CIPD – Autumn Statement 2016: what employers need to know
Chancellor announces NLW rise, crackdown on personal service companies and fund to boost British management skills
Chancellor Philip Hammond delivered his first – and last – Autumn Statement yesterday. Here, we walk you through seven key changes employers need to prepare for, from a rise in the national living wage (NLW) and new restrictions on salary sacrifice schemes to changes to national insurance thresholds.
1. Rise in national living wage
The NLW will increase from £7.20 an hour to £7.50 from April 2017 – a rise of 4.2 per cent for employees aged 25 and over. Hammond said this will equate to a pay increase of more than £500 per year for full-time workers. The minimum wage for 21 to 24-year-olds will also rise, from £6.95 to £7.05 per hour, and the rate for apprentices will increase by 10p to £3.50 per hour.
The changes follow recommendations from the Low Pay Commission, an independent body, but are lower than forecast. John Harding, employment tax partner at PwC, said this raised questions about how the UK will reach the £9 per hour target by 2020. “From moving to £7.50 per hour in April, it will then require an average 50p per year increase in the NLW – which could be a tall order for smaller employers.”
Even a small increase will come as a harsh blow to some employers – especially considering the other additional costs they must factor in, added Harding: “Employers are facing a triple whammy of additional costs from the apprenticeship levy, holiday pay changes and pension auto-enrolment increases.”
While the government says it will provide additional support for small organisations – and introduce an awareness campaign to ensure staff and employers understand their rights and responsibilities – Ruth Christy, employment lawyer at Blake Morgan, said employers need to plan now for the rise. “Many employers may not be ready for the changes and the impact the increased financial burden will have,” she said.
“Sectors such as retail and hospitality, prior to the introduction of the NLW, were particularly concerned about its potential impact. Many organisations could, however, offset the costs of the NLW through reduced premium payments, higher prices, lower profits and reduced hours.”
But for sectors where flexibilities do not exist, businesses will have to consider increasing productivity to fund the changes or attempt to pass the costs on to customers, she added.
The government also announced it will invest £4.3m a year into national minimum wage enforcement, enabling HMRC teams to review employers that are considered at risk of non-compliance.
2. Alignment of national insurance thresholds
Both employees and employers will start paying national insurance (NI) on weekly earnings of more than £157 from April 2017. The current thresholds for 2016-17 stand at £155 per week for employees and £156 for employers. This change aims to simplify the NI payments for employers, but will lead to a marginal increase in employer costs – the Treasury said this will amount to no more than £7.18 per employee per year.
3. End of personal services companies in the public sector
The government said it will introduce IR35 tax changes that mean contractors using personal service companies in the public sector will lose their right to determine their tax status. This change will give recruitment firms, and others who pay contractors, liability and responsibility for operating payroll and paying the correct taxes to HMRC.
HMRC estimates that 90 per cent of the 20,000 people who operate as contractors in the public sector will be affected. It is likely to deter many from running their own company, said Damian Broughton, executive chairman of accountancy firm Danbro. “People who provide freelance skills to public sector bodies will now have to change the way they operate and, for many, work through an employment business, as there are fewer incentives to have your own company. The likelihood is that these rules will also soon be applied to the private sector,” said Broughton, alluding to comments the chancellor made about a further review of self-employment taxation.
The chancellor said the 5 per cent tax-free allowance would be removed because workers no longer had the administrative burden of deciding their status. But this is little consolation for those who have to grapple with this change with only five months to go, said Susan Ball, head of Crowe Clark Whitehill’s employers’ advisory group.
Ball said: “You have to wonder if the public sector might move away from using personal service companies altogether. Hopefully, HMRC will now issue the promised digital tool and detailed guidance.”
4. Abolition of employee shareholder tax relief
Tax advantages linked to employee shareholder status (ESS) will be wiped out because they are primarily being used for tax-planning purposes by high-earning individuals, said Hammond.
ESS was originally introduced in 2013 and affected employees who gave up certain employment rights – such as the right not to be unfairly dismissed – in return for workplace shares worth at least £2,000.
It is reported that take-up of the scheme has been extremely low. But Mark Quinn, head of Mercer’s UK talent business, said: “ESS is well-regarded and, particularly in young companies, viewed as a mechanism for increasing employee engagement by making them shareholders while improving the flexibility of the employment proposition.
“Removing the tax advantage will undoubtedly reduce the take-up of such schemes. This runs counter to the government’s stated intention to improve employee representation and engagement as a means of improving corporate governance and with evidence of employee-owned businesses performing more strongly.”
5. Changes to the personal allowance
The tax-free personal allowance will increase from £11,000 to £11,500 in April 2017, and to £12,500 by the end of the current parliament’s term in 2020. The higher-rate threshold will rise to £45,000 in 2017 and £50,000 by 2020. The allowance will increase in line with the consumer price index, rather than the national minimum wage, from 2020.
Hammond said: “Once £12,500 has been reached, the personal allowance will rise automatically during the 2020s, in line with inflation. It will be for the chancellor to decide from year to year whether more is affordable.”
6. End to most salary sacrifice schemes
The government will abolish tax exemptions on most salary sacrifice benefits schemes from April 2017, as reported by People Management. Hammond described the difference between the tax paid on a cash salary and benefits-in-kind as “unfair”.
“Employees who use these schemes will pay the same taxes as everyone else,” he said.
7. £13m to boost managerial skills
The government will invest £13m in a Productivity Leadership Group initiative overseen by Sir Charlie Mayfield, chairman of the John Lewis Partnership, which aims to help improve the quality of management in the UK.
Ian Brinkley, acting chief economist at the CIPD, said: “This is a crucial step forward in cracking the UK’s productivity puzzle, which the chancellor highlighted as a key area of focus and investment for the government.
“However, attempts to improve workplace productivity will continue to be undermined without fundamental changes to skills policy, particularly in relation to apprenticeships, lifelong learning and adult skills provision.”
Ann Francke, CEO of the Chartered Management Institute, said more needed to be done: “We need two million more new managers by 2024 to compete in the post-Brexit business world, which means, as well as addressing better practices in our businesses now, we need to embed leadership skills into our education system now for the next generation too.”
Brinkley also sounded a warning note about the broader prospects for the UK economy, on the back of forecasts from the Office for Budget Responsibility (OBR) of relatively weak growth: “The economic forecasts from the independent OBR show that low growth and weak productivity will persist until at least 2018. The forecasts also show that real wage growth over the next two years will be close to zero.
“Even this may prove optimistic, as continued uncertainty, difficult market conditions and higher unemployment are likely to constrain firms’ ability or need to pay more. The OBR is forecasting a slow recovery in productivity, but previous forecasts have been optimistic.”
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