Budget 2016: What it Means for Employers and Workers

George Osborne’s budget announcement contained several key points of importance to the workplace, and also measures designed to discourage tax avoidance.

Compulsory national insurance contributions (NICs) on termination payments over £30,000 are to be introduced and there is to be an increase in the threshold for personal tax contributions.

A band of national insurance affecting 3m self-employed people is to be abolished.

Employee shareholder shares acquired under agreements entered into after March 16 2016 will be subject to a lifetime limit of £100,000 on the capital gain which can be exempt from CGT.

The Chancellor also announced that the rate of tax charged on loans to participators and other arrangements will increase, and disguised remuneration avoidance schemes are to be shut down.

NI payable on termination payments

From 2018, termination payments over £30,000 will be subject to employer national insurance contributions – anything under £30,000 is currently given tax-free.

George Osborne said in his speech that “the rules are complex and the exemptions incentivise employers to manipulate the rules, structuring arrangements to include payments that are ordinarily taxable such as notice and bonuses to minimise the tax and NICs due.”

The measure will be an additional cost to employers, potentially making redundancies much more expensive in the future.

Tax threshold rises in “a budget for working people”

From April 2017, the tax threshold will rise to £11,500; the threshold for employees paying the 40% tax rate will also be increased, to £45,000.

Class 2 national insurance contributions to be scrapped for self-employed workers

Self-employed workers will save £350m a year in national insurance contributions from 2018. Under current rules, self-employed workers have to pay £2.80 per week in Class 2 National Insurance contributions if they earn more than £5,965 profit a year, but these will be scrapped from April 2018.

The changes do not affect Class 4 national insurance contributions, which are paid by self-employed workers who make more than £8,060 a year.

The Chancellor said that the scrapping of Class 2 contributions amounted to a tax cut of over £130 for each of Britain’s 3m self-employed workers.

Capital gains tax relief to be restricted on employee shareholder shares

Employee shareholder shares (ESS) acquired under agreements entered into after 16^th March 2016 will be subject to a lifetime limit of £100,000 on the capital gain which can be exempt from capital gains tax.

The budget announcement appears to be a response to the increasing popularity of ESS, which offers a novel arrangement for existing or new employees to acquire shares in their employer or the employer’s parent company. The government says it intends this measure will ensure that the potential capital gains tax exemption will not be excessive.

Clampdown on disguised remuneration schemes and tax on directors’ loans up

From April 6 2016, the rate of tax charged on loans to participators and other arrangements, currently 25%, is to be linked to the dividend upper rate, which will be 32.5%.

The measure, which follows earlier announcements of changes to dividend taxation at Summer Budget 2015, relates to loans to participators rules that aim to prevent owners of close companies avoiding personal tax by remunerating themselves through loans or advances which are not repaid, or other arrangements rather than taking dividends or salaries. It will apply to all relevant loans made or benefits conferred by close companies on or after April 6 2016.

An additional targeted anti-avoidance rule (TAAR) will come into effect from 16^th March 2016 to counter previous attempts to exploit the disguised remuneration legislation.

The insertion of a TAAR will put beyond doubt that the legislation does not work by preventing the relief from being available where there is a connection, direct or indirect, with a tax avoidance arrangement. As such it will withdraw the transitional relief on investment returns after November 30 2016, which was intended to work alongside the Employee Benefits Trust (EBT) Settlement Opportunity, which closed on July 31 2015.

Expert legal advice for employers

At IBB Solicitors, we take a proactive approach to workplace problems, helping employers find the best possible outcome for their employment issues. We can help advise on policy reviews and provide expert training for your HR team. Our specialist employment lawyers place heavy emphasis on continuing personal training and development, to ensure that they always present you with the most up-to-date legal and practical advice available.

Find out how we can help you settle disputes and stay on the right side of the UK’s ever-changing employment law by calling us on 01895 207892, or email your details to employment@ibblaw.co.uk. Alternatively please visit https://www.ibblaw.co.uk/service/employment/employment-law-businesses or complete our online form.