Reflections on the decade
It seems appropriate at the start of 2020 to look back to the significant payroll changes that occurred in the last decade and reflect on how these have impacted where we find ourselves in 2020.
We began the decade in 2010 with the prospect of both RTI and auto-enrolment on the horizon for employers.
2010 – the personal allowance was only £6,475, so over the decade it’s nearly doubled taking a significant number of people out of the tax system. Equally, it has caused a problem in net pay arrangement schemes because anyone earning between £10,000 and £12,500 is receiving no tax relief on their pension, whereas in relief at source schemes everyone receives 20% tax relief regardless of their earnings.
We also saw a change to the personal allowance with the introduction of the income limit. This has seen the allowance progressively withdrawn for those with an income over £100,000. The limit introduced has remained the same for the whole decade.
In March 2010, the Office of Tax Simplification (OTS) was set up to provide the government with independent advice on the simplification of the tax system. Over its first decade the OTS has carried out a number of reviews which have made a difference to employers: for example the introduction of the trivial benefit exemption as part of their review of tax reliefs. Their review of small business taxation, completed in 2019, made numerous recommendations about improvements in Real-Time Information (RTI).
2011 – employer and employee national insurance rates rose by 1%. When taken alongside the cost of auto-enrolment introduced the following year and the significant increase in the national minimum wage which will continue in April 2020, employers’ salary bill costs have played a part in a number of high-profile corporate failures.
2012 – the beginning of auto-enrolment, arguably one of the biggest policy successes of the decade with upwards of 9 million new members of workplace pension schemes. Payroll shouldered most of the burden of this project, having to become pension experts overnight as many small employers or payroll agents had never dealt with pensions before. It became clear by 2018 that far too many master trusts had entered the workplace pension market and were not financially viable. An authorisation process therefore opened in October 2018 and over the following year more than half of the 80+ master trusts either exited the market or merged with larger players. Whilst this happened far too late, at least employers now know that in choosing a master trust it will be financially viable in the long term, in the same way as any insurance-based pension has always been.
2013 – the first year of full RTI reporting begins and at the end of the decade we are still dogged with problems relating to duplicated records and misallocated payments. HMRC eventually conducted a post implementation review which was published at the end of 2018 but the promised implementation plan that was due to be published by the end of March 2019 never transpired.
The top rate of tax dropped to 45% from 50% and has remained at that level through the rest of the decade. We started to see a drop in the 40% threshold, which led to hundreds of thousands of taxpayers being dragged into that bracket over the next few years to pay for the increases in the personal allowance, until this fiscal drag started to reverse in 2018.
2014 – the introduction of the employment allowance heralded a number of incentives being embedded in the national insurance system. This included; the introduction of the under 21 exemption from employer national insurance in 2015, the apprentice exemption in 2016, and also an increase in the employment allowance to £3,000 – but this only impacted businesses employing more than one individual with earnings above the secondary national insurance threshold, so effectively excluded all single director businesses.
In April 2020 there will be significant further changes to the employment allowance because, in restricting its eligibility to those businesses with an employer NI liability of £100,000 or less in 2019/20, the Government had inadvertently caused employment allowance to have to be treated as de minimis state aid.
2015 – the marriage allowance was introduced, replacing the married couples’ allowance for those born after 1935. This is intended to support marriage or civil partnership by allowing couples who cannot utilise the personal allowance fully as one of them is not a taxpayer, to transfer 10% of the year’s personal allowance to their partner. As claims can be backdated for four years, it is worth alerting employees as many eligible families do not currently claim and the saving is around £250 per year.
George Osborne introduced the pension freedoms in April 2015, allowing individuals over the age of 55 to access pension savings. Whilst this may have been very welcome for the many thousands of individuals who were able to increase their accessible cash, it has meant many people have reduced their pension savings to a level that will not provide enough support in retirement. This also led HMRC to deduct emergency tax on many of these withdrawals and has provided scammers with a huge opportunity to defraud individuals of hundreds of thousands of pounds of DB benefits, seen most recently in the scandal of the treatment of the British steel workers in Port Talbot in 2018.
2016 – the P9D was abolished in April 2016, meaning that all employees regardless of their level of earnings were now subject to tax on all benefits in kind. Whilst this was arguably a simplification for employees, it of course meant more tax and NI revenue for the Treasury. As part of this package of measures related to benefits in kind, HMRC allowed employers to payroll benefits for tax if they chose to, and introduced a statutory registration process that then exempted them from any P11D reporting.
In the same year we said goodbye to dispensations. ITEPA was amended such that any business expenses could now be reimbursed tax-free because these were now classed as exemptions. Of course this put the onus completely on employers to ensure that only expenses that meet the ‘wholly, necessarily and exclusively’ criteria are being provided tax-free. There is no longer the safety net provided by a paper dispensation, employers need robust and well policed expense policies that are regularly updated – regularly means every tax year!
Scale rates (round sum allowances that can be paid for daily subsistence) were also legislated for the first time. Employers who wanted to pay more than the specified rates had to apply to HMRC for an approval notice which could run for a maximum of five years.
Scottish income tax was introduced in April 2016, but only in 2017 did significant changes to bands and rates take effect. It’s clear from evidence from employers that HMRC are still struggling to identify Scottish taxpayers correctly.
In terms of national insurance we saw the end of contracting out which has arguably led to some of the significant cost pressures on the public sector, for example in education and in the NHS, because of the significant 3.4% increase in employer’s NI. The end of contracting out was necessitated by the introduction of the single tier pension and the consequent move to requiring 35 years of qualifying national insurance. We must get employees to focus on the accuracy of their national insurance records as HMRC don’t reconcile these figures as they do for tax each year.
It didn’t seem so contentious at the time, but this was the year that the tapered annual allowance was introduced for higher earners. Three years later in 2019, many column inches were devoted to the fact that doctors were now refusing to take on additional clinics because of the significant tax bill caused by the definition of pensionable pay in the NHS pension scheme.
2017 – salary sacrifice was renamed as an ‘optional remuneration arrangement’ (OpRA) and equally was expanded to include the giving up of future salary (such as a car allowance) and deeming that also to be an OpRA. Type A OpRAs were defined as giving up current salary – for example in exchange for an enhanced employer pension contribution, and type B as giving up a future salary. A number of politically popular benefits were carved out of the new regime, but there is nothing to say that this may not change in the future as it’s always in the governments gift to remove or restrict tax reliefs – employers should be mindful of this when basing their reward strategy on a tax relief. It is therefore sensible in any contract changes that rely on the current exempt list, to indicate to employees that the offer of the benefit via an OpRA arrangement may be withdrawn if the government changes the law. This gives the employer a ‘get out of jail’ clause if the savings from the OpRA arrangement are no longer material for the employer because the government has restricted or removed the exemption.
The apprenticeship levy was introduced in April 2017 and arguably employers are still having problems calculating the new definition of ‘pay bill’ on which the levy is based. We can expect compliance activity on this to ramp up in 2020 as we have seen with the employment allowance, because the connected companies’ rule also applies to the levy, but with the key difference that the levy allowance can be allocated across numerous PAYE schemes.
Off-payroll working was also rolled out in the public sector, and with HMRC’s assertions that it’s been a huge success, it’s likely to be implemented in the private sector in April 2020 for all but small engagers. There will also be changes for the public sector with the introduction of status determination statements and an appeal process.
2018 – the childcare exemption was closed to new entrants eventually in October 2018. The introduction of tax-free childcare should have happened in 2015, but legal claims followed by IT problems meant that the exemption had to continue much longer than the Government intended – and with it the significant loss of employer national insurance through salary sacrifice.
Post-Employment Notice Pay (PENP) was introduced for those with leaving dates of the 5th April or later. It no longer made sense to remove Pay in Lieu of Notice (PILON) clauses from contracts as all PILONS had become taxable by being deemed to be PENP. The final part of this implementation will take place in April 2020, when class 1A on termination payments in excess of £30,000 will be introduced and this type of NI will be reported on the full payment submission and paid in-year, for the first time.
2019 – further changes were made to scale rates to remove the need for random sampling by employers – they now trust that the employee has appropriately incurred expenditure during a business journey after leaving home.
In order to improve transparency about the payment of national minimum wage, regulations were introduced to require employers to show hours for any amounts of variable pay, for example related to callouts, KIT days and overtime. From April 2020, there will be further changes in workers’ rights in respect to the employment particulars that have to be provided on day one.
We also reached the end of phase 1 of auto-enrolment with the last legislated for increases for both employers and employees. However, it’s fair to say that the current rates are only half of the minimum 15% that is deemed necessary to provide for an adequate retirement income. We will have to see when the new Government decide to break the news that contributions for both parties will have to increase considerably if we are not sleepwalking into employees thinking that they have adequate retirement income, when they do not.