BUDGET 2016 – Employment Related Taxation Changes

17th March 2016

In this blog we will be discussing the legal implications of the Budget 2016 with regard to employment related taxation changes.

Tax and NICs rules for pay-offs

Certain forms of termination payments are exempt from employee and employer National Insurance contributions and the first £30,000 is income tax-free. 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 National Insurance due.

From April 2018, the government will tighten the scope of the exemption to prevent manipulation and align the rules so employer National Insurance contributions are due on those payments above £30,000 that are already subject to income tax. The government will continue to support those individuals who lose their job. The first £30,000 of a termination payment will remain exempt from income tax and the full payment will be outside the scope of employee NICs.

Capital Gains Tax: lifetime limit on Employee Shareholder Status exemption

The measure places a lifetime limit of £100,000 on the Capital Gains Tax (CGT) exempt gains that a person can make on the disposal of shares acquired under Employee Shareholder Agreements entered into after 16 March 2016.

The measure will have effect in relation to Employee Shareholder shares acquired in consideration of an Employee Shareholder Agreement entered into from midnight at the end of 16 March 2016 (the date of the budget announcement), and to gains on such shares.

Any past or future gains, realised or unrealised, on Employee Shareholder shares that were issued in respect of Employee Shareholder agreements made before midnight at the end of 16 March 2016 will not count towards the limit.

The Budget 2016 specifies that for transfers of Employee Shareholder shares between spouses or civil partners, the transfer will be treated as being for consideration which gives rise to a gain equal to the transferor’s unused lifetime limit, subject to the over-riding condition that the consideration does not exceed the market value of the shares transferred. This amount will fix the acquisition cost in the hands of the spouse.

Employee share schemes: simplification

The measure simplifies the law so that a rights issue which takes place on or after 6 April 2016 in respect of shares received on exercise of an EMI option will be treated in the same way for share identification purposes as other rights issues.

‘IR35 companies’ have been the subject of consultation, and changes have followed which will be a relief to such companies – though ambiguity about when the rules apply have yet to be resolved….

The IR35 rules apply where individuals work through their own limited company and undertake jobs that would ordinarily mean they are employees of the business that they are working for. In those circumstances, existing legislation requires them to pay broadly the same taxes as employees. The liability for such tax rests with the IR35 company.

As a result of the budget, from April 2017, where the public sector engages an off-payroll worker through their own limited company, that body (or the recruiting agency if the public sector body engages through one) will become responsible for determining whether the rules should apply, and for paying the right tax. Where the private sector engages the services of such workers through their own limited company, liability will remain with the IR35 company.

The government has acknowledged that the current criteria as to when IR35 should apply are seen as complex and can create uncertainty. It will therefore consult on a simpler set of tests and online tools that will provide a clear answer as to whether and when the rules should apply.

If you would like any further information, please contact Andrea London on 020 7955 1425.

This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice in relation to any of the above, please contact Andrea London as above.