The Government’s Growth Plan (the Plan) has received a mixed reception, both politically and in the financial markets, with considerable economic turmoil since it was announced on 23 September. While most of the Plan’s key proposals appear to be going ahead, the Chancellor stated on Tuesday this week that the removal of the 45% additional rate of income tax for higher earners will not now proceed.
The opening statement of the Plan clarifies that the Government’s overall mission is to promote growth, with a view to generating higher wages and greater opportunities. Whether the intended impact on the economy is achievable remains to be seen, but in the meantime UK employers will need to assess the potential impact on their business. With this in mind, we summarise the proposals below and suggest action points for employers to take.
The 1% cut to the basic rate of income tax, which was originally intended to take effect in April 2024, has been brought forward by 12 months. From April 2023, the rate will be 19%, rather than the current 20%. This change will affect employees in England and Wales, but not those in Scotland, where tax rates are devolved.
The 1.25% increase in Class national insurance contributions (NICs) which took effect earlier this year, will be reversed with effect from 6 November 2022. Further, the proposed Health and Social Care Levy, which was due to take effect next April and replace the increase in NICs, will also be scrapped.
In due course, employers will need to make the necessary payroll adjustments (and check employees’ payslips are accurate) to ensure compliance with the upcoming changes. The underlying intention is to simplify the tax system and allow employees and workers to hold on to more of their earnings.
One of the more controversial aspects of the Growth Plan is the proposal to scrap the current cap on banker’s bonuses, with a view to attracting top global talent to the City.
Employers in the financial services sector will be familiar with the current bonus cap, which is contained in PRA and FCA rules and requires that bonuses (i.e. variable pay) are no more than 100% of fixed annual pay (or 200% with shareholder approval). The rules apply to UK banks, building societies and designated investment firms.
While full details of the proposal are still awaited, including whether the move will affect other remuneration rules (such as in relation to malus, deferral and clawback provisions), we highlighted the 10 key employment issues in our recent article.
The Government acknowledges that the reforms to the IR35 tax regime (also known as the off-payroll working rules) are complex and were costly for businesses when they were extended to private sector employers in April last year. To address these concerns, the rules will be repealed with effect from 6 April 2023.
Currently, the off-payroll rules make it the responsibility of employer clients to determine the deemed employment status for tax purposes of contractors engaged to provide their services. HMRC’s online “Check Employment Status Tool” is often used to assist with the required determination and depending on the outcome, the client may be responsible for deducting and paying the correct amounts of income tax and NICs for such contractors.
Previously, the IR35 regime placed this responsibility on the intermediary company supplying the contractor’s services, such as a personal services company (PSC). The proposed change marks a return to the previous regime, with PSCs once again answerable to HMRC in relation to contractors’ tax status.
At first glance this change is likely to be welcomed by most employer clients who engage contractors and are subject to the current off-payroll tax regime. They may even agree with the statement in the Plan that it will allow them to “get on with business”. However, there is likely to be a tricky transition period while clients assess whether their current workforce remains fit for purpose in light of the new rules. If changes are required, for example by terminating existing contractors’ contracts and engaging new self-employed contractors providing their services through a PSC, aside from the administration burden, it will be important to seek advice on the associated legal and tax risks.
There will be changes to the current company share option (CSOP) regime, to help businesses with their growth plans. In particular, employees will be able to hold up to £60,000 of share options from their employer (an increase on the current limit of £30,000).
Further, companies will be able to receive a more generous maximum of £250,000 through Seed Enterprise Investment Schemes, rather than the current £150,000 limit. Both changes will take effect from April 2023.
In response to recent strike action, the Government intends to bring in legislation to ensure minimum service levels can be maintained for transport services, so that the impact of strike action on essential travel and commuting can be minimised. Further, with a view to ensuring that strike action only occurs if negotiations have genuinely broken down, new legislation will be introduced which requires trade unions to put pay offers from employers to a members’ ballot.
This area of employment law has changed recently, with legislation in July to permit employers to hire agency workers to fill workforce gaps created by strike action, and an increase in the maximum potential damages award against a trade union for unlawful strike action.
The precise content of the proposed new legislation will be awaited with interest by employers who have previously experienced the disruption of strike action. However, it is not a stretch to imagine that it could end up the subject of legal challenge by the trade unions, particularly given the ongoing judicial review proceedings in relation to the agency worker legislation introduced in the summer.
At the Conservative party conference this week, the Prime Minister also announced a plan to exempt employers with under 500 employees from existing reporting requirements “and other regulations in the future”. It is believed that the plan applies to current gender pay gap and executive pay ratio reporting obligations, but the exact application is unclear. At present, the threshold for such reporting obligations is set at 250 employees.
Any new regulations published in the future are expected to take account of the new threshold, with the potential for it to increase over time to cover employers with up to 1000 employees. This change is stated to be part of a sweeping package of reforms to cut red tape for business and stimulate growth.
There have also been reports that the Government is considering the removal of employment law protection from employees earning over a certain annual salary (with suggestions that this could be £100,000), but it is unclear how likely it is that this proposal will proceed.
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