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Osborne reviews national insurance, taxes and savings in a budget that ‘puts the next generation first’
Chancellor George Osborne had plenty of intriguing news for HR professionals as he delivered his 2016 budget speech in Westminster today (16 March). From changes to national insurance contributions to encouraging 'younger savers' and rate relief for UK PLCs, People Management summarises the key areas of interest with expert commentary as it arrives.
The chancellor said tax reforms have been a huge part of the government’s strategy to boost economic growth. In its latest effort to support business and enterprise, Osborne announced plans to cut the main rate of corporation tax from 28 to 20 per cent, reducing to 19 per cent in 2017 and 18 per cent in 2020.
In a nod to the growing number of small businesses across the UK, the chancellor also announced he would “more than double” the small business rate relief from April 2017, so from next year more than 600,000 small businesses will pay no business rates at all.
This year’s budget promised to build on the economic gains over last few years, and simplify the UK’s “complex” tax system by setting out a business tax road map for parliament and employers to raise productivity, create job opportunities and increase wages for the next generation. The roadmap will draw on international best practice and focus on supporting small businesses and enterprise. It will also support investment while continuing to crack down on avoidance and aggressive tax planning, making sure rules are fair and taxes are paid, Osborne said.
Mike Cherry, policy director at the Federation of Small Businesses, said: “In a budget constrained by both the need to reduce the deficit and the economic outlook, the chancellor has listened to our calls for the tax system to be made simpler for small businesses and the self-employed and taken important action on business rates.”
Pensions and savings
In an effort to give the next generation choice and flexibility in their savings, the chancellor said his government would increase the ISA limit to £20,000 per year and launch a new flexible Lifetime ISA for those under 40 years old.
The new ISA allows people to save up to £4,000 each year and receive an additional 25 per cent bonus from the government. Savings, including the government bonus, can be accessed both to buy a first home and in retirement. Osborne said the initiative acknowledged the “agonising choice” for many young people who are forced to choose between the two.
But Joanne Segars, chief executive of the Pensions and Lifetime Savings Association, sounded a note of caution: “An important part of this will be to make sure that savers’ interests are protected by ensuring that the regulation on charges and governance of the Lifetime ISA are comparable to those for pensions, which have been reviewed to make sure they offer savers good value.”
David Brooks, technical director at Broadstone, added: “The Lifetime ISA, with a combination of pension and mortgage saving, sounds like a very interesting idea but is surely the thin end of the wedge. With the age of 40 set rather arbitrarily it isn’t hard to see (if successful and with high take up) that it couldn’t be opened up to all savers in due course.
“However, the government will be wary of wealthy pension savers already maxed out on existing allowances using it to squirrel away more money, and so perhaps some form of exemption will need to be established."
Critics have also questioned how the new Lifetime ISA will work alongside auto-enrolment; for example, whether it will it encourage younger savers to opt out of workplace schemes in favour of a private equivalent.
Meanwhile, Mark Beatson, chief economist for the CIPD, said measures to encourage younger workers to invest in their future could go further: “The new Lifetime ISA makes the assumption that people have enough money left at the end of the month to put aside for retirement or buying their own home, but we know this is a huge struggle for many people. It also assumes that people will make the right decisions with their money, which could have an impact on their efforts to save sufficiently for their retirement.”
“As well as giving people the means to save for their retirement and their own home, we need to look at how people can be given the means to invest in themselves. The government should consider a ‘Help to Learn’ fund that can give individuals at different stages of their working lives access to the careers guidance, training and development they need to move into skilled jobs and progress at work.”
Public sector pensions
Osborne announced that the government wants to see an increase in pension contributions from public sector employers, which Jonathan Clifton, associate director for public services at IPPR, said could cost the public sector an extra £2bn by the end of 2020.
“These pension changes will fall on all public sector employers – including schools and hospitals – which are meant to be ‘protected’ from spending cuts. They will find it even harder to balance the books in the coming years,” he said.
Encouraging the self-employed
Could plans to abolish class 2 national insurance contributions – which require the self-employed to pay £2.80 a week on profits of £5,965 or more a year – encourage more employees to take the plunge into self-employment? Currently an estimated 3.4 million people are set to benefit from this change, which would come into effect from April 2018.
The requirement for self-employed workers to pay class 4 national insurance on 9 per cent of their profits between £8,060 and £42,385 per year, and 2 per cent on profits over £42,385, remains unchanged.
After April 2018, class 4 national insurance contributions will also be reformed so self-employed people can continue to build benefit entitlement, the chancellor said.
Karen Bolan, head of engagement at communications specialists Anthony Hodges Consulting, said: “While the abolition of class 2 national insurance contributions might seem like an immediate benefit to the self-employed, ceasing payment of these will mean that the self-employed will no longer build up [their] state pension entitlement. Given that most of this group is unlikely to have a sizeable private pension, this could be storing up real problems for the future.”
Income tax thresholds
The personal allowance will be 70 per cent higher in April this year than in 2010-11, and the March 2016 budget confirmed that the government will be taking another significant step by increasing the personal allowance from £11,000 in 2016-17 to £11,500 in 2017-18.
This continues to ensure that no one working 30 hours per week on the national minimum wage will pay income tax in 2017-18, and will bring the total number of taxpayers taken out of income tax since the start of this parliament to 1.3 million. Osborne said the typical basic rate taxpayer will pay more than £1,000 less income tax in 2017-18 than in 2010-11.
Additionally, the higher-rate tax threshold – where the rate rises from 20 per cent to 40 per cent – will increase from £42,385 to £45,000 in April 2017. While this wasn't quite the raise that some had predicted, it is still a significant jump on previous years. The Scottish parliament will decide whether to adopt the new higher threshold north of the border; if it opts against it, income tax rates will differ across the UK for the first time in history.
Personal service company clampdown
With reports from HMRC that 90 per cent of personal service companies are not paying the correct amount of tax and national insurance contributions, Osborne made a beeline for their use in the public sector by announcing a £12bn tax evasion and avoidance clampdown.
He said that loans for those who participate in personal service company schemes will be taxed at 32.5 per cent, and that the government will be tightening rules around termination payments to stop them being used to avoid tax.
Mark Groom, tax partner at Deloitte, said: “Public sector bodies will need to rethink the basis on which they engage with personal service companies. They will also need to make appropriate changes to their payroll systems to capture payments made irregularly to personal service companies on submission of invoices.” This could increase the administrative burden and number of contractual amendments across the public sector, he added.
In a move that may increase the costs of running a business, the chancellor announced that, from 2018, termination payments of more than £30,000 will be subject to employer national insurance contributions. Certain forms of redundancy payments are currently exempt from employee and employer national insurance contributions and the first £30,000 is income tax free, which the government says incentivises employers to manipulate the rules.
"In practice, many termination payments are not classed as redundancy for tax purposes. However, if and when large-scale redundancies become common again, there is a risk that this change will put pressure on the level of redundancy payments provided,” said Peter Boreham, director of executive reward at Mercer.
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Salary sacrifice schemes
Any changes to the pensions tax relief system may have gone unnoticed in Osborne’s announcement, but accompanying budget documents reveal that, although the government wants to encourage employers to offer certain benefits, it is concerned about the growth of salary sacrifice schemes, and is considering limiting the range of benefits that attract income tax and national insurance advantages when they are provided as part of such schemes. More is expected on this at a later date.
The budget offered some clarity over the upcoming childcare changes in the UK, but Iain McMath, chief executive of Sodexo Benefits and Rewards Services, said these changes won’t necessarily benefit all working parents.
"The tax-free childcare scheme has been designed with the intention of saving parents up to £2,000 per year, but our research suggests the average saving will be just £600 – with 66 per cent of households estimated to be worse off under this new scheme," he said.
"The budget confirms that childcare vouchers will be closed to new entrants from April 2018, which means that parents who are looking for help with their staggering childcare costs would be best served to sign up for childcare vouchers now, while they are still available."
Employers and business groups have been calling for greater clarity on how the apprenticeship levy will work in practice come 2017, but the chancellor avoided going into detail in this week's announcement. Budget documents have revealed that, from April 2017, employers will receive a 10 per cent top-up on their monthly levy contributions in England, available to spend on apprenticeship training through their digital account.
Further details on the operating model are due in April and draft funding rates will be published in June.
Petra Wilton, director of external affairs at the Chartered Management Institute, said degree-level apprenticeships will create a generation of true professionals capable of delivering significant business returns to employers, but businesses urgently need further clarification on the funding and quality assurance of such schemes, she added.
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