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    Tag: National Insurance

    Growth, credibility and survival: what’s really at stake in November’s Budget

    Posted on by Rebecca Campbell

    The run-up to any Budget inevitably brings with it a flurry of speculation and selective leaks. Often these are nothing more than flag-flying exercises so policy ideas can be floated to test the reaction of the press and public before any real decision has been taken. It seems this year is no different. What matters, however, is separating the noise from the reality: what the Chancellor can do, what she might do, and what she should do.

    Income tax remains the government’s single largest source of revenue, accounting for around 27% of receipts and 11% of national income. It is the most obvious lever for any Chancellor looking to raise funds. But the Labour Party’s manifesto pledged not to increase taxes on working people and that commitment already looks fragile. The rise in employers’ National Insurance contributions earlier this year was framed as something different, but it represented a broken promise by stealth.

    There have also been rumours of National Insurance being extended to rental income – a puzzling idea given that NIC has historically been a tax on earnings rather than investment returns. A more coherent approach might be to recognise that the tax system already differentiates between earned and unearned income. Not long ago, the basic rate was 22% on earnings and 20% on investment income. The Chancellor could revisit this structure and perhaps nudge earnings up to 21% while raising the rate on interest and rental income to 24%. Such a move would raise revenue while leaning on those with greater investment wealth, rather than purely on earned income.

    Another near certainty is the continued use of fiscal drag. By freezing thresholds in the face of inflation, the Treasury allows more taxpayers to be pulled into higher bands without the political fallout of an explicit rise in rates. But there is a real problem with the personal allowance. Left unchanged for so long, it risks dragging pensioners with only the state pension into the tax net. That would be politically toxic. I believe the Chancellor should use this Budget to raise the allowance, even modestly, to protect those on the lowest incomes.

    Inheritance Tax is always politically sensitive, but changes in the last Budget have already prompted greater use of gifting. Possible next steps include extending the seven-year survival period or introducing a US-style cap on lifetime gifts exempt from IHT. Either would be radical and controversial, so the government has to weigh the revenue benefit against the risk of alienating middle-income households who increasingly view IHT not as a tax on the wealthy, but as one on families who have worked and saved throughout their lives.

    Pensions remain a constant target for reform, and I can see three possibilities: 1) restricting or reshaping the tax-free lump sum. This would be politically explosive, given that many have planned their retirements and even final mortgage payments around this entitlement. 2) Introducing a flat rate of relief on contributions. This would simplify the system and redistribute relief away from higher earners, although at the cost of dampening incentives to save. 3) levying employers’ NIC on pension contributions. That would raise revenue, but at the expense of both businesses and employees, who ultimately share the burden. None of these options are straightforward, and each risk undermining long-term confidence in retirement saving.

    When Labour came into power, they spoke endlessly of a £22bn black hole. That narrative dominated to such an extent that it risked talking the UK economy into recession. This time around, the government has been quieter. That feels like a deliberate choice by a relatively unpopular administration which is trying to dampen expectations, avoid fuelling pessimism, and buy time. But the Chancellor cannot rely solely on delay. Her policies will only succeed if the economy grows. Growth, in turn, requires confidence and not constant tinkering. It also requires investment from both the private sector and individuals.

    When you combine all of these factors, this Budget must offer something beyond tax rises and fiscal drag. Reliefs for businesses investing in the UK, or incentives for individuals to back British companies, would send an important signal. They would, of course, cost money in the short term but would support the growth the government ultimately needs.

    I know I’m not alone in thinking this, but the decision to delay the Budget until late November may not be accidental as it gives the Chancellor more time to hope for better growth figures. If that happens then it could potentially soften the blow of whatever tough measures she feels compelled to announce.

    For now, the Chancellor faces a delicate balancing act between fiscal responsibility and political credibility, and between raising revenue and sustaining growth. Whether she succeeds will depend not only on the measures announced next month, but also on whether she can offer a clearer, and more confident vision for the economy than we have seen so far.

    It does all make you wonder whether this will be her last Budget. As we know, political cycles move quickly, and so too do ministerial careers.

    Roger Phillips – tax partner at PM+M – reacts to the Autumn Budget

    Posted on by Laura Boyd

    Roger Phillips, Tax Partner at PM+M: Working people will pay the price for today’s Budget, no matter how much the Treasury dresses it up

    It’s been 112 days since Labour came to power, and after three months of febrile speculation, Rachel Reeves finally delivered the most hyped-up budget that I can remember in 20 years of being a tax professional. This prolonged period of speculation hasn’t been helpful as the markets, businesses and taxpayers have been crying out for stability and certainty.

    Much of the talk in advance of this Budget was around the £22bn black hole, which was there for anyone to see if they had delved into the data which is fairly readily available – and I expect the new government were well aware of this before they penned their manifesto.  As well as dealing with the black hole, it’s clear that this government wants to borrow, spend and grow the economy.

    The Chancellor’s change to the way in which her “fiscal rules” operate, combined with the tax rises that we have seen today, should give her the headroom to do this. But this will come at a cost – a cost which, despite assurances, will fall on the category of people who the government have seemingly been unable to define in the days leading up to this Budget – and the people who they said would be protected from tax rises in their manifesto: “working people.”

    Costs to business – employer’s NIC

    To a degree, the government had tied their own hands in their manifesto by saying that they wouldn’t increase income tax or NIC for working people. The jump in Employer’s NIC to 15% from April 2025 is being spun as Labour having not broken their manifesto commitment, as this cost will be borne by business rather than workers. However, the announcement that threshold at which it gets paid come down from £9,100 per year to £5,000 did come as surprise and will inflict further pain for employers across the UK.

    By the letter of the law, this ‘spin’ may be true. The cost will be paid by employers. However, when this is combined with the increased cost burden in the form of a national minimum wage increase, these costs will undoubtedly be felt by employees in the future, either through reduced pay rises, or in the worst of cases, the loss of jobs for those where these increased employment costs are unsustainable by businesses. The pain is likely to be most felt by those in the already squeezed hospitality and retail sectors despite the announced 40% relief on their business rates. The PM intimated that he doesn’t want people to see lower amounts going through people’s payslips and into their bank accounts but, indirectly, it will, no matter how the government dresses this up.

    Capital Gains Tax, Inheritance Tax and Pensions

    Capital gains tax and inheritance tax are relatively low fund raisers for the government – and paid by relatively few.

    The jump in the rates of CGT (the lower rate will rise from 10% to 18%, and the higher rate will go up from 20% to 24%) will not be huge money spinners for the government. The rates have not been equalised with income tax, as some were calling for, which is sensible. However it is disappointing not to see some kind of relief for inflation being introduced for those realising long term gains.

    IHT appears to be in line for some relatively radical reform. An extension of the freezing of the IHT thresholds to 2030 will pull more families into IHT. The biggest announcement, on which the Chancellor spent a very short period of time announcing, was that inherited pensions will now be subject to IHT.

    Additionally, there will be reform to the BPR and APR rules – effectively placing a cap on those reliefs equivalent to £1m per taxpayer, with anything over and above that being taxed at an effective IHT rate of 20%. Some drastic changes from the current position where pensions can be inherited tax free and shares in family companies attract no IHT on death.

    The government claims that there is ‘no return to austerity’, but with a total rise in taxes of £40bn, this is the largest any chancellor has announced since Norman Lamont in 1993. Time as they say will tell.

    Roger Phillips – tax partner at PM+M – reacts to the March 2024 Budget

    Posted on by Laura Bannan

    It’s fair to say that this Budget threw up no great surprises as there was limited scope for any sizeable changes to tax, spending or borrowing. With the spectre of Kwarteng and Truss’ dual legacy still in the air, coupled with it being an election year, the Chancellor simply couldn’t risk being seen as fiscally irresponsible. He had to tread a fine line of giving away something to appease the right in his own party but without spooking the markets.  I don’t think he could have feasibly done much more as unfunded and grandiose tax cuts were – thankfully – off the table.

    By choosing the cheaper – and some might say less headline grabbing – option of cutting national insurance by a further 2% rather than slashing income tax, the Chancellor has professed to putting more money in the coffers of millions of working people. The changes should mean that someone who earns £30,000 a year will be around £58 “better off” a month when the national insurance cuts that were announced in the Autumn Statement are factored in. However, when you look at it in the round, it will have little impact as we are all still facing the highest tax burden in recent memory – as he didn’t take the opportunity to increase the personal allowance or tax thresholds – and therefore the effect of fiscal drag will likely outstrip the NIC saving for many.

    Cutting income tax would have been significantly more expensive as it benefits both workers and pensioners. The announced cut of 2% in employee NIC will cost about £10 billion a year, whilst a 2p cut in income tax would have cost £13.7 billion a year. I also had concerns that if he did capitulate to the right – and had cut income tax or announced a raft of short-termism, vote grabbing measures – there might have well have been inflationary consequences, so I think he’s made the right call, especially as the government is so constrained by the highest public sector debt levels since the 1960’s, low public spending, weak economic growth and overall tax levels that are beyond the highest level as a share of GDP, since World War II.

    The Chancellor has helped some families by way of a long-overdue reform of the high-income child benefit charge tax trap, largely seen as unfair by many – although he decided to shift the issue further up the earnings ladder for the time being, rather than choosing to get rid of it altogether – so this will please some, but not all.

    The increase in the VAT registration threshold from £85,000 to £90,000 was long overdue – and anything that acts as a barrier to growth should be addressed. The news will cut taxes for some small businesses in the North West and right across the UK – however, he could have been braver and increased the threshold even further – or alternatively he might have considered a more dramatic reform to the VAT registration rules, as has been called for by some well-respected tax commentators.

    There is a fear that the decision to abolish the current ‘non-dom’ status to fund tax cuts for working families could have led to a decline in investment in the UK, as those affected may be more inclined to move to other locations. The abolition of the concept of “domicile” and the introduction of a new residency-based system sounds like a sensible solution – although as ever the devil will be in the detail as to how this will work in practice for those looking to come to the UK – and whether it will have the unintended impact of making taxpaying individuals leave the UK for other shores.

    Other tax changes included the scrapping of the furnished holiday let regime – so a tax rise for those who currently benefit from it, and a modest reduction in CGT for higher rate taxpayers where they sell residential property – the rate dropping from 28% to 24%.

    In terms of stamp duty, we saw the Chancellor abolish multiple dwellings relief. This was not necessarily the stamp duty change that many in the property sector were hoping for.

    This Budget was largely aimed at workers, and it was interesting that there was no real mention of anything for pensioners. Perhaps he is hoping the triple lock guarantee will be enough to win that vote.  In reality, the Budget was always going to be about the election – and making sure nothing was done to rock the country’s current fragile economy.

    All in all, he may have achieved that and hopefully the markets will be reassured. I’m sure the Chancellor is now hoping that he has persuaded some voters that the Conservative party isn’t economically, and politically, dead in the water. That will of course, remain to be seen. It will now be interesting to see when the Prime Minister calls for a general election, and whether there will be enough time for the Chancellor to try to win a few more votes with another fiscal event before that.

    HMRC confirms NIC reclaim rules on car allowances

    Posted on by Laura Bannan

    HMRC have released an update on how to reclaim historic NIC charges following their loss in the Upper Tribunal ruling of the joint case of two constructions, Wilmott Dixon and Laing O’Rourke.

    Both employers had car schemes that let participants choose between a company car and a cash allowance. Employees who chose the cash allowance had to maintain a private vehicle suitable for business use, but there was no requirement to spend the allowance on motoring expenses.

    The employers maintained that the car allowance payments represented ‘relevant motoring expenditure’ which, whilst in principle is subject to NIC, also allows for relief on the ‘qualifying amount’ of 45p per business mile travelled less any business mileage reimbursed.

    Who will the update affect?

    HMRC’s confirmation of the NIC reclaim rules may affect employees with car allowances that use their own vehicle for work.

    In a recent update to employers, HMRC confirmed: “The tribunal ruled that it is not just payments relating to actual use, but also potential and anticipated use of the vehicle. This will affect those who receive fixed sum car allowance payments where those payments are made in anticipation or potential use of a qualifying vehicle.”

    A refund of overpaid contributions may be claimed for earlier years in instances where car allowance payments have been made and NICs have been paid on these amounts by employees.

    However, HMRC have stressed that, for a claim to be successful amongst other conditions, there needs to be evidence of business mileage actually undertaken.

    Further information on the rates can be found in the Employment Income Manual.

    HMRC guidance is currently being updated to reflect the change following the tribunal ruling, and further communications will be made once complete.

    How to make a claim

    Employers

    Employers in a similar situation to the two businesses which were successful in their case against HMRC will be expected to make their claim by way of adjusting their PAYE RTI submissions.

    If this is not possible, it should be the case that written submissions can be made to HMRC.

    Employees

    If you are an employee who believes they are due a refund, we would recommend contacting your employer in the first instance. The employer should make a refund claim, and repay any overpaid NICs due to you.

    If the employer has not applied for a refund, employees may be able to approach HMRC directly.

    Get in touch

    If you would like to find out more about NIC reclaim rules on car allowances, whether you are an employer or an employee, or need help submitting a claim, get in touch with PM+M tax manager, Julie Walsh by clicking the button below…

    Potential refund of national insurance on certain car allowances

    Posted on by Laura Bannan

    A recent tax appeal which has reached the Upper Tier Tax Tribunal (UTT) has been heard and the decision could be significant for companies who offer a car allowance to their employees rather than a company car.

    Background

    In the case heard, arrangements were in place for two employers which allowed employees to choose between taking a car allowance or a company car. To receive the car allowance, employees had to ensure a suitable car was available for business use, but there were no directions on how the allowance should be spent by employees.  The companies involved in the case treated these payments as earnings subject to income tax and national insurance.

    However, both employers contended that the car allowances were Relevant Motoring Expenditure (RME) for NIC purposes and that any ‘qualifying amounts’ of RME were not liable to NIC. The qualifying amounts being 45p per business mile less any business mileage separately paid.

    Both employers sought significant refunds of NIC which were initially rejected by HMRC, and the case went to the UTT to be heard.

    The judgement

    In its judgement on 10 July 2023, the UTT agreed with both taxpayers that their car allowances were RME, and therefore the qualifying amounts of RME were not liable to NIC.

    The UTT decision was mainly because RME for NIC purposes has a much wider definition than HMRC had contended and included car allowances paid for expected or potential use of a car, or for making a car available for use. The UTT also found that the grade of the employee, and how the car allowance is spent by the employee, are irrelevant for determining whether a payment is RME.

    Impact on similar employers

    The UTT’s decision is currently setting a binding precedent. It means that any employer paying car allowances in comparable circumstances to those in this case (where employees have paid tax and NIC on the allowances, have used the cars at least partially for business but have not been paid 45p per business mile), could potentially seek refunds of both employers’ and employees’ NIC from HMRC, potentially going back six years.  The claim would be based on the NIC suffered on an amount equal to the HMRC approved mileage rate of 45p per mile for the first 10,000 miles in a tax year and 25p thereafter, less the actual business mileage rate paid to the employees.

    HMRC do have around 30 days to appeal this decision and if they do so, it could take at least one or two years for the case to be reheard in the Court of Appeal. It is likely that any employers who follow suit and claim refunds will have to wait for this case be resolved before any refunds are issued.  It is also likely that the government may seek to amend the legislation on this matter in the forthcoming Autumn Statement.

    However, for now, protective claims for refunds of national insurance on payments made as detailed above could be advisable for affected employers in order to ensure that the opportunity to make such a claim is not missed.

    If this is something you would benefit from and would like to know more please get in touch with tax manager, Julie Walsh, by clicking the button below…

     

    Time could be running out to increase your pension pot

    Posted on by Katie Heaton

    In order to qualify for a full State Pension, you will need a complete National Insurance (NI) record of 35 years or a minimum of 10 qualifying years to be entitled to any amount.

    There are various ways you will build up your entitlement, the main ones being:
    -Whilst you work and pay NI contributions
    -Receiving NI credits
    -Paying voluntary NI contributions

    You are able to attain a forecast of your state pension and a copy of your NI record through the Government Gateway, this will provide information on the State Pension you have accumulated to date and any extra NI credits that are needed in order for you to receive the full State Pension entitlement.

    Voluntary contributions

    If you find there is a shortfall in your NI contributions, there is the option to make voluntary contributions to fill any gaps in your NI record. This is usually only possible for gaps during the previous six years.

    However, there are certain extensions available to the six-year timeframe but only until 5 April 2023; so, if applicable to you, prompt action is advised. Until this date, men born after 5 April 1951 and women born after 5 April 1953 are able to pay voluntary contributions for any eligible gaps between the tax years April 2006 and April 2016. This essentially provides a potential window of 16 years for which to make up any shortfalls.

    The cost to fill in gaps in an NI record are up to £3.15 per week for class 2 contributions (£163.80 per annum) or up to £15.85 per week for class 3 contributions (£824.20 per annum). It is clear to see the benefit of making these contributions, given that each additional qualifying year equates to an extra £275.08 of State Pension benefit. Voluntary payments can be made as a one-off payment, by quarterly or monthly instalments.

    What should I do?

    If you think you could potentially miss out on utilising your voluntary contributions based on the above information, it is important that you seek clarification from an expert financial planner as soon as possible. With specialist advice, you can ensure you make the most of the potential benefit before the end of this tax year when the window of opportunity will be reduced to the previous six years for everyone.

    Get in touch with a member of our financial planning team today to discuss your personal circumstances by emailing enquiries@pmm.co.uk or calling 01254 679131.

    A comment to note that the article does not constitute personalised advice and that advice should be sought before taking any action.

    National Insurance thresholds are set to change from 6 July – are you prepared?

    Posted on by Rebecca Campbell

    The Primary Threshold (PT), the level at which employees begin paying National Insurance contributions (NICs), is set to increase to £12,570 from 6 July 2022 – a move designed to lessen the impact of the Government’s decision to increase NIC rates by 1.25 percentage points in April 2022.

    This rise will bring the rate in line with the current personal allowances for income tax, therefore, those earning below this amount will pay no tax or NICs. Many people should see benefit from the cut to their NICs as a larger proportion of an individual’s income will be free of the charge – something which will be welcomed given the current cost of living crisis alongside rising inflation.

    What does this mean for those who are self-employed?

    Alongside the increase to the PT, the Lower Profits Limit (LPL), the point at which self-employed individuals start paying Class 4 NICs, will also be increased to £12,570.

    By increasing the LPL, Class 2 NICs liabilities are also reduced to nil on profits between the Small Profits Threshold (SPT) and LPL, ensuring that no one earning between the SPT and LPL will pay any Class 2 NICs, but will continue to accrue National Insurance credits.

    Will employers’ contributions change?

    The Secondary Threshold, the point at which employers must start making contributions, remains unchanged at £9,100 per year. This means that employers will continue to pay NICs for all employees once they earn £9,100 and over.

    Has the threshold for Directors increased?

    As Director’s in limited companies pay NICs on an annual basis, they are calculated using annual earnings rather than what they earn in each pay period. For 2022-23, the PT rate of £11,908 will apply, If you are a director, it may be worth reassessing your remuneration strategy following NI changes and increasing dividend tax rates to ensure you are minimising your tax burden.

    Get in touch

    To accommodate the NIC threshold increase, payroll software, including HMRC’s Basic PAYE Tools, will need to be updated before processing and reporting any payments on or after 6 July 2022.

    For more information on the NIC increase, or any other payroll requirements, please get in touch with payroll director, Julie Mason, by clicking the button below.