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Spring Budget 2017: Employment tax changes less radical than feared, says expert


This week's UK Budget was "fairly uneventful" from an employment tax perspective, despite high profile increases to National Insurance contributions (NICs) payable by the self-employed, an expert has said.

Private sector employers will be particularly relieved that the chancellor does not yet have any intention to extend to the private sector changes to the rules governing 'off payroll' contractor arrangements in the public sector, which are due to come into force next month, according to Chris Thomas of Pinsent Masons, the law firm behind Out-Law.com.

However, Thomas said that employers could not rule out "more radical action" on employment tax in the medium term, ahead of the publication of the various reviews into modern working practices and associated tax issues which have been commissioned by the government.

In the Budget document, chancellor of the exchequer Philip Hammond said that the government's goal was to create a "fair" system, in which "people doing similar work for similar wages and enjoying similar state benefits pay similar levels of tax".

Under the current rules, an employee earning £32,000 per year will contribute £6,170 worth of NICs between employer and employee contributions while a self-employed person earning the equivalent amount will only contribute £2,300, at a cost to the Exchequer of over £5 billion each year, according to government figures.

To address this, Class 4 NICs for the self-employed will increase from 9% to 11% over two years, beginning in April 2018 when Class 2 NICs are abolished. This new rate will "reflect more accurately the current differences in benefits available from the state", following the introduction of the new state pension in 2016. Self-employed workers build up entitlement to the new state pension at the same rate as employees.

The tax-free dividend allowance will be cut from the same date, from the current £5,000 to £2,000 per year. This change is intended to remove the incentive for a self-employed person to incorporate and pay themselves a dividend rather than a salary in order to reduce their employment tax liability, according to the budget document.

"Both of these changes are aimed at levelling the playing field between employees and people who choose to work through other structures - and, indeed, between contractors engaged individually and those who use a personal service company," said Thomas, an employment law expert at Pinsent Masons.

"Whilst this will not be popular in some quarters, the change is probably overdue given that there is no longer much justification for different treatment following changes to state pension and other benefit entitlements - although they could also catch 'innocent' parties, such as savers," he said.

The government intends to publish a number of consultations on employment tax-related issues alongside the Finance Bill on 20 March 2017. These include a call for evidence on income tax relief and employee expenses, a call for evidence on income tax and benefits in kind, and a consultation on proposals to bring the tax treatment of employer-provided living accommodation and board and lodgings up to date.

From 1 April, public sector employers will become responsible for ensuring that any 'off payroll' workers, including those engaged through personal service companies (PSCs), pay the correct tax. Recruiters will be under the same obligation where the individual is engaged through an agency. In the private sector, responsibility for compliance with the so-called IR35 rules, which require off payroll workers in disguised remuneration to pay tax as employees, will remain with the individual.

Matthew Taylor, chief executive of the RSA think tank, is currently carrying out an independent review of modern employment law practices and their wider implications. He is due to present his final report to the government in the summer.

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