The People Bulletin

As expected there was a goody bag of bad news!  The increase in personal allowances, and the NICs changes were expected, but the NICs holiday for new employers is going to present an administration challenge.  Although employers will benefit from NI savings, will the cost of monitoring and complying with the rules prove more costly than the savings?  The Institute of Payroll Professionals’ (IPP) policy team has already advised HMRC that we need to be involved in the implementation of this new scheme, particularly when the guidance is being written.

You may recall that there was a lot of concern around the Conservative PAYE improvement proposals prior to the general election.  We welcome the news that it is the Minister David Gauke who will lead future consultation around the simplification of the tax system.  Indeed it was also very welcome that the payroll industry was recognised in the budget statement as being a key stakeholder.

Pensions was not left out of this budget, in fact it could be argued that it dominated the budget with the exception of the increase in VAT of course.

The controversial and complex pensions tax relief previously announced is to be re-considered and the use of the annual allowance may be reduced instead.  There are to be further consultations on the default retirement age with a recently-announced acceleration in the state retirement age to 66 years.

This extended article is a detailed summary of the key changes and what the implications are for employers having to implement them in payroll runs.

The full budget detail can be found within the following links:

1. Main Budget announcements affecting ‘HMRC customers’
2. Key changes to rates and allowances (from the Treasury website)
3. HM Treasury June Budget press notices

Payroll news

National insurance contributions (NICs) personal allowances, Basic rate limits and upper earnings limits

 Legislation will be introduced to provide for the following income tax and NIC changes for the tax year 2011-12:

• the personal allowance for those aged under 65 will be increased by £1,000 to £7,475;
• the basic rate limit will be reduced so that higher rate taxpayers do not benefit from the increase in the personal allowance. The exact figure will be confirmed when September’s retail prices index (RPI) is known;
• the alignment of the upper earnings/profits limit (UEL/UPL) with the higher rate threshold (the total of the personal allowance for those aged under 65 and the basic rate limit) will be maintained by reducing the UEL/UPL; and
• the secondary threshold, which is the point at which employers start to pay Class 1 NICs, is to be increased by an extra £21 per week above indexation.

Taken together, these measures reduce the tax liability for those on lower incomes and have no impact on most higher rate taxpayers who are employees or self employed and will help employers.

The government’s long-term objective remains to increase the personal allowance to £10,000, as set out in the coalition agreement.[1]  Further information can be viewed in Budget Note 1.[2]

Regional employer NICs holiday for new businesses

The government will shortly announce details of a scheme to help new businesses in targeted areas of the UK that need it most. During a three year qualifying period, new businesses which start up in these areas will get a substantial reduction in their employer NICs.

Within the qualifying period, these employers will not have to pay the first £5,000 of Class 1 employer NICs due in the first twelve months of employment. This will apply for each of the first 10 employees hired in the first year of business and operate in selected countries and regions.

Subject to meeting the necessary legal requirements, the expected implementation date is 6 September 2010. Any new business set up from 22 June which meets the criteria set out in the forthcoming announcement will benefit from the scheme.  The countries and regions which will benefit will be Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West.

Further information is available from HMRC.

PAYE review

The Pay As You Earn (PAYE) system is a fundamental part of the UK tax system. The government wishes to explore how it could be improved in order to reduce costs and make the system easier for employers and HMRC to administer. As an initial step, the government intends to consult with employers and payroll providers in the summer on mechanisms that could support more frequent or real time PAYE data. 

 This brings us nicely into the introduction of the government’s publication of a document entitled "Tax Policy Making: a new approach"[3] which was announced along side the Budget announcement where it alludes to tax policy making.  Section 2.6 states:

‘The government recognises the value that policymakers and taxpayers derive from effective consultation. It is an integral feature of all policy making. It helps ensure that changes are well targeted and without unintended consequences, and that legislation is right first time. There has been greater consultation on tax policy in recent years, and some notable examples of best practice such as the review of HMRC’s powers. The government is committed to ensuring that all tax consultations are conducted to a high standard. The government will publish a statement on its approach to tax consultation later this year. It welcomes discussion with interested parties on the scope and content of that statement, including the proposals set out below and other improvements that could be made to the current approach.’

This document outlines the government’s new, more considered approach to developing tax policy to make the tax system more predictable, stable and simple.  It commits the government to greater scrutiny of policies and legislation, and improved transparency around the rationale and impact of policy changes. The discussion document sets out a number of proposals for improving the framework for developing legislation and implementing tax policy.  The proposals include:

• improving the consultation process at each stage: setting out objectives and options; determining best option and policy design; and implementing policy through legislation;
• publishing a statement on governments approach to tax consultation;
• a more strategic approach to tax avoidance to prevent increasing complexity and frequent legislation;
• the creation of an independent office of tax simplification;
• a framework for the introduction of new reliefs;
• introducing a tailored tax impact assessment and publishing more information on tax policy costings; and
• evaluating effectiveness of tax reforms to ensure they meet their objectives. 
   

Pensions news

Public sector pensions

The Chancellor stated that the cost of public service pensions is one of the greatest long term pressures facing our nation’s finances.  John Hutton (the previous government’s Work and Pensions secretary) will be carrying out an investigation and will provide an interim report in September this year to help inform any decisions required for the spending review, and a full report in time for next year’s Budget.

State pension age

The government will be accelerating the increase in the state pension age to 66.  A call for evidence will be launched later this week.  They will also be consulting on whether to phase out the default retirement age (DRA).
 

Basic state pension

The government will uprate the basic state pension by a triple guarantee of the highest of earnings, prices or 2.5 per cent from April 2011. The CPI will be used as the measure of prices, consistent with the government's decision to index all benefits and tax credits by the consumer price index (CPI), although the basic state pension will increase by at least the equivalent of the retail prices index (RPI) in April 2011 to ensure its value is at least as generous as under previous uprating rules. The coalition states that there will be no more 75p increases in the basic state pension!

The standard minimum income guarantee in pension credit will increase in April 2011 by the cash rise in a full basic state pension.

 Pensions savings and tax relief

The government is considering restricting pensions tax relief from 6 April 2011, by reforming the existing pension savings allowances, principally by significantly reducing the annual allowance. They will discuss the changes with interested parties but provisional analysis has suggested that the level of a reformed annual allowance may be in the region of £30,000 to £45,000.  The annual allowance that was set for 2010/11 and subsequent five years is £255,000 so a significant reform indeed.  The revised regime will include the appropriate level of lifetime allowance (currently £1.8m).

These reformed allowances would replace the high income excess relief charge, which currently is due to come into force on 6 April 2011. Legislation will be brought in to allow the high income excess relief charge legislation to be repealed.  The current ‘anti-forestalling’ provisions (which are designed to prevent individuals from increasing their current pension savings now to avoid the future tax restrictions) will remain in place in the meantime.

The government intends to address the following technical difficulties, which had already posed problems for Labour's original proposals:

• How pension accrual in DB schemes would be measured.
• Ensuring basic-rate taxpayers are not subject to the restriction, and countering hardship caused by sudden increases in pension accrual.
• Flexibility for individuals in paying any tax charge.
• Practical aspects of compliance and delivery.
   

The government also intends to consult on removing from 2011 the effective obligation to purchase an annuity by age 75. A consultation on the detail of this change will be launched shortly.  As an interim measure members of registered pension schemes, who reach age 75 on or after 22 June 2010, won’t have to buy an annuity or otherwise secure a pension income until they reach age 77. This will enable all such members to defer their decision on what to do with their pension savings until the new rules are finalised next year.

Further information on pensions tax relief is available from the HM Treasury.

Anti-avoidance: Employment income and pensions contributions

The government will be taking action to prevent efforts to avoid tax and National Insurance Contributions (NICs) on earnings provided through the use of trusts and other vehicles.

Employers and employees are entering into arrangements using trusts and other vehicles that seek to avoid, defer or reduce liabilities to income tax and NICs on earnings or that seek to avoid restrictions on pensions tax relief. Arrangements in some cases seek to rely on the use of complex intermediary structures, some of which may be offshore.

The government is considering options for tackling these arrangements, including those which seek to avoid the restrictions on tax relief for pension schemes, and intends to introduce legislation in due course to take effect from 6 April 2011.

Items of interest

Public sector pay

The government will introduce a two-year pay freeze for public sector workforces from 2011-12, except for those earning £21,000 or less, who will receive an increase of at least £250 in these years.

VAT

The standard rate of VAT will increase to 20% on 4 January 2011.

Further information on the main VAT announcements is available from the HMRC website.

Corporation tax

For those of you who may be affected the main changes to corporation tax can be found on this part of the HMRC site and include

• Annual investment allowance - changes to allowance.
• Corporation tax reform.
• Corporation tax – controlled foreign company and foreign branch reform.

Anti-avoidance: Geared growth and employment-related securities

A consultation is being undertaken during 2010, on the taxation of employment-related shares and securities, where geared growth arrangements are used. The aim of the consultation is to develop proposals to ensure that employment income from employment related securities is subject to income tax and NICs.

Arrears of tax: Additional revenue and cash flow

Following a successful pilot exercise in 2009-10, HMRC will use debt collection agencies during 2010-11 to provide it with additional capacity to pursue and collect tax debts.  As part of HMRC's debt strategy all debts are risk assessed and in-house resources are focused first on the highest risk and highest value debts.  This additional capacity will accelerate the collection of lower value tax debts and generate an additional £140m from debts that might otherwise be written off.

Managed payment plans and Budget payment plans

Budget 2009 announced legislation for ‘managed payment plans’, which would allow taxpayers to pay self assessed income tax and corporation tax in a series of monthly instalments either side of the theoretical due date. The government has decided to defer implementation of this measure.

Deferral of this measure means that ‘Budget payment plans’ for corporation tax will also now be deferred. Budget payment plans will continue to be available to income tax payers.  This announcement does not affect existing time to pay arrangements designed to help those taxpayers having temporary difficulty in settling their tax bill.

Capital gains tax

From 23 June 2010 there will be two main rates of capital gains tax (CGT), 18% and 28%, in place of the single rate of 18 per cent for all gains. The rate paid by individuals will depend upon the amount of their total taxable income.

Low and middle income savers will continue to pay tax on their capital gains at 18%. From midnight (22 June), taxpayers on higher rates will pay 28% on their capital gains.  The annual exempt amount for capital gains tax will remain at £10,100 this year and will continue to rise with inflation in future years.

Gains qualifying for entrepreneurs’ relief will be taxed at a rate of 10%, and the lifetime limit of gains qualifying for entrepreneurs' relief will be raised to £5m (from the previous figure of £2m). Gains of trustees or personal representatives of deceased persons will be charged at 28%.

Further information on the relief can be found on the HMRC site.

 Child Trust Fund - Restriction of government contributions

The government announced on 24 May 2010 that it intends to reduce and then stop all government contributions to child trust funds. Subject to legislation, the government intends to reduce government contributions at birth, and to stop government contributions at age 7, from August 2010. The government also intends for HMRC to stop issuing new child trust fund vouchers from 1 January 2011. There is no immediate effect on child trust funds. Legislation is required to implement the government’s intentions and until that legislation is in place child trust funds will continue as usual.

 Main changes to tax credits and child benefit

The government will reduce tax credit eligibility for families with household income above £40,000 from April 2011 and make further changes in 2012-13.  Further information on this and other changes affecting individual taxpayers can be viewed on the HMRC site.

Taxation of non-domiciled individuals

The chancellor has announced that the government will review the taxation of non-domiciled individuals. This reiterates a statement made previously in the coalition agreement.  

Saving Gateway

The government has announced that the Saving Gateway is not affordable given the need to reduce the deficit. It will, therefore, not be introduced in July 2010. 

Capital allowances: Plant and machinery – rate changes

Planned changes for 1 April 2012 (for Corporation Tax) or 6 April 2012 (for income tax).  The government has announced that the rates of writing-down allowances (WDAs) for new and unrelieved expenditure on plant and machinery will be reduced:

• from 20% to 18% per annum for expenditure in the main rate pool; and
• from 10% to 8 % per annum for expenditure in the special rate pool.
   

Expenditure on long life assets, thermal insulation, integral features and cars with emissions of 160g/km or more (in the case of cars purchased on or after April 2009) is allocated to the special rate pool.  Further information can be viewed within Budget note 4 covering capital allowances. [4] 

[1] www.cabinetoffice.gov.uk/media/409088/pfg_coalition.pdf 

[2] www.hmrc.gov.uk/budget2010/bn01.html 

[3] www.hm-treasury.gov.uk/junebudget_tax_policy_making.htm

[4] www.hmrc.gov.uk/budget2010/bn04.htm