2020 Budget: Income Tax, Employment and Share Schemes
As was widely anticipated, Entrepreneurs’ Relief has been scaled back. The overall lifetime limits for gains to which the relief can apply will reduce from the current £10 million to £1 million per person with immediate effect.
There were suggestions that Entrepreneurs’ Relief might have been abolished completely, therefore even a dramatic restriction in the available relief may be viewed as good news by some. However, individuals with very large investments which would otherwise have qualified for relief will see their capital gains tax rate on disposal potentially double, to 20%.
The Government previously restricted the availability of Entrepreneurs’ Relief through a number of changes in the 2018 budget but left the limit for gains to which the relief can apply intact at that time.
The new restriction in the relief will mean that individuals who have already used Entrepreneurs’ Relief for gains of at least £1 million will no longer be able to benefit, whilst others will have the maximum amount of relief capped. The Chancellor reported that, according to HMRC data, over 80% of individuals using the relief will remain unaffected.
The changes follow a report in May 2017 by IFF Research for HMRC which highlighted that only around 1 in 6 individuals were aware of Entrepreneurs’ Relief at the time of their initial investment and only half of these individuals declared that the availability of the relief influenced their decision to invest.
Pensions Income Tax Relief
The Chancellor announced two main changes, effective 6 April 2020 – firstly, the two thresholds for individuals to be affected by the pensions annual allowance tapering will be raised by £90,000 and, secondly, that the minimum pensions annual allowance (after tapering) will be reduced from £10,000 to £4,000.
This means that the “threshold income” limit increases from £110,000 to £200,000 and the “adjusted income” limit increases from £150,000 to £240,000.
In line with inflation the lifetime allowance will increase from £1,055,000 to £1,073,100 from 6 April 2020.
Calculating the annual allowance taper can be complicated. Individuals firstly need to calculate their “threshold income” (broadly, net taxable income less pension contributions with relief at source) and if above the limit they must then calculate their “adjusted income” (broadly, net taxable income plus employer pension contributions and other private pension contributions). It is the amount of adjusted income that is used to determine whether the annual allowance is tapered and to calculate any restriction.
The increase of both thresholds by £90,000 will mean that only individuals with a threshold income of over £200,000 for 2020-21 and onwards have the potential to be impacted and only individuals with an adjusted income of over £240,000 will have their annual allowance tapered. This will undoubtedly have the effect of taking many people out of the taper and may be especially relevant for individuals who have generous employer contributions, or defined benefit schemes, and whose total net taxable income is no more than £200,000.
The restriction in the annual allowance means that the highest earners, who have adjusted income above £300,000 will not be able to put as much money into their pension tax efficiently as before.
Individuals may wish to make use of “carry forward” which allows unused annual allowances from the previous three tax years to be used to make pension contributions tax efficiently in excess of the current year’s annual allowance.
Support for Workers and Employers Affected by COVID-19
The Chancellor announced several measures aimed at helping workers and employers who will be financially impacted by COVID-19 (Coronavirus).
Statutory Sick Pay (“SSP”): The Government previously announced that SSP will be available for eligible individuals from day 1 of illness, removing the usual “waiting period” that meant SSP started on day 4 of illness. Additionally, SSP will now be extended to cover individuals who cannot work due to the requirement for self-isolation.
The Chancellor announced that employers with fewer than 250 employees (as of 28 February 2020) will be able to claim reimbursement for SSP paid to employees absent due to COVID-19 for up to 2 weeks.
Universal Credit and Employment and Support Allowance: Also, individuals who are not eligible for SSP (such as the self-employed) will be able to claim Universal Credit or Contributory Employment and Support Allowance more easily.
The ability to reclaim SSP by certain employers will certainly be welcomed by those eligible, although the Government noted that there are currently no systems in place to allow this and, therefore, it remains to be seen how easy this will be in practice.
Off-payroll Working (“IR35”)
Shortly after the budget, the Government announced that the extension of the off-payroll working rules to medium and large businesses in the private sector, which was to go ahead from 6 April 2020, has been delayed until 6 April 2021.
These rules will impact medium and large businesses who use the services of contractors but engage them through their personal service companies (“PSCs”).
Businesses will need to assess whether the contractor would have been considered as an employee for tax purposes had they engaged them directly. If this is the case, the business will need to operate payroll withholding on all payments to the PSC for services provided from 6 April 2021. This will include PAYE deductions for income tax and National Insurance together with payment of employer’s National Insurance and, where relevant, the apprenticeship levy.
Following a recent review of implementation measures, it had been agreed that HMRC will take a “light touch” approach to enforcement and penalties for the first year. It remains to be seen whether a similar approach will take place given the delay to implementation.
This represents a major change for any medium and large business that engages contractors via a PSC. The additional delay may well be welcomed by many businesses who have not yet worked through all the implications, but may also cause additional work for those businesses and contractors that were already prepared and may now need to look again at their arrangements.
It will be necessary for impacted businesses to review any decisions taken already in respect of 6 April 2020. There may be a huge amount of work to complete prior to 6 April 2021 and the revised implementation date. Every impacted business will need to review all their contractor engagements, including those with agencies in the chain, on a case-by-case basis. Official status determination statements will need to be completed and provided to all relevant PSCs by 6 April 2021.
The April 2019 Loan Charge – independent Review Outcome
The Government previously set out their response to the independent review of the Loan Charge (from Sir Amyas Morse), and their acceptance of the majority of the recommendations it contained. The revised measures include a reduction to the retrospective effect of the legalisation which will now only apply to loans made on or after 9 December 2010 and additional flexibility for taxpayers who can defer submission of their 2018-19 tax return (together with any required payment of tax) to 30 September 2020 without penalty or interest.
Schemes purporting to provide tax free loans to individuals have been targeted by HMRC’s introduction of the Loan Charge in 2019 (together with previous measures). Under these schemes individuals would not receive remuneration directly, but rather an amount would be paid into an umbrella company and, ultimately, loaned to the individual.
The Loan Charge, when originally introduced, had a 20-year retrospective effect. The review was subsequently commissioned to consider whether the measures introduced were appropriate.
Although many individuals with loans pre-dating 9 December 2010 will be happy with the changes, it is important that all individuals review their position. Any outstanding loans that are not caught by the loan charge will not be subject to an income tax and NICs charge in 2018-19 (which would be calculated by reference to the outstanding amount of the loan), but the disguised remuneration legislation is still likely to catch any waiver or write-off of outstanding amounts.
Enterprise Management Incentives (“EMI”) schemes
The Government has announced a review of the EMI share options scheme, in particular to consider whether to broaden access to the scheme to help high growth companies attract and retain talent. Currently the ability to grant EMI options is available only to businesses with less than £30 million of assets and fewer that 250 (full-time equivalent) employees on a group basis.
EMI schemes allow employees to be granted up to £250,000 worth of share options with significant tax advantages.
Any potential to widen the scope of EMI schemes is likely to be welcomed by small and start-up businesses who often use the scheme as an important method of retaining and incentivising key individuals, especially in situations where there may not be sufficient cash to provide bonuses and other market rate compensation.
Other Measures For Employers
Employment Allowance: The Employment Allowance will be increased from £3,000 to £4,000 from April 2020.
The Employment Allowance allows eligible employers to reduce their National Insurance bill, up to the lower of the Class 1 National Insurance paid and the Employment Allowance.
Originally available to most employers, the Government previously announced that, from 6 April 2020, it will only be available to employers who have a total employer’s National Insurance liability of below £100,000.
Whilst the previously announced restriction will rule out many employers, those who are eligible will receive an extra £1,000 of relief. It is important for employers to note that they need to consider the total National Insurance liability of payrolls across all connected entities to determine if they are eligible and, if so, ensure that only one entity makes the claim, where relevant.
National Insurance Contributions for Employers of Veterans
Businesses that employ veterans will not be required to pay employer’s National Insurance Contributions on the salary of veterans up to the Upper Earnings Limit from April 2021. This will apply for the first year of a veteran’s civilian employment.
The Government announced that a full digital service to support this National Insurance “holiday” will be available from April 2022 and transitional arrangements will be in place for the 2021-22 tax year. The Government is also launching a consultation on the design of this relief. It is likely that employers will need to claim this relief and will need to ensure they have sufficient data to ensure claims only in respect of eligible veterans.
From April 2020 the scope of non-taxable counselling services that can be provided by employers to its employees tax free will be extended. These will now include related medical treatment stemming from the welfare counselling services (for example, cognitive behavioural therapy).
It is likely that this extension stems from the Department for Work & Pensions’ consultation “Health is everyone’s business: proposals to reduce ill health-related job loss” which closed on 7 October 2019, for which we await the full Government response to submissions.
Home Working Deduction
When employees work at home they may be entitled to claim a flat rate deduction against income tax for their additional household expenses. From April 2020 the rate will increase from £4 to £6 per week.
Employers can choose to reimburse the flat rate amount to regular homeworkers without any tax implications and without the employee needing to keep any records. Where the amount proves insufficient, employers may instead decide to reimburse employees for specified expenses related to homeworking, but records will be required.
Company Car Tax Rates
As previously announced, the company car tax rates that apply to electric cars will change.
From 6 April 2020 fully electric cars (i.e. with 0 g/km of CO2 emissions) will not attract company car tax (but will in 2021-22 and 2022-23 at 1% and 2% of list value respectively).
Hybrid cars with emissions between 1 and 50 g/km of CO2 emissions will be subject to company car tax calculations based on the stated electric range mileage.
This change represents a large reduction in company car tax for zero and low emission cars and will be welcome news for employees choosing greener vehicles.
Construction Industry Scheme (“CIS”) Measures
The Government announced additional that anti-abuse provisions, to be effective from April 2020, will be introduced to prevent non-compliant businesses from claiming tax refunds under the CIS where they are not entitled to.
A consultation on promoting due diligence through the supply chain will also be launched – this will include ideas for tackling fraud.
Tax Rates and Allowances
Income Tax Rates: The basic, higher, and additional rate thresholds and rates for England, Wales and Northern Ireland remain unchanged for the 2020-21 tax year.
The basic rate (20%) applies to taxable income to £37,500.
The higher rate (40%) applies to taxable income above £37,500 and to £150,000.
The additional rate (45%) applies to taxable income over £150,000.
The dividend rates also remain unchanged at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Tax Free Allowances: The tax free personal allowance remains unchanged for the 2020-21 tax year at £12,500.
As with previous years, this allowance is reduced by £1 for every £2 of income over £100,000. This means that an individual with income of £125,000 or more will receive no tax free personal allowance and that income between £100,000 and £125,000 is taxed at an effect rate of 60% (accounting for the 40% higher tax rate and the loss of the tax free allowance combined).
The dividend allowance (the amount of dividends that can be received tax free) remains unchanged at £2,000.
The personal savings allowances (the amount of savings income that can be received tax free) also remain unchanged. The personal savings allowance for basic rate taxpayers is £1,000, for higher rate taxpayers it is £500, and there is no personal savings allowances for additional rate taxpayers.
National Insurance Contribution (“NIC”) Rates and Thresholds for Employees and Employers: The rates of NIC payable remain unchanged from 6 April 2020.
For employees, income between the primary threshold and upper earnings limit is subject to NIC at 12% and above the upper earnings limit at 2%.
Employers pay NIC at 13.8% on an employee’s earnings above the secondary threshold.
The thresholds for NIC have been increased from 6 April 2020.
Using annualised weekly limits, the threshold at which employees begin to pay National Insurance (the primary threshold) increases from £8,632 to £9,516. The threshold at which employers begin to pay National Insurance on an employee’s earnings (the secondary threshold) increases from £8,632 to £8,788.
The upper earnings limit for employees does not change.
National Insurance Contribution (“NIC”) Rates and Thresholds for Self-employed Individuals:The rate of Class 4 NICs payable (on self-employed profits) remains unchanged at 9% between the lower and upper profits limits and 2% above this limit.
The lower profits limit has been increased from £8,632 to £9,500 whilst the upper profits limit remains unchanged.
The rate of Class 2 NICs (payable where self-employed profits are above the Small Profits Threshold) has increased from £3.00 to £3.05 per week.
The Small Profits Threshold has increased from £6,365 to £6,475.
Voluntary National Insurance Contributions (“NICs”): The rate of Class 3 NICs increases from £15.00 to £15.30 per week from 6 April 2020.
Individual Savings Account (“ISA”) Limits: The ISA subscription limit remains unchanged for 2020-21, at £20,000.
The Junior ISA subscription limit increases for 2020-21, from £4,368 to £9,000.
Capital Gains Tax (“CGT”): The rates of CGT remain unchanged from 6 April 2020, at 10% for basic rate taxpayers and at 20% for higher and additional rate taxpayers. The rates for gains on residential property and carried interest remain 18% and 28% respectively.
The annual exempt amount for CGT purposes increases from £12,000 to £12,300 from 6 April 2020.
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