Budget 2016: Issues for employers

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

We have set out below the main employment-related issues coming out of Budget 2016. The devil may yet be in the detail of initiatives, but this alert should serve to make sure employers know what to expect going forward.

Termination payments

Employers often take advantage of certain termination payments being exempt from both employee and employer National Insurance Contributions (NICs) and the first £30,000 not being subject to income tax. Termination payments are often structured in a way to minimise the tax and NICs due but the complex rules can lead to misunderstandings and manipulations.

From April 2018, the government will tighten the scope of the exemption to prevent payments from being manipulated to avoid tax and NICs. The intention is that employer NICs will be payable on payments above £30,000 that are subject to income tax. The first £30,000 of a termination payment will remain exempt from income tax and the full termination payment will be outside of the scope of employee NICs.

Salary sacrifice

The government is considering limiting the range of benefits that allow employees to take advantage of salary sacrifice because of its concerns about the growth of such schemes.

No information has been provided on which schemes are causing the concern but the government has committed to its support to salary sacrifice schemes for pensions, childcare and health-related benefits such as Cycle to Work.

Workers providing services to the public sector through their own limited company

The government believes that the wrong tax treatment of workers providing services through their own limited companies is costing the taxpayer £440m per annum. To address this, the government is taking measures to ensure that individuals who work through their own limited company but are undertaking jobs that would ordinarily mean they are employees of the business they are working for are taxed appropriately.

From April 2017, where the public sector engages a worker through their own limited company, that body (or the recruiting agency if the public sector body engages through one) will be responsible for ensuring the correct tax is paid.

The government has acknowledged that the rules on tax in this particular area are not clear and consultation will begin on a simpler set of tests and online tools that will provide clear answers to the bodies that are responsible for determining the correct tax treatment.

Support for parents in employment

Shared Parental Leave has had success since its introduction in April 2015 and the government has committed to extend the support for parents in employment by introducing shared parental leave and pay to grandparents. The consultation will begin in May 2016.

From early 2017, the government is introducing tax-free childcare to help working parents with the cost of childcare. The existing scheme (employer-supported childcare) will remain open to new entrants until April 2018 to support the transition between the schemes. This will sit alongside doubling the free childcare entitlement from 15 hours to 30 hours a week for working families with three- and four-year-olds from September 2017.

Support for the self-employed

The government has committed to reforming self-employed NICs. From April 2018, Class 2 NICs will be abolished. This represents an annual tax cut for 3.4 million self-employed people.

The government will reform Class 4 NICs, so that self-employed individuals continue to build entitlement to the State Pension and other contributory benefits, following the abolition of Class 2 NICs. The government will set out its plans for the contributory benefit tests in its response to the recent consultation on this reform.

Employee shareholder status

The government has committed to supporting individuals with employee shareholder status (ESS) so that they can take advantage of tax benefits on the shares awarded in exchange for relinquishing certain employment rights.

The budget introduces an individual lifetime limit of £100,000 on gains eligible for capital gains tax exemption through ESS. This limit will apply to arrangements entered into on or after 17 March 2016, and will not apply to arrangements already in place.