On Wednesday Rachel Reeves presented her first budget – which, as expected, contained a significant package of tax increases to fund public services and public investment. With Labour having made promises to shield workers from the burden of the tax increase, the burden will largely fall on employers.
But it’s not all bad news – the smallest businesses will be shielded from the effects of the increase in National Insurance, and changes to business rates will continue to provide relief for small businesses and those in the retail, hospitality and leisure sectors.
Employer's National Insurance
The key change that will affect all employers is the rise in National Insurance contributions, which came in two forms:
- An increase in the rate of employer NICs from 13.9% to 15%; and
- A reduction in the threshold at which NICs start being paid from £9,100 to £5,000.
However, the government has increased the Employment Allowance from £5,000 to £10,500. This reduces the NIC bill for businesses paying NICs of £100,000 or less. This should absorb most of the cost of National Insurance increases for micro businesses with small numbers of staff.
The higher cost of employing workers and employees is likely to lead to continued efforts to re-classify staff as ‘self-employed’, for whom the business would not have to pay employer NICs. This is a complex area of employment and tax law and business are advised to tread carefully and seek advice – simply declaring that a worker is self-employed is not sufficient, and their status is a matter of employment or tax law as applied to the specific facts of their employment.
Businesses and workers should familiarise themselves with the IR35 rules and use HMRC’s employment status for tax tool if they are unsure of their position.
Beware – whilst the definition of an employee in tax law is similar to that as in employment law, they are not the same. Employment law recognises employees (with full rights, including unfair dismissal), workers (with most rights, including paid holiday but not unfair dismissal protection), and the genuinely self-employed (with few employment protections). A person who does not qualify as an employee for the purposes of employment law may still be an employee for tax purposes.
If you are unsure of the status of your staff – check the .GOV.UK website’s page on employment status, check with ACAS, or contact us via our contact page for free advice.
Employee Ownership Trusts
The other tax change announced in the budget was that relating to Employee Ownership Trusts – this scheme allows owners to significantly reduce Capital Gains Tax liability by selling shares in their firm to employees.
The changes were aimed at clamping down on those using the scheme as a form of tax avoidance and ensure it is supporting genuine employee ownership.
The firm Charles Russell Speechlys has produced a more in-depth analysis of these changes here.
