Employment tax aspects of the Spring 2017 Budget

United Kingdom

Every year, a controversial aspect of the Budget emerges. This year’s battleground seems to be the increase in NIC rate for the self-employed from April 2018.

Although not directly related to employment tax, it is another sign of a likely trend over the next few years to align the tax/NIC treatment of the employed and self-employed (whether they operate through service companies or on their own account). The self-employed have for some time enjoyed a lower rate of tax and NICs, partly explained by the fewer State benefits that they are able to receive but mostly because of a lighter burden historically being placed on entrepreneurial activities.

However, that favourable tax burden and regime of unfavourable benefit coverage (and statutory protection regime as a whole) is now being examined by a large number of Government and Parliamentary reviews. They are concerned by the blurring of employment and self-employment, and in particular the use of self-employment as a means of reducing wage bills and tax payments and leaving workers exposed when it comes to benefit rights. The main focus is on low pay arrangements, but there seems no reason to think that the higher remuneration arrangements of consultancy arrangements through personal service companies will also not be caught.

It is likely that there will be more announcements over the next few years reducing the tax and NIC differences and all businesses should probably plan for this.

The Budget also confirmed that other expected changes will come into force as follows: 

  • The off-payroll working changes for public sector (but not private sector) clients will come into force from 6 April 2017 when it will affect existing and not just new contracts. Until now, end user clients have not, other than in exceptional circumstances, been caught by the many rules which recharacterise income received by contractors operating through companies and partnerships. From 6 April 2017, this will change for public sector end users who will have to determine whether those rules apply to each engagement and will be responsible for tax deductions and other tax compliance aspects (and if they fail to operate the system properly will be subject to penalties and interest etc.). This is a major change for public sector clients and may lead to public sector entities refusing to engage anyone other than as an employee for fear of the risk of getting it wrong, or equally for individuals who wish to use companies etc to supply their services declining public sector work. It may also be a sign of what is to come for the private sector. Again, this makes self-employment, in its broadest sense, that bit less attractive. 
  • Salary sacrifice changes (which take effect from 6 April 2017) (see here our most recent Law-Now on this) and changes to the termination payment regime (which take effect from 6 April 2018) (see here the comment from Graham Muir at Nabarro on this in the joint tax blog which CMS, Nabarro and Olswang now operate) were also confirmed. Practitioners will still be hoping though that some concessions on the salary sacrifice changes (which also capture cash alternatives) will emerge when the legislation is published in its supposed final form on 20 March.