Employer round up: what the 'mini budget' means for Employers

The government will reverse the recent rise to National Insurance Contributions (NICs) and has scrapped plans for the Health and Social Care Levy. The 1.25 per cent increase to NICs that came into force in April will now be reversed from 6 November, and the new, separate Health and Social Care Levy of 1.25 per cent that was to be introduced in April 2023 has also been cancelled.

This change will be welcomed in terms of National Insurance cost savings for both employees and employers but there are some administrative points to consider. How quickly can your payroll system or external provider put in place these changes?

HMRC has directed that all payroll providers should implement immediate updates to payroll processing systems and that the responsibility for remedying any overpayments will sit with the Employer in the first instance. HMRC stated in a communication to Employers:

“We realise the timeline for this is tight and some employers may not be able to implement the changes in time. HMRC will be directing employees to their employers to correct any overpaid NICs (National Insurance Contributions) in the first instance.”

Payroll and HR teams will also need to ensure that, from 6^th November 2022, the additional note on payslips referring to the 1.25% contribution which has applied since April 2022 is removed. It would also be worth considering drafting communications to employees to explain why take-home pay will be different from that date.

If you operate salary sacrifice or salary exchange schemes to help employees mitigate tax and national insurance costs you should review recent communications on national insurance costs to see whether any updates are required. If the higher rate of NICs had been referred to in communications these will need to be adjusted accordingly and communications formally updated.

The Basic rate of income tax cut will be cut by 1% to 19% with effect from April 2023. A one year transitional period will also be introduced for relief at source pension schemes, permitting them to continue claiming tax relief at the 20% rate.

The additional rate of income tax will also be removed from April 2023. This applies to the additional rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland.

The additional rate for savings, dividends and the default additional rate will also be removed from April 2023.

However, employers should be aware that analysis suggests that the combined effect of all changes will still leave the vast majority of income tax payers paying more tax by 2025-2026. Those impacted most in cash terms will be those earning between £63,000 and £125,000. They will be paying £1,570 more in direct tax in 2025-26 than if no changes had been made.

As part of the Mini-Budget last week, the Chancellor announced that the 2017 and 2021 IR35 reforms will be repealed with effect from 6 April 2023 (however legislation to do so is pending).

This will mean that contractors who are providing their services to an organisation via a private service company (or other intermediary) will once again be responsible for determining their own employment status (for tax purposes) and paying the appropriate amount of tax and NICs.

We understand that services provided before 6 April 2023 will remain subject to the current rules (even where payment is made after that date). So current arrangements with regard to determining status (and deducting tax and NICs where inside IR35) should remain in respect of services provided until that date.

Businesses in the private sector have been grappling with the 2021 IR35 reforms which required them determination the status of those contracting with them via private service companies and to deducted income tax and NICs from anyone that they determined (rather tortuously given the lack of any clarity in the relevant tests) to be employed for tax purposes, and therefore ‘inside IR35’. Many businesses will be relieved to see the back of these processes and the complex application of the uncertain rules that sits within them.

However, businesses would still be wise to consider that:

• The current rules will remain in force in respect of services provided up to and including 5 April 2023. The repeal announced does not mean that HMRC will not seek enforcement action in respect of the reform rules for services prior to that date.
• Criminal tax evasion legislation will continue to apply. So businesses would need to think hard (and obtain tax advice) about the impact of this where planning to revert after April 2023 to simple contracting with a private service company for services that they deemed recently to be inside IR35.
• Employment status for employment purposes will remain a relevant challenge e.g. if a long-term contractor later seeks to claim unfair dismissal or rights to holiday pay.

New investment zones will be introduced across the UK. Details of where the zones will operate are not yet available but there will be a significant package of measures designed to make employing new staff in the investment zones more attractive for employers. It is expected that if new employees work in these investment zones for at least 60% of their time the employer will benefit from zero-rate employer national insurance contributions on earnings of up of £50,270 per annum.

The Chancellor also announced that the government plans to legislate to reduce strike action by making trade unions take all pay offers to a member vote. The government did not confirm further details as to the timing or details of proposed legislation, and we will be watching this carefully in future weeks. Kwasi Kwarteng stated:

“It is simply unacceptable that strike action is disrupting so many lives. Other European countries have minimum service levels to stop militant trade unions closing down transport networks during strikes, so we will do the same and we will go further. We will legislate to make trade unions put pay offers to a member vote to ensure that strikes can only be called once negotiations have genuinely broken down.”

Universal Credit claimants who earn less than the equivalent of 15 hours a week at National Living Wage will be required to meet regularly with a work coach. If they do not, the Government has threatened that their benefits could be reduced. We mention this here because HR teams may see more requests from employees to increase their contractual working hours in response. Where it is not possible for the business to accommodate this there may be higher turnover of employees as they are forced to seek alternative roles with more hours available.

The government has scrapped the cap on bankers bonuses. Previously limited to twice the banker’s salary, this cap has been lifted but it will take time for HR teams to adjust contracts and processes to account of bonuses rather than fixed salary being the primary reward mechanism.