As if it were needed, the Autumn Statement reinforced the message that this is set to be an incredibly difficult period for employers and employees alike, to the extent that it is not already for some.
However, one positive from the Autumn Statement is that it does bring some certainty for employers that has been lacking for too long. When you’re not sure what is coming next or how long any tax measure will last, planning is difficult and perhaps even pointless.
Now that we have some confidence as to the fiscal landscape in the coming years, I outline some initial thoughts on how employers may adapt and plan ahead. Before that, let’s look at the key issue:
In short, there is a double whammy - an increasing wage and employment tax bill for employers with declining disposable income for employees.
How come?
- On top of increasing employer wage bills (due largely to the pressure of inflation), many employers will see their employment tax bills rise substantially year on year. This is in large part due to the freezing of NIC thresholds until April 5, 2028. Simply put, with each wage increase, more income becomes subject to secondary Class 1 NIC since the threshold at which NIC starts remains static. That said, there was some respite for smaller employers with the £5,000 employment allowance remaining in place such that an estimated 40 per cent of employers will not be affected by the freezes. Nevertheless, many employers will conclude that employing new staff is not possible and, inevitably for some, the only way to manage costs and remain in business will be to reduce headcount.
- The increase in the National Living Wage to £10.42 will be welcomed by most. Low earners need the most support. Nevertheless, it is employers who will be providing the support in this case and they’ll be required by law to bear the additional cost of the raise.
- It perhaps wouldn’t be so gloomy if increasing wages meant that employees will have more money in their pockets. Unfortunately, this is unlikely to be the case for many. The extension to April 5, 2028, of the personal allowance freeze at £12,570 and the higher rate tax threshold at £50,270, together with the freeze in NIC thresholds will mean relative disposable income falls. Why is this? As wages increase (but lag behind the cost of living), more people will be paying tax for the first time (because the growth in their income exceeds the personal allowance) and more people will be paying tax at the 40 per cent rate (because the growth in their income means they exceed the 40 per cent threshold). This will inevitably impact employers to varying degrees on everything from staff welfare and morale to incentivisation, retention and remuneration planning.
- At a time of national economic challenge, few people will openly oppose the reduction in the 45 per cent threshold to £125,140 (currently at £150,000). However, this too will have potential implications for employers. There will no doubt be pressure on some employers from senior executives and ‘talent’ for increased remuneration to compensation for their drop in net income. Also, there may also be other direct cost increases where employers are settling tax on the employee’s behalf. For example, it is common for employers to ‘tax equalise’ employees seconded to the UK whereby the employer settles UK tax on behalf of the employee and the employee is subject to a hypothetical ‘stay at home tax’ equivalent to what they would have suffered in their home country. The drop in the 45 per cent threshold means increased cost for employers since the starting point at which they pay a grossed-up tax rate of 82 per cent will now be £125,140.
Finally, the right time to plan ahead: 6 next steps
As I indicated above, the one positive from the budget is that employers at least now have some certainty on future employment tax.
This means that taking some time out now to plan ahead is likely to be well worthwhile. Here are six steps to help get your thinking off the mark:
1. Revise or perform employment cost projections (factoring in rising wage bills and employment tax costs) to estimate the increase in employment costs associated with the current workforce over the coming years. Is it sustainable? If not, what action can be taken now to avoid future issues?
2. Determine whether too much tax/NIC is being paid. Whilst the focus is often on tax compliance and paying the right amount of tax, some employers find that they have actually been paying too much tax or NIC for many years. Are you claiming all the available tax reliefs? Are you up to date on exemptions (e.g. the veterans' NIC exemptions)? Where you have globally mobile employees, have you reviewed the international social security position to determine if NIC is required?
3. Review employee benefits package. What benefits cost the most? Are they worth it? Can they be delivered more efficiently? Has salary sacrifice been considered? Employers will no doubt have reviewed this before but the climate has changed and may well warrant another look and a revised approach.
4. Consider alternative employment/engagement options. Given the changes from 6 April 2021 whereby employers became responsible for assessing the employment status of certain contractors under IR35, many employers simply decided to move their contractors on to payroll. This increases employment costs because the engaging company is then required to pay the Class 1 employer NIC. However, is this necessary? Provided the right checks are undertaken and the individual is deemed self-employed under the UK employment status rules, then self-employment may still be a possibility in some cases, meaning reduced employment costs.
5. Review your compliance processes. Have you missed anything? With the government desperate for revenue and HMRC being given more money to launch enquiries, employers will inevitably come under greater scrutiny in the coming years. The last thing any employer needs during a time of increased costs is to find out that they have additional tax, penalties and interest to pay. Remember, HMRC can look back four tax years (and sometimes longer) for PAYE and six tax years for NIC.
6. Think about how your employees will be affected. Last but absolutely not least, how will your employees be affected? What will the impact be on low earners? Are there particular employees or groups of employees who will be affected? Do we need to communicate anything?
Employers that plan ahead, look out for creative solutions, adapt and evolve will be best placed to weather what is coming down the line. If you haven’t done so already, start planning now!
Author: Lee McIntyre-Hamilton
Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations. Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.
Contact Lee: lee@globalpayrollassociation.com
As if it were needed, the Autumn Statement reinforced the message that this is set to be an incredibly difficult period for employers and employees alike, to the extent that it is not already for some.
However, one positive from the Autumn Statement is that it does bring some certainty for employers that has been lacking for too long. When you’re not sure what is coming next or how long any tax measure will last, planning is difficult and perhaps even pointless.
Now that we have some confidence as to the fiscal landscape in the coming years, I outline some initial thoughts on how employers may adapt and plan ahead. Before that, let’s look at the key issue:
In short, there is a double whammy - an increasing wage and employment tax bill for employers with declining disposable income for employees.
How come?
- On top of increasing employer wage bills (due largely to the pressure of inflation), many employers will see their employment tax bills rise substantially year on year. This is in large part due to the freezing of NIC thresholds until April 5, 2028. Simply put, with each wage increase, more income becomes subject to secondary Class 1 NIC since the threshold at which NIC starts remains static. That said, there was some respite for smaller employers with the £5,000 employment allowance remaining in place such that an estimated 40 per cent of employers will not be affected by the freezes. Nevertheless, many employers will conclude that employing new staff is not possible and, inevitably for some, the only way to manage costs and remain in business will be to reduce headcount.
- The increase in the National Living Wage to £10.42 will be welcomed by most. Low earners need the most support. Nevertheless, it is employers who will be providing the support in this case and they’ll be required by law to bear the additional cost of the raise.
- It perhaps wouldn’t be so gloomy if increasing wages meant that employees will have more money in their pockets. Unfortunately, this is unlikely to be the case for many. The extension to April 5, 2028, of the personal allowance freeze at £12,570 and the higher rate tax threshold at £50,270, together with the freeze in NIC thresholds will mean relative disposable income falls. Why is this? As wages increase (but lag behind the cost of living), more people will be paying tax for the first time (because the growth in their income exceeds the personal allowance) and more people will be paying tax at the 40 per cent rate (because the growth in their income means they exceed the 40 per cent threshold). This will inevitably impact employers to varying degrees on everything from staff welfare and morale to incentivisation, retention and remuneration planning.
- At a time of national economic challenge, few people will openly oppose the reduction in the 45 per cent threshold to £125,140 (currently at £150,000). However, this too will have potential implications for employers. There will no doubt be pressure on some employers from senior executives and ‘talent’ for increased remuneration to compensation for their drop in net income. Also, there may also be other direct cost increases where employers are settling tax on the employee’s behalf. For example, it is common for employers to ‘tax equalise’ employees seconded to the UK whereby the employer settles UK tax on behalf of the employee and the employee is subject to a hypothetical ‘stay at home tax’ equivalent to what they would have suffered in their home country. The drop in the 45 per cent threshold means increased cost for employers since the starting point at which they pay a grossed-up tax rate of 82 per cent will now be £125,140.
Finally, the right time to plan ahead: 6 next steps
As I indicated above, the one positive from the budget is that employers at least now have some certainty on future employment tax.
This means that taking some time out now to plan ahead is likely to be well worthwhile. Here are six steps to help get your thinking off the mark:
1. Revise or perform employment cost projections (factoring in rising wage bills and employment tax costs) to estimate the increase in employment costs associated with the current workforce over the coming years. Is it sustainable? If not, what action can be taken now to avoid future issues?
2. Determine whether too much tax/NIC is being paid. Whilst the focus is often on tax compliance and paying the right amount of tax, some employers find that they have actually been paying too much tax or NIC for many years. Are you claiming all the available tax reliefs? Are you up to date on exemptions (e.g. the veterans' NIC exemptions)? Where you have globally mobile employees, have you reviewed the international social security position to determine if NIC is required?
3. Review employee benefits package. What benefits cost the most? Are they worth it? Can they be delivered more efficiently? Has salary sacrifice been considered? Employers will no doubt have reviewed this before but the climate has changed and may well warrant another look and a revised approach.
4. Consider alternative employment/engagement options. Given the changes from 6 April 2021 whereby employers became responsible for assessing the employment status of certain contractors under IR35, many employers simply decided to move their contractors on to payroll. This increases employment costs because the engaging company is then required to pay the Class 1 employer NIC. However, is this necessary? Provided the right checks are undertaken and the individual is deemed self-employed under the UK employment status rules, then self-employment may still be a possibility in some cases, meaning reduced employment costs.
5. Review your compliance processes. Have you missed anything? With the government desperate for revenue and HMRC being given more money to launch enquiries, employers will inevitably come under greater scrutiny in the coming years. The last thing any employer needs during a time of increased costs is to find out that they have additional tax, penalties and interest to pay. Remember, HMRC can look back four tax years (and sometimes longer) for PAYE and six tax years for NIC.
6. Think about how your employees will be affected. Last but absolutely not least, how will your employees be affected? What will the impact be on low earners? Are there particular employees or groups of employees who will be affected? Do we need to communicate anything?
Employers that plan ahead, look out for creative solutions, adapt and evolve will be best placed to weather what is coming down the line. If you haven’t done so already, start planning now!
Author: Lee McIntyre-Hamilton
Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations. Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.
Contact Lee: lee@globalpayrollassociation.com