be taken into account, and to ensure that the provisions relating to cases involving conditionally exempt assets work as intended. These changes will apply for deaths on or after 6 April 2017 where the deceased downsized or disposed of a property on or after 8 July 2015.
Inheritance Tax: exemption for compensation and ex-gratia payments to victims of persecution during World War II - As announced at Autumn Statement 2015, the government will legislate Extra Statutory Concession F20, which gives an inheritance tax exemption in respect of certain compensation and ex-gratia payments for World War II claims.
The legislation will also extend the scope of the existing concession to include a payment made under a recently created compensation scheme known as the Child Survivor Fund. Following consultation, the legislation has amended to extend the power for the Treasury to add additional payments from particular schemes so that it includes prisoners of war and civil internees as well as victims of National Socialist persecution. The legislation will apply to deaths on or after 1 January 2015.
Higher rate of Stamp Duty Land tax (SDLT) on additional residential properties - As announced at the Spending Review and Autumn Statement 2015, legislation will be introduced in Finance Bill 2016 to apply higher rates of SDLT, 3 percentage points above the existing rates, for purchases of additional residential properties on or after 1 April 2016. Those considering buying second properties need to be aware!
Air Passenger Duty (APD) - Rates for 2016 to 2017 - As announced at March Budget 15, legislation will be introduced in Finance Bill 2016 to increase air passenger duty rates in line with RPI from 1 April 2016. Does this mean that your holidays abroad will now be more expensive?
Vehicle Excise Duty (VED) rates for cars, vans, motorcycles and motorcycle trade licences - Legislation will be introduced to increase VED rates in line with the Retail Price Index (RPI) with effect from 1 April 2016.
Vehicle Excise Duty (VED) 40-year rolling classic vehicle exemption - Legislation will be introduced to extend the existing VED exemption for classic vehicles permanently so that on the 1 April each year vehicles constructed more than 40 years before the beginning of the year will automatically be exempt. This change will have effect from 1 April 2017.
Tobacco products duty rates - The duty rates for all tobacco products were increased by 2% above inflation, from 6pm on the 16 March 2016. This is in accordance with the Budget 2014 announcement that all tobacco duty rates will increase by this amount each year until the end of this Parliament. Also announced was that hand-rolling tobacco duty would rise by an additional 3% above this to 5% above retail price inflation.
Alcohol duty rates - The following alcohol duty rates will rise in line with inflation (based on RPI):
sparkling cider and perry exceeding 5.5% alcohol by volume (abv) but less than 8.5% abv all wine and made-wine rates at or below 22% abvThese changes will take effect from 21 March 2016. So, you wine lovers have a week to stock up on your favourite tipples – Make mine a Primitivo!
The duty rates on beer, spirits, wine and made wine exceeding 22% abv, still cider and perry, and sparkling cider and perry of a strength not exceeding 5.5% abv have been frozen.
Tax administration
The following measures are proposed to tackle the major issues of tax avoidance
State Aid Modernisation - As announced at Budget 2016, legislation will be introduced in Finance Bill 2016 to enable HMRC, from July 2016, to collate more information on beneficiaries of approved State aids. This will help the UK improve the monitoring of tax State aids and compliance with State aid guidelines.
Large Business – Large businesses will be required to publish tax strategies and special measures.
To provide a requirement for large businesses to publish their tax strategy as it relates to or affects UK taxation A ‘special measures’ process narrowly targeted to tackle the small number of large businesses that persistently engage in aggressive tax planning and/or refuse to engage with HMRC in an open and collaborative wayFollowing consultation, the draft legislation has been revised to clarify the population of those entities in scope of the legislation. The legislation will be effective for accounting periods commencing on or after Royal Assent to Finance Bill 2016.
Strengthening civil deterrents for offshore evasion - As announced at Budget 2016, and following publication of draft legislation on 9 December 2015, Finance Bill 2016 will include legislation to increase minimum penalties for deliberate offshore tax evasion, require greater levels of disclosure for penalty reductions, remove protection from naming for unprompted disclosures, and allow naming provisions to name individuals who look to hide their evasion behind companies and other entities. This introduces an additional penalty for serious cases of deliberate offshore evasion, which is equivalent to up to 10% of the underlying asset value. This will come into force from to Finance Bill 2016.
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All the changes from the 2016 Budget will be covered in our Payroll Update coure in full detail, for more information of the course click here.
