Payroll, Benefits & Taxation Changes from April 2016

There are a number of changes and new challenges from 6 April 2016 in the UK that will affect employers. In this summary we will highlight some of the key changes and discuss the impact that these changes may have.

Many of the changes being introduced come as a result of the work of the Office of Tax Simplification. They have been looking at all areas of personal taxation and National Insurance and making recommendations to the government based on these findings.

The topics covered here are:

  • Abolition of UK expenses and benefit dispensations
  • Abolition of the £8,500 higher earnings threshold
  • Trivial benefits exemption
  • Payrolling Benefits In Kind
  • Contracted Out Pensions Abolished & Pension Changes
  • Employment Allowance For 2016

Abolition of UK Expenses and Benefits Dispensation 

Under the current system, an employer can apply for a dispensation on some expenses and benefits they provide for their employees. This means the employer won’t need to report them to HM Revenue and Customs (HMRC) or pay tax or National Insurance on them. Dispensations can cover a variety of expenses and benefits, but are mainly used to cover routine business expenses and benefits like travel and phone bills.

The abolition of dispensations with effect from 6th April 2016 is a significant reform. This change in the provision of tax and NIC relief for employees will mean that many business expenses will be treated as exempt from tax and NIC. However, employers will have to determine that the expenses being reimbursed are exempt business expenses and that the employee has actually incurred the expenditure. Otherwise, with dispensation protection stripped away, P11D reporting becomes necessary.

The exemption regime covers specific reimbursements of actual costs but HMRC may also agree that employers can instead pay certain scale rates or flat rates. If the employer wishes to pay scale rates, e.g. for subsistence, it must obtain HMRC agreement unless it has a dispensation less than five years old. HMRC has also precluded linking any tax free business expenses (e.g. travel and subsistence expenses) to salary exchange arrangements. 

What activpayroll has to say:

“With the abolition of the dispensation regime, there is more emphasis on employers ensuring that they have a robust system in place for checking employee expense and benefit claims. It is essential that each company has a system of checks in place, as HMRC will potentially look more closely at these areas now that the “safety net” of the dispensation is being removed. We would be more than happy to carry out a health check, to review the expenses and benefits systems for companies, and to give help and advice to companies who are unsure as to what systems they are required to have in place.”

Abolition of the £8,500 Higher Earnings Threshold 

Sometimes referred to as the ‘higher earnings threshold’, this throwback to the 1970s has finally been abolished. With it goes the Form P9D for reporting the few benefits that were not excluded from tax and NIC by the operation of the threshold. Few employees will be affected, although with the rise of part time working and zero hours contracts this number could potentially have been on the rise for the first time in decades. 

Trivial Benefits Exemption

Originally scheduled to have been introduced in 2015/16, the delayed trivial benefits exemption will be in place for 2016/17. The exemption will apply to qualifying benefits in kind up to a maximum of £50 (including VAT) for each employee, and the draft legislation indicates that this cap applies per qualifying benefit rather than per tax year.

There are, however, three further conditions: 

  1. The benefit cannot be a cash payment or cash voucher (this does not impact the use of non-cash vouchers and credit tokens, i.e. those that can only be exchanged for goods and services)
  2. The employer must bear the cost, so this exemption cannot be used with salary exchange arrangements
  3. The benefit cannot be given to the employee in recognition of particular services they have or will perform or as part of a contractual arrangement. 

There will also be special anti-avoidance rules for employees of certain small family owned companies, based on a £300 annual limit for all trivial benefits. 

Payrolling Benefits in Kind 

We have already published some guidance around the new Payrolling of Benefits in Kind  (PBiK) service being offered by HMRC.

The first point to mention is that this service is entirely voluntary, for now, so if employers are happy completing P11Ds, they can continue to do so.

Some employers may currently payroll benefits in kind but should also report the costs and the amount payrolled on P11Ds or submit a list to HMRC at the end of each tax year. Such voluntary arrangements are ceasing and employers that are already, or intend to, payroll benefits and expenses under the new regime must register with HMRC using the new online PBiK service. The service does not apply to all benefits, so P11Ds remain in place for these.

Employers must register to use the PBIK service by 5 April 2016. Upon registration, HMRC will remove qualifying benefits from relevant employees’ 2016/17 PAYE code numbers - so it makes sense to register as early as possible to avoid HMRC issuing too many tax coding notifications for your employees. 

Contracted Out Pensions Abolished & Pension Changes

From 6 April 2016, contracting-out of the state second pension is abolished and the new single-tier state pension is introduced. As the contracting out rebate is only now available where the employee is a member of a defined benefit workplace pension, only employers that offer them are affected. However, where employees are members of a workplace pension and have contracted out of the state second pension, both the employee and employer face increases in their NIC payments.

Affected employees should be warned to expect an increase in their weekly or monthly NIC deductions of 1.4% on earnings between £5,824 and £42,385 (a maximum of £42.65 a month) from 6 April 2016 regardless of the increase in the upper earnings limit for 2016/17.

Employers will lose the 3.4% rebate but can amend their pension scheme rules to set off the additional NIC liability they must pay – although such a change can only take effect from April 2016. 

Employment Allowance For 2016

As a company you can claim employment allowance if you are paying class 1 national insurance. For the 2014/15 and 2015/16 tax years, this allowance was set at £2,000, but for 2016/17, this allows you £3,000.00 of employers NI contributions that do not have to be paid.

Please note a new rule has been introduced which excludes companies for whom their only employee is a director from claiming Employment Allowance.