The following update has been received from Sandy Adirondack, voluntary sector legal expert – www.sandy-a.co.uk
Income and National Insurance
For quick reference, the tax and NI rates for 2018-19, along with rates for statutory maternity, paternity, adoption pay, shared parental and statutory sick pay, student loan recovery, advisory fuel rates for company cars provided to employees, and mileage allowance payments for employees’ vehicles, are on Gov.uk at https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2018-to-2019.
The key changes that came into effect on 6 April 2018 were:
- The personal allowance – the amount that income can be earned free of tax – went up from £11,500 to £11,850 per year (£228 per week, £988 per month), equivalent to a tax cut of £70 per year for most taxpayers. As in the past, the personal allowance may vary for individual taxpayers.
- New rules apply to benefits in kind (BiKs) provided to employees. Such benefits provided during tax year 2017-18 need to be reported to HMRC on form P11D before 6 July 2018, unless the employer is registered to deal with tax on benefits and expenses through the payroll.
- There are significant changes to taxation of termination payments.
- In England, Wales and Northern Ireland, the basic tax rate remains 20% on income above personal allowance, with the 40% higher rate band starting at £46,351 (increased from £45,001) , and the 45% additional rate band continuing to start at £150,000. Tax rates are now different in Scotland [see below].
- The minimum contribution to auto-enrolment pensions has increased for both workers and employers. I will do an update on pensions as soon as I can; in the meantime information on auto-enrolment is available from the Pensions Advisory Service at https://www.pensionsadvisoryservice.org.uk/about-pensions/pensions-basics/automatic-enrolment and the Pensions Regulator at http://www.thepensionsregulator.gov.uk/.
Tax-free childcare has now been fully rolled out for all eligible parents. In a related change, childcare vouchers – which were supposed to close to new entrants on 5 April – will remain open until 4 October [see below].
Benefits In Kind
The rules around Salary Sacrifice and benefits in kind have changed. Salary sacrifice is a way that employees can give up some of their salary in return for a non-cash benefit and this has also allowed them to avoid some tax and NIC.
But from 6 April 2017, tax and some national insurance advantages have been removed from many benefits when provided as part of salary sacrifice schemes.
For more information see HMRC guidance on reporting benefits and expenses.
When a contract of employment allows an employer to dismiss an employee by making a payment in lieu of notice (PILON) rather than giving the notice to which the employee would be entitled, the payment is subject to tax and employer’s and employee’s class 1 national insurance contributions in the usual way, even if the contract says that the payment is discretionary. But where there is no contractual entitlement for the employer to make a PILON, any such payment up to £30,000 has been treated as compensation for breach of contract rather than pay, and has not been subject to tax or NICs.
This has now changed. For terminations taking effect on or after 6 April 2018, with a PILON made on or after 6 April, some or all of the PILON is subject to tax and NICs even if the payment is not contractual.
For tax purposes, the PILON is divided into two parts:
- post-employment notice pay (PENP), representing the basic pay the employee is not receiving because their employment was terminated without full or proper notice being given;
- the remaining balance of the termination payment or benefit which is non-PENP.
The PENP is subject to tax and NICs in the usual way, but the non-PENP element of the PILON is subject to tax (but not NICs) only if it is over £30,000. Where a PILON is given, there is a statutory formula for calculating how much of the total payment is and is not PENP.
The government intended to impose employer’s class 1A NIC on termination payments over £30,000 from 6 April 2018, but due to a delay in legislation this was postponed and is now due to come into effect on 6 April 2019.
Foreign service relief on termination payments to UK residents employed abroad has also been removed, except for seafarers. UK residents whose employment ends on or after 6 April 2018, and who receive a payment or benefit made after 13 September 2017 in connection with that termination, will not be eligible for tax relief for any period of foreign service as part of that job, if they are UK resident for the tax year in which their employment is terminated.
- “PILONs: Taxing times”, short intro blog, Allen & Overy solicitors, 19 April 2018: http://aoemploymenttalk.com/termination-of-employment/pilons-taxing-times/.
- “Taxation of termination payments”, what is and isn’t taxable, Out-law.com, April 2018: https://www.out-law.com/en/topics/tax/employment-tax/taxation-of-termination-payments/.
- “Termination payments: What do employers need to know and do?”, longer article with a worked example of how to calculate the PENP and non-PENP elements of a termination payment, Osborne Clarke solicitors, 10 April 2018: http://www.osborneclarke.com/insights/termination-payments-taxed-differently-from-6-april-2018-what-do-employers-need-to-know-and-do/.
- HMRC’s detailed guidance on termination payments in its employment income manual: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim13874. This is intended for tax experts. I haven’t been able to find any straightforward guidance for non-experts on the HMRC website, though it is probably there somewhere – all I can find are policy papers and short news articles.
The government’s tax-free childcare scheme, which started in April 2017 and completed its rollout in February 2018, provides eligible employed or self-employed parents with a government top-up of up to a £2,000 per year for each child aged under 12. If the child is disabled, the top-up can be up to £4,000 per year while the child is under 17.
To be eligible, the parent (if a single parent) or, in most cases, both parents in a couple must be in work (employed or self-employed); must expect to earn at least the equivalent of 16 hours at the national living wage for the next 13 weeks (currently £125.28 per week); and neither parent may earn more than £100,000 per year. Generally both parents in a couple have to be working, but they will remain eligible if they are absent on paid or unpaid maternity, paternity or adoption leave or on paid sick leave. Parents who are starting out as self-employed do not have to earn the minimum income level during a “start-up period”. All parents in the scheme have to confirm every three months that they remain eligible.
The parent(s) open a childcare account for each child, and for every 80p the parent, employer or anyone else pays into the account, to a maximum of £2,000 per quarter (£4,000 if the child is disabled), the government pays in 20p, to a maximum of £500 per quarter (£1,000 if the child is disabled). This is equivalent to the basic rate tax the parent paid on the amount they deposited, which is why the scheme is called tax-free. The childcare accounts are opened via the childcare choices website [see Resources, below] and are held by National Savings and Investments (NS&I), the state-owned savings and investment organisation.
The money in the account can then be used to pay any childcare provider regulated by Ofsted in England, or the equivalent bodies in Wales, Scotland and Northern Ireland.
Parents can pay in as much or as little as they wish, whenever they wish, and can withdraw funds when their circumstances change or they no longer want to pay into the account. If funds are withdrawn, the government will withdraw its corresponding contribution.
Employers have no direct involvement with the tax-free childcare scheme, but may choose to make payments into their employees’ childcare accounts. Any such payment is subject to tax and to employer’s and employee’s class 1 national insurance contributions. The tax, but not the employee’s NIC, is “repaid” to the parent through the government’s contribution to the childcare account.
From 6 April 2019 itemised pay statements (colloquially called payslips) for employees whose pay varies according to time worked will have to show the number of hours being paid, either as a total number of hours or as separate figures for different types of work or different rates of pay.
Where necessary the format of payslips should be adjusted by April 2019 to show the additional hourly pay information, and employers whose payroll software (or paper systems) do not collect the information must ensure their systems are changed in good time.
The Employment Rights Act 1996 (Itemised Pay Statement)(Amendment) Order 2018 is at http://www.legislation.gov.uk/uksi/2018/147/made.
Redundancy pay, unfair dismissal and other awards
England, Wales and Scotland
Annual changes to the statutory maximum “weekly pay” for calculating certain statutory entitlements, including statutory redundancy pay and basic compensation for unfair dismissal, take effect on 6 April each year in England, Wales and Scotland. These and related changes are based on the September retail prices index (RPI).
The maximum weekly pay for calculating statutory redundancy pay for redundancies taking effect on or after 6 April 2018, and other payments based on this figure, is £508 (increased from £489).
From 6 April 2018 the limit on guarantee payments when an employee is not provided with work is £28 per day (increased from £27). The minimum award for unlawful inducement relating to trade union membership, trade union activities or collective bargaining, and the minimum compensation for a worker excluded or expelled from a trade union, are £9,474 (increased from £9,118).
For unfair dismissals in England, Wales and Scotland taking effect on or after 6 April 2018, the maximum basic award is £15,240 (increased from £14,760). For unfair dismissal on grounds of health and safety, trade union involvement, serving as an employee representative or occupational pension scheme trustee, or other reasons that are automatically unfair, the minimum basic award is £6,203 (increased from £5.970).
The maximum compensatory award for unfair dismissal is £83,682 (increased from £80,541), or 52 weeks’ of the employee’s normal pay, whichever is lower. The compensatory award is intended to compensate employees for loss of earnings, so normal pay in this context is as defined in s.221 of the Employment Rights Act 1996. It is not “weekly pay” as defined for calculating redundancy pay and the other awards listed above. The maximum does not apply in discrimination and whistleblowing cases, where there is no cap.
Where notice of dismissal has been given before 6 April 2018 but the notice period expires on or after 6 April, the new amounts apply. Where pay in lieu of notice has been given before 6 April, the effective date of dismissal is the date the actual dismissal takes effect, plus the statutory period of notice (one week’s notice per year of employment, to a maximum of 12 weeks). If this would take the effective date of dismissal to 6 April or later, the new amounts apply.
The Employment Rights (Increase of Limits) Order 2018, covering events taking place between 6 April 2018 and 5 April 2019, is at http://www.legislation.gov.uk/uksi/2018/194/made.
The Employment Rights (Increase of Limits) Order 2017, covering events taking place between 6 April 2017 and 5 April 2018, is at http://www.legislation.gov.uk/uksi/2017/175/made.
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