I was once told never to look back because “you’re not going that way”. Whilst I quite like this as an approach to life, it does have its drawbacks. As we enter the final weeks of 2021, I nevertheless thought it would be useful to look back over 2021 when it comes to employment tax, not least because some lasting changes have been set in train.
Whilst the pandemic has made this past year seem a bit of a blur in some respects, two key themes stand out for me when it comes to employment tax – an increased employment tax compliance burden for HR and payroll and increasing costs for employers.
Alongside managing pandemic related compliance issues such as the government’s Coronavirus Job Retention Scheme, employers have had to grapple with some big changes during the year, some of which are likely to affect employers and employees well into the next year and beyond.
In this article, I’ve looked at some of the key elements from the past year that underpin these themes, what they mean for employers and employees and what actions may be required.
The end of furlough (for now?)
Since it is the biggest single thing affecting us all right now, I thought I would start with a pandemic-related item.
The Coronavirus Job Retention Scheme provided a substantial financial boost to employers and employees during 2021. Without the scheme, it is likely that we would have seen a significant increase in unemployment and many businesses would simply have perished. However, it undoubtedly placed a significant additional strain on already stretched HR and payroll departments, with perpetual government rule changes (some estimate over 200) and difficult guidance to wade through.
Whilst the scheme ended on September 30, we are unlikely to see the back of it just yet. Firstly, it is quite possible in these uncertain times that it will be re-introduced for a limited period in the event of any further lockdowns. Even if this does not happen, employers will very likely see a substantial increase in enquiries and investigations in 2022, with HMRC estimating that several billion pounds have been lost to the exchequer through fraud and error.
Given this, I think it would be wise for employers to review their claims now for accuracy, both to identify any errors and provision for them where necessary and so that penalties and interest can potentially be minimised by voluntarily disclosing the position to HMRC.
IR35 overhauled
In the early part of the year, the first big change in employment tax was the overhaul of IR35. For the first time since its inception in 2000, responsibility for assessing and operating PAYE and NIC passed from a contractor’s personal service company to their client (i.e. the engaging company).
Applying from April 6, 2021, this major change means that any UK organisation deemed ‘medium’ or ‘large’ under HMRC rules is required to determine the employment status for existing and new contractors and is obliged to provide a formal determination statement (“Status Determination Statement”) to contractors with whom they engage. Where contractors are deemed to be employees under the rules, then organisations are obliged to operate PAYE and NIC.
Whilst these changes had been expected (they were postponed from 2020), many employers have still yet to fully understand what they mean. This is not surprising as employment status is based largely on case law and can be difficult to determine accurately and, of course, employers have had a great many other pandemic related issues to contend with.
Over the coming year, we are likely to see an increase in HMRC investigations into this area and so I would recommend that employers turn their attention to this, if they have not done so already. Penalties and interest can quickly rack up for non-compliance, particularly where organisations engage multiple contractors.
NIC increases and the social care levy
Alongside the increased compliance burdens related to the pandemic and the IR35 changes, increasing employment costs were also announced this year during the chancellor’s Autumn Budget and Spending review on October 27.
In the first rise since 2011, employers NIC is set to increase by 1.25% to 15.05% from April 6, 2022. For many employers, particularly small businesses and those that are already struggling financially due to the pandemic, this was an unwelcome surprise. Employees are to be equally impacted, with a 1.25% increase to employee NIC, taking the employee NIC rate to 13.25% from April 6, 2022.
Whilst the NIC rates will, presumably, return to their previous levels from April 6, 2023, the increases will be maintained via the introduction of the Health and Social Care Levy from April 6, 2023. So, on top of the forthcoming increasing cost, employers will also need to factor in the additional time to introduce new payroll processes to charge and report the levy correctly.
Freeze in the personal allowance
Some tax rises are harder to spot than others. One such tax rise that flies somewhat under the radar is the freeze in the personal allowance of £12,570 until April 6, 2026. With inflation on the increase, this means that the value of the tax-free income employees earn will decrease over the coming years.
Whilst this ‘rise’ primarily affects employees and their take-home pay, it is also likely to impact employers via pressure to increase salary levels in order that employees can sustain the same level of net pay.
Increase in National Minimum Wage
Amidst the gloomy news, many employees will have been heartened to learn of the increase to the National Minimum Wage this year. From April 2022, rates have been increased to £9.18 per hour (for ages 21 to 22), £6.83 per hour (for ages 18 to 20) and £4.81 (for those under 18). For those who are 23 or over (whereby the National Living Wage is paid), the rate will increase to £9.50 from April 2022.
These increases represent a significant rise on current levels and are of course welcomed by employees. Whilst few would argue that a rise in the National Minimum Wage is not welcome or just, particularly given the rising cost of living, it will place additional cost pressure on many businesses, especially small businesses. Any increases will also mean an increase in the amount of employers NIC and pension contributions, thereby further increasing employer costs.
It is fair to say that there have been better years for employers when it comes to employment tax, particularly when it comes to the employer compliance burden and employment tax costs. Whilst, as things stand, things are not likely to ease up any time soon, it does help to take stock of the various changes, plan ahead and make the best of what is coming in 2022.
I wish you all a happy and safe festive holiday and my best wishes for 2022.
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
I was once told never to look back because “you’re not going that way”. Whilst I quite like this as an approach to life, it does have its drawbacks. As we enter the final weeks of 2021, I nevertheless thought it would be useful to look back over 2021 when it comes to employment tax, not least because some lasting changes have been set in train.
Whilst the pandemic has made this past year seem a bit of a blur in some respects, two key themes stand out for me when it comes to employment tax – an increased employment tax compliance burden for HR and payroll and increasing costs for employers.
Alongside managing pandemic related compliance issues such as the government’s Coronavirus Job Retention Scheme, employers have had to grapple with some big changes during the year, some of which are likely to affect employers and employees well into the next year and beyond.
In this article, I’ve looked at some of the key elements from the past year that underpin these themes, what they mean for employers and employees and what actions may be required.
The end of furlough (for now?)
Since it is the biggest single thing affecting us all right now, I thought I would start with a pandemic-related item.
The Coronavirus Job Retention Scheme provided a substantial financial boost to employers and employees during 2021. Without the scheme, it is likely that we would have seen a significant increase in unemployment and many businesses would simply have perished. However, it undoubtedly placed a significant additional strain on already stretched HR and payroll departments, with perpetual government rule changes (some estimate over 200) and difficult guidance to wade through.
Whilst the scheme ended on September 30, we are unlikely to see the back of it just yet. Firstly, it is quite possible in these uncertain times that it will be re-introduced for a limited period in the event of any further lockdowns. Even if this does not happen, employers will very likely see a substantial increase in enquiries and investigations in 2022, with HMRC estimating that several billion pounds have been lost to the exchequer through fraud and error.
Given this, I think it would be wise for employers to review their claims now for accuracy, both to identify any errors and provision for them where necessary and so that penalties and interest can potentially be minimised by voluntarily disclosing the position to HMRC.
IR35 overhauled
In the early part of the year, the first big change in employment tax was the overhaul of IR35. For the first time since its inception in 2000, responsibility for assessing and operating PAYE and NIC passed from a contractor’s personal service company to their client (i.e. the engaging company).
Applying from April 6, 2021, this major change means that any UK organisation deemed ‘medium’ or ‘large’ under HMRC rules is required to determine the employment status for existing and new contractors and is obliged to provide a formal determination statement (“Status Determination Statement”) to contractors with whom they engage. Where contractors are deemed to be employees under the rules, then organisations are obliged to operate PAYE and NIC.
Whilst these changes had been expected (they were postponed from 2020), many employers have still yet to fully understand what they mean. This is not surprising as employment status is based largely on case law and can be difficult to determine accurately and, of course, employers have had a great many other pandemic related issues to contend with.
Over the coming year, we are likely to see an increase in HMRC investigations into this area and so I would recommend that employers turn their attention to this, if they have not done so already. Penalties and interest can quickly rack up for non-compliance, particularly where organisations engage multiple contractors.
NIC increases and the social care levy
Alongside the increased compliance burdens related to the pandemic and the IR35 changes, increasing employment costs were also announced this year during the chancellor’s Autumn Budget and Spending review on October 27.
In the first rise since 2011, employers NIC is set to increase by 1.25% to 15.05% from April 6, 2022. For many employers, particularly small businesses and those that are already struggling financially due to the pandemic, this was an unwelcome surprise. Employees are to be equally impacted, with a 1.25% increase to employee NIC, taking the employee NIC rate to 13.25% from April 6, 2022.
Whilst the NIC rates will, presumably, return to their previous levels from April 6, 2023, the increases will be maintained via the introduction of the Health and Social Care Levy from April 6, 2023. So, on top of the forthcoming increasing cost, employers will also need to factor in the additional time to introduce new payroll processes to charge and report the levy correctly.
Freeze in the personal allowance
Some tax rises are harder to spot than others. One such tax rise that flies somewhat under the radar is the freeze in the personal allowance of £12,570 until April 6, 2026. With inflation on the increase, this means that the value of the tax-free income employees earn will decrease over the coming years.
Whilst this ‘rise’ primarily affects employees and their take-home pay, it is also likely to impact employers via pressure to increase salary levels in order that employees can sustain the same level of net pay.
Increase in National Minimum Wage
Amidst the gloomy news, many employees will have been heartened to learn of the increase to the National Minimum Wage this year. From April 2022, rates have been increased to £9.18 per hour (for ages 21 to 22), £6.83 per hour (for ages 18 to 20) and £4.81 (for those under 18). For those who are 23 or over (whereby the National Living Wage is paid), the rate will increase to £9.50 from April 2022.
These increases represent a significant rise on current levels and are of course welcomed by employees. Whilst few would argue that a rise in the National Minimum Wage is not welcome or just, particularly given the rising cost of living, it will place additional cost pressure on many businesses, especially small businesses. Any increases will also mean an increase in the amount of employers NIC and pension contributions, thereby further increasing employer costs.
It is fair to say that there have been better years for employers when it comes to employment tax, particularly when it comes to the employer compliance burden and employment tax costs. Whilst, as things stand, things are not likely to ease up any time soon, it does help to take stock of the various changes, plan ahead and make the best of what is coming in 2022.
I wish you all a happy and safe festive holiday and my best wishes for 2022.
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